Back on track

M&G HAS A lineage dating back to the beginning of the last century.

It was formed in 1901 as Municipal and General Securities, the financial arm of a British engineering company.

It also lays claim to launching the first unit trust in 1931.

But its reputation hasn't always kept up with its pedigree.

A few years ago its equity performance did little justice to its giant brand.

Its strength in fixed interest helped it weather the rough times of its equity portfolios; and markets since the start of 2000 favoured this business strategy.

But with the equity market recovery, M&G could not afford to be seen as a one trick pony.

Recent years have seen the group put a new emphasis on its equity business with a number of new appointments.

With many of the group's equity funds showing improved performance, this strategy appears to be working.

What has contributed to this turnaround? David Jane, who became head of equities at M&G in September 2002, can certainly take partial credit.

Jane reorganised the equity team in September 2003.

Aled Smith was appointed head of research.

A team of analysts, led by Peter Knapton were handed control of the UK Growth and Strategic Growth funds.

Giles Worthington took over the M&G European Blue Chip and Jane himself took on the M&G Capital fund (management has now moved to Mike Felton, hired from ISIS in December 2004).

Jane stated at the time that he believed the true skill of a head of equities was to identify talent, work out the manager's skills, provide the requisite resources and then let them get on with managing money.

Among the group's core UK funds (those in the UK All Companies sector) the biggest improvements in sector position have come in the Strategic Growth and UK Growth portfolios, who have raised their positions 112 and 74 places respectively (to 109th and 123rd in the sector) over the past three years, when compared to the three years to June 2003.

The Capital fund has also improved, up from 238th in the sector to 145th.

The group has a way to go before it hits the top rung, but there are clear signs of improvement.

The strongest parts of the group's equity portfolio are Richard Hughes' giant Dividend fund and Charifund, Graham French's Global Basics, Tom Dobell's Recovery fund and Aled Smith's Global Leaders.

These funds have all maintained long-term top quartile performance despite their size (they are all in excess of £600m) Gary Shaughnessy, UK retail chief executive, believes that Jane's mentality and attitude have acted as a major catalyst for the M&G upturn.

He says: "David is well respected among his peers. He gets the best out of individuals and not by just telling them what to do. He makes sure the manager has the right environment to work in, one they enjoy and in which they are well supported." Shaughnessy says the group's investment philosophy has also played its part.

"There is no over-arching macro-philosophy. We employ strong stock pickers on the equities side and offer them a good support team and risk management system. Essentially we give them the freedom to run their funds how they see fit. Tom Dobell's Recovery Fund, for example, levers off the corporate finance team. They support him and show the impact of certain decisions. We do the same for our fixed interest offerings." M&G scored a high profile coup when it bagged Richard Woolnough from Old Mutual to run its flagship fixed interest funds in January 2004.

There were murmurings at the time that Woolnough may not be able to maintain his strong track record with such a large fund (the Corporate Bond fund is now over £1.3bn in size), plus a number of intermediaries thought former manager Anna Griffen (nee.Lees-Jones) had been poorly treated.

But Woolnough has undoubtedly raised the performance of the fund - it is now rated 19th out of 89 in the UK Corporate Bond sector over the past year.

The Strategic Corporate bond fund was launched for Woolnough in February 2004 and is ranked 16th out of 89 funds in the UK Corporate Bond sector over one year.

Shaughnessy also believes that the interaction between managers is hugely beneficial for the group, "We are trying to create a boutique culture, we don't demand, but we encourage the likes of Jim Leaviss and Richard Woolnough to interact over ideas with one another. Jim Leaviss will also talk to managers of different asset classes like David Jane or Graham French. We are a big group, but in some ways we are still small in terms of infrastructure and support." There have been some casualties along the way.

The group lost Phil Wagstaff, its high profile director of UK retail and Simon Clark, its head of discretionary sales in June 2004, which prompted further restructuring of the business.

Head of UK Equities Sam Morse left for Fidelity to be replaced by Mike Felton from ISIS.

Jim Leaviss, head of institutional and retail fixed interest at M&G, recently took 'extended leave' and is due to return in September.

The group were quick to deny that it was a sabbatical - perhaps aware how few managers return from longer periods of time out of the office.

The group has also recently pulled out of its multi-manager joint venture with Cazenove, which did not meet expectations.

Management of the funds is to be taken inhouse with a team led by Mark Thompson.

They took control of the funds in July and will aim to generate more return from asset allocation.

Shaughnessy says the group wanted to use existing skills - the team already manage the asset allocation for the £61bn Prudential Life fund.

M&G was taken over by Prudential in 1999, which has - by and large - left them to run as a stand-alone business.

Shaughnessy says: "The Prudential helped us enormously to get into the property market in March 2004, but its backing had a scale effect across all the asset classes.

Prudential is well regarded in Europe allowing us to improve our business there.

M&G is also actively forging third-party links with life offices and other distribution platforms.

About 85% of its business comes directly through the intermediary market.

"Around 60% to 65% of our business is through fund supermarkets, life links and open-architecture, we are big fans of that arena, and as a big brand, it is important to play the market." Five years ago, M&G was in danger of tarnishing its long-established brand with mediocre performance.

Since then it has been relatively aggressive in restructuring its business and improving its performance.

Some of its core UK equity funds have some way to go as they are only just managing midsector performance, but if their improvement over the past five years is continued, investors can expect better things from M&G in the future.

They should expect performance worthy of the brand.

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