Global
The Prudential Group's asset management businesses are contributing to the Group in two ways. Not only do they provide value to the insurance businesses within the Group, but also are important profit generators in their own right, with low capital requirements and generating significant cash flow for the Group.
The asset management businesses are well placed to capitalise on their leading market positions and strong track records in investment performance to deliver net flows and profit growth as well as strategically diversifying the Group's investment propositions in retail financial services (RFS) markets that are increasingly favouring greater product transparency, greater cross-border opportunities and more open-architecture investment platforms. Wholesale profit streams are also growing.
The Group's asset management businesses operate different models and under different brands tailored to their markets and strengths, but are increasingly working together by managing money for each other with clear regional specialism, distributing each others' products and sharing knowledge and expertise, such as credit research.
Each business and its performance for the first half of 2007 is summarised below.
M&G
1. Financial results and performance
M&G is Prudential's UK and European fund management business and has £168 billion of funds under management, of which £119 billion relates to Prudential's long-term business funds. M&G aims to maximise profitable growth by operating in areas of the retail and wholesale markets where it has a leading position and competitive advantage, including retail fund management, institutional fixed income, pooled life and pension funds, property and private finance.
M&G is made up of three distinct and autonomous businesses - Retail, Wholesale and Prudential Capital - each with its own strategy for the markets in which it operates. M&G's retail strategy is to maximise the leverage of its strong investment performance, efficient operating platform and multi-channel distribution in the UK, Europe and Asia. M&G's wholesale strategy is twofold: to add value to its internal clients through investment performance, liability matching and investment in innovative and attractive areas of capital markets and to utilise the skills developed primarily for internal funds to build new business streams and diversify revenues. Prudential Capital manages Prudential's balance sheet for profit.
M&G delivered significant profit growth during the first six months of 2007. Operating profits, which include performance related fees (PRF), increased 40 per cent to £140 million compared to the same period last year. Underlying profits, excluding PRF, were £127 million, an increase of 40 per cent. This continues M&G's strong profit growth that has seen underlying profits increase fourfold over the past five years. Profit growth in the first half was generated on the back of rising market levels, strong net inflows across the UK and international markets and improved deal flow in Prudential Capital. First half profits were boosted by £5 million of non-recurring items and M&G also expects to incur a number of anticipated project costs in the second half. PRF and carried interest during the first six months was £13 million, an increase of 51 per cent on last year.
Strong fund performance led to record gross fund inflows of £7.5 billion, up 11 per cent on the same period last year. Net fund inflows of £3.4 billion were the second highest ever achieved in a first half, but were slightly down on last year largely due to reduced inflows into lower margin institutional areas such as traditional segregated bond funds. External funds under management grew by eight per cent to £49 billion from the end of 2006 and represent over a quarter of M&G's total funds under management.
In the retail marketplace, continued high demand for M&G's high alpha equity and competitive fixed income and property offerings led to record gross fund inflows of £4.5 billion, up 26 per cent on the first half last year. Net fund inflows in the first six months were £1.7 billion, equalling last year's record.
Excellent retail sales momentum continued in the UK, with gross fund inflows increasing by 23 per cent and net inflows up seven per cent compared with the same period last year. M&G was also named Best Overall Large Group at the 2007 Lipper Awards.
Growth was also strong in international markets. In Europe, where M&G is maximising the opportunity created by the continued opening of markets to foreign players, gross fund inflows increased by 15 per cent. While net fund inflows reduced by 25 per cent as a result of asset allocation shifts by European investors in the wake of equity market falls in late February, sales in May and June have been exceptionally strong. Asian markets, where M&G distributes funds in partnership with Prudential Corporation Asia, also saw significant growth with net inflows up 56 per cent in the first half compared to 2006. M&G's international markets now account for some 70 per cent of net retail fund inflows.
In its wholesale markets, M&G saw a continued shift towards
higher margin products during the first half of 2007 and a fall in
lower margin business such as traditional segregated bond funds.
As a result, total gross institutional fund inflows fell by six per cent
to £3.0 billion and net inflows fell
However, gross fund inflows into higher margin products, such as leveraged loans, collateralised debt obligations (CDOs), infrastructure finance and the Episode global macro hedge fund, more than doubled during the first six months of the year and represented over half of all institutional flows. Net fund inflows into these areas more than tripled compared to the same period last year, producing a more profitable sales mix. The first half of the year has also seen M&G's infrastructure fund, InfraCapital, grow substantially, completing purchases of the Isle of Wight ferry business, Red Funnel, and investing in Zephyr, one of the UK's largest wind farm operators.
| CER | RER | |||||
| M&G | Half year 2007 £m |
Half year 2006 £m |
Percentage change |
Half year 2006 £m |
Percentage change |
|
|---|---|---|---|---|---|---|
| Net investment flows | 3,367 | 3,595 | (6)% | 3,595 | (6)% | |
| Total IFRS operating profit | 140 | 100 | 40% | 100 | 40% | |
2. Outlook and forthcoming objectives
Looking ahead, M&G's priorities continue to be to deliver investment outperformance to its clients, extend distribution through existing channels and exploit new opportunities, and to leverage its scale and capabilities to develop innovative products for the retail and wholesale marketplaces.
Asia
1. Financial results and performance
The Asian asset management business continues to deliver record net inflows. Net inflows of £1.7 billion were up four per cent on the same period in 2006. Of the £1.7 billion in net inflows, £1.3 billion was in longer term equity and fixed income products and £0.4 billion was in shorter term money market funds. Third party funds under management in Asia at the half year were £14.6 billion, up 42 per cent compared to the end of the first half of 2006. The main contributors to the growth were Japan, India, Korea and Taiwan.
PCA Asset Management Korea successfully launched the China A-Share fund under the Qualified Foreign Institutional Investor (QFII) scheme and raised over £50 million in the second quarter of 2007. Introduced in May 2002, the QFII scheme allows qualified foreign institutional investors direct participation in China's domestic 'A' share equity and fixed income markets.
Our innovative product strategy continues to deliver strong growth in net inflows for our operation in Japan. We have reached a significant milestone with our PCA India Infrastructure Equity Fund, which has now become our third POIT (Publicly Offered Investment Trust) crossing the Yen 100 billion mark (£400 million). This makes us one of only three foreign asset management companies that have attained this achievement in Japan.
In Taiwan, PCA Securities Investment Trust (PSIT) had a successful launch of the Asian Infrastructure Fund, raising over £210 million. This is PSIT's third consecutive fund launch that has hit the fund cap and the success of these fund launches is evidence that the combination of providing innovative products together with a sound distribution strategy is working well in Taiwan. Following the successful product launches, PSIT's retail FUM has grown to over £1.9 billion up 68 per cent on the first half of 2006. In terms of overall domestic fund market ranking, PSIT's ranking has improved from ninth to fifth in the overall market. This increased the number of our funds operations in top five market positions from four to five as at the end of May 2007.
Our fund management businesses in India (ICICI Prudential Asset Management) and Singapore (Prudential Asset Management Singapore) both won Gold Awards in the Reader's Digest Trusted Brand Awards 2007. The top award being Gold for brands which score clearly above their competitors based on consumers' surveys. This achievement represents consumers' confidence in our brand and services in both markets.
Total funds under management as at 30 June 2007 were £32.8 billion, up 34 per cent on the first half of 2006. Operating profits grew 65 per cent, compared to the first half of 2006, to £33 million (HY 2006: £20 million) driven by strong contributions from the established markets of Hong Kong and Singapore. Hong Kong and Singapore account for 49 per cent of profit compared to 60 per cent a year ago, as newer operations such as India, Japan and Korea begin to make meaningful contributions.
| CER | RER | |||||
| Asia | Half year 2007 £m |
Half year 2006 £m |
Percentage change |
Half year 2006 £m |
Percentage change |
|
|---|---|---|---|---|---|---|
| Net investment flows | 1,662 | 1,603 | 4% | 1,709 | (3)% | |
| Total IFRS operating profit | 33 | 20 | 65% | 22 | 50% | |
2. Outlook and forthcoming objectives
Prudential remains confident that its fund management business is ideally positioned to capitalise on the opportunities to grow this business strongly and profitably.
United States
US broker-dealer, fund management and Curian Capital (Curian)
1. Financial results and performance
PPM America (PPMA) manages assets for Prudential's US, UK and Asian affiliates. PPMA also provides investment services to other affiliated and unaffiliated institutional clients including CDOs, private investment funds, institutional accounts and mutual funds. PPMA's strategy is focused on effectively managing existing assets, maximising synergies with international asset management affiliates and leveraging investment management capabilities across the Prudential Group. PPMA also opportunistically pursues third party mandates. During the first half of 2007 PPMA raised over £0.5 billion of third party funds under management, with the opportunity to increase such mandates during the second half of the year.
PPMA's IFRS operating profit in the first half of 2007 was £4 million, in line with the prior year figure.
National Planning Holdings (NPH), Jackson's independent broker-dealer network, had a strong first half to the year with profits up 67 per cent to £5 million. NPH, which is a network of four independent broker-dealers, increased product sales to £3.5 billion in the six months ending June 2007, an increase of 14 per cent over the prior year. NPH also increased the number of registered advisors in its network to 2,819 at the half year, up from 2,628 at year end, further expanding Jackson's access to independent broker-dealer distribution.
Curian, which offers innovative fee-based customised separately managed accounts, recorded improved results with losses of £2 million in the first half compared to losses of £3 million in the first half of the prior year at CER, as it continues to build scale in assets under management. At 30 June 2007, Curian had £1.5 billion of assets under management compared with £1.2 billion at 31 December 2006.
| CER | RER | |||||
| United States | Half year 2007 £m |
Half year 2006 £m |
Percentage change |
Half year 2006 £m |
Percentage change |
|
|---|---|---|---|---|---|---|
| Funds under management (£bn): | ||||||
| Fund Management (PPMA) | 39 | 35 | 11% | 38 | 3% | |
| Curian | 1.5 | 1.0 | 50% | 1.1 | 36% | |
| Total IFRS operating profit (£m): | ||||||
| US broker-dealer | 5 | 3 | 67% | 4 | 25% | |
| Fund Management (PPMA) | 4 | 4 | - | 4 | - | |
| Curian | (2) | (3) | 33% | (4) | 50% | |
| Total | 7 | 4 | 75% | 4 | 75% | |
2. Outlook and forthcoming objectives
PPMA expects a positive outlook for the rest of 2007, driven by current momentum, favourable economic and market conditions, and growth prospects.
NPH expects to continue its track record of profitable growth driven by its strong operating model and opportunities in the US retirement market.
Curian expects to continue growing its assets under management, driven by favourable market conditions and opportunities in the US retirement market.
