Legal & General's plans to diversify its product range will not affect its philosophy of catering for the needs of the standard investor, finds Christopher Salih
Its heritage is as an insurer to the legal profession, but Legal & General (L&G) prides itself on being a more democratic institution these days. With £181bn under management, 5.4 million customers and a place in the FTSE 100, L&G is a colossus of the financial services industry. But recently with all of its rivals embracing external fund links the group was starting to look off the pace. That is, until it took the surprising step of taking a 25% stake in Cofunds, thus paving the way for it to provide one of the broadest open architecture offerings on the market. So what does the future hold for the group?
L&G has built its business providing life assurance, pensions, investments and general insurance plans for the mass market. The brainchild of five barristers and a lawyer, L&G was founded in 1836 as the Legal & General Life Assurance Society. Initial membership was restricted to the legal profession and the group started with a total investment of just £40,000.
The group has not been immune to the problems that have beset the UK life industry in recent years. Most notably it suffered reputational damage over its endowment misselling in the 1990s in a well-publicised spat with the FSA. However, its with-profits business has been among the strongest in the industry. Chartwell rates L&G as one of a small group of life offices still offering a top-tier with-profits fund that has fair MVRs as well as good asset allocation and financial strength.
Simon Pistell, retail investment director at L&G, says: "Our with-profits fund is doing very well in the current climate. It can be accessed in three different ways, through our pensions contracts, pensions annuity and also through a life-bond. When it comes to our philosophy on product development we don't claim to provide products for the whole of the market. Our target market is very much the average investor/saver - we want to provide good value products for the middle-of-the-road investor."
Pistell believes that the L&G with-profits fund is still a good place to invest, both for new and existing customers. He says: "We operate our with-profits fund on a quarterly pool basis. This allows us to reflect actual asset performance more accurately when setting bonus rates and therefore treat customers as fairly as possible. The aim is to treat those who are staying as well as those who are leaving or joining."
Less than two years ago, former chief executive David Prosser had considered closing the £24 billion fund to new business. Pistell says this was in response to proposed regulation changes that never materialised. He says: "The FSA made some proposals that we felt would tip the balance of risk and reward too far against shareholders. However, subsequent changes that were made to these proposals in the end did not prevent with-profits from being a viable product line for us."
Pistell says the group has tried to diversify its product offering as far as possible: "We operate across a whole range of styles and we are both passive and active managers of both equities and bonds. We have just over £100 billion in passive funds (equities and bonds), and just over £50 billion in active bonds. We are big players in both the retail and institutional markets".
Although the group is better known for its passive funds, it has been trying to boost its presence in the active equity market. L&G's active equity team is headed by Mark Burgess, who joined in January 2003 from DWS. Burgess now runs this part of the business as a series of small boutiques, each focusing on a geographic area. The intention is to enable the teams to run their funds in the way that they believe is best for their particular market, rather than imposing a "one-style-fits-all" approach.
Pistell believes the group is particularly strong in the distribution fund market. The group's main distribution fund is run by David North. He says: "We are the market leader in distribution funds; we sell them as insured savings vehicles, for pensions, savings and as income based balanced funds. The group has been managing them for 10 years and have nearly £4bn invested in the funds."
Performance is middling for most of the equity funds and, as with most life companies, tends to be stronger in fixed interest. Burgess has made a number of appointments to the UK equity team since joining the firm, including DWS's Nigel Ridge, Lombard Odier's Ashley Reid, and Adam Holmes of Credit Suisse, though Ridge left just months after he started at the group. It will remain to be seen whether Burgess can raise equity performance above the mediocre.
As might be expected, the group has huge distribution clout. In 2001 the group entered a partnership with Barclays Bank and Alliance & Leicester to provide financial services to these organisations' 20 million customers and to take over the two companies' existing mutual funds. Although these were significant deals Pistell is keen to stress that L&G has many other important distribution arrangements, he says: "We have strong links with lots of banks and building societies; including Bradford & Bingley, Northern Rock and Yorkshire Building Society."
In the adviser sector, Pistell sees open-architecture platforms as key to the future of the business: "There are good reasons for open-architecture and platforms continuing to grow, particularly in terms of fund supermarkets. The market has seen the emergence of a new distribution dynamic in the wake of depolarisation as the difference between an IFA and a tied agent has reduced. A tied agent can now choose from a panel of external funds within all product wrappers."
As L&G is one of the few life offices without external fund links, Pistell says the Cofunds tie-up is extremely important. He adds: "Our 25% stake in Cofunds reiterates just how important this relationship is to us. We feel the platform is sure to grow and Cofunds was definitely our first choice as a company, simply because as far as platforms go, it is the market leader."
The first L&G/Cofunds platform went live in July, with the launch of the joint proposition for B&B, featuring 34 funds from 12 investment houses. The platform is a scaled-down version of the L&G/Cofunds offering to be launched later this year to the wider intermediary market.
The benefits of open-architecture platforms post-depolarisation can be seen by L&G's recent link-up with Bradford & Bingley. Pistell says: "We provide products to B&B. Advisers in the branches can select which funds to invest in from a range of fund management groups that they feel best meets the client's needs."
With L&G's fingers in so many pies, Pistell believes the group is well-placed for growth. He says: "We are still looking for growth and believe there is lots of potential in both the short and medium term. The pension changes (A-Day) in April 2006 will bring numerous opportunities as it transforms the pensions market. That apart, we are generally keen on more of the same, such as a continued widening of our distribution links and the positive effects resulting from depolarisation, and good value-for-money, straightforward products."
worldwide financial planning
"The last couple of years have seen many changes in our industry--with household name providers jockeying for market share and looking for that edge to achieve distribution. Looking back a couple of years and Legal & General were always on our radar for competitive protection products and innovative structured investments. How things have changed - I cannot immediately recall the last time I placed any business with L&G and the question has to be why? Have they simply retracted back to only those areas of business profitable for them to pursue? And how are they getting their new business, if not from the IFA sector? "
Justin Modray, BestInvest
There are four L&G funds that we are comfortable recommending: Its UK and US tracker funds, as charges are competitive, Malcolm White's Fixed Interest fund and David North's High Income trust. L&G also launches reasonably attractive protected capital plans from time to time. Our biggest bugbear is L&G's administration; we've had some bad experiences. Fortunately their funds are now available through fund supermarkets, which means we don't have to deal directly with L&G's administration. Overall a reasonable company, let down by poor administration, that is unlikely to set the investment world alight.
Belgravia Insurance Consultants
While not unique to L&G, I think that they could take the lead by changing their claim definitions for Terminal Illness on their Life Only policies, where the client must have a life expectancy of less than twelve months, confirmed by a specialist. Why twelve months? If the doctor says the client has eighteen, then there may be a declinature and the need to reapply in six months' time, adding to the distress of that situation. It's an arbitrary period of time, confirmed by the medical opinion of one person, so L&G should soften those requirements immediately.
Underperformance still present – for now
Regtech or fintech
15% increase in number of claims paid
Open architecture philosophy
Inflation above 2% for first this this year