The asset management division of Legal & General usually gets rather overshadowed in any assessment of Britain’s second biggest insurer. Legal & General Investment Management might be one of the biggest asset managers in Britain, with nearly a trillion pounds of assets under management, but in terms of profit generation it is still modest beside the retirement and annuities division.
L&G wants to change that perception, which explains why its capital markets event yesterday focused purely on LGIM.
The division has a strong story to tell. Over the past ten years it has produced compounded annualised growth in operating profits of 11 per cent, last year hitting the £400 million mark. A decade ago, LGIM was the 50th biggest asset manager in the world by money under management; today, it is the tenth biggest. Indeed, if it was an independent listed company, it might very well be in the FTSE 100.
LGIM probably accounts for around a third of the entire group’s £16 billion market value. Of course, highly beneficial investment markets in both bonds and equities have provided a nice tailwind, boosting the value of assets under management and therefore the amount in fees creamed off. But LGIM appears to have outpaced its peers, with new mandates comfortably exceeding the outflows of clients from mature pension funds withdrawing cash to pay retirement benefits. Last year it scooped in a net £43.5 billion of business.
The days when LGIM could be dismissed as an ultra-low-margin passive house are over. Index funds, which accounted for two thirds of assets ten years ago, now account for only a third. L&G is much bigger now in property, infrastructure, alternative credit and liability-driven investment.
Even so, its low cost base is a persuasive reason for clients to continue to put money its way. While average fees in the asset management industry are now 26.7 basis points (that is £2.67 per £1,000 managed), LGIM does the job for a mere 82p. In Britain, pension auto-enrolment is another plus point. Minimum contribution rates for both employers and employees rocketed in April and will rocket again next April. Soon the nudging of millions of people into pension saving will start to move the dial and LGIM, as the country’s biggest provider, is an obvious beneficiary. With some of the country’s biggest employers, including Tesco, John Lewis and Royal Bank of Scotland, signed up, LGIM’s market share in workplace pensions is 18 per cent.
L&G shares had a fabulous run on the back of booming markets between 2009 and 2015, rising fivefold, but have struggled to make progress since then. That looks a little unfair. Results in March were fine. Even without the windfall from people dying earlier than the actuarial tables predicted (it’s a funny business, insurance), operating profit growth was 12 per cent.
There are other strings to its bow, opportunities in Britain’s failure to build enough homes or to modernise infrastructure or to accommodate the aging population. But there are risks, too. Some question whether L&G has diversified too far, for example in running a prefab housing factory. Some fret whether the dividend is being grown too fast, although at present the company appears to have more than £2 billion of surplus capital. And like all insurers, L&G is vulnerable to a protracted bear market.
Nevertheless, a lot of the doubts are in the price. At 267p, the shares trade on only nine times forecast earnings this year and yield a prospective 6.1 per cent. Add in the persuasive LGIM growth story and that starts to look quite cheap.
Advice Buy
Why Valuation starting to look cheap given potential
Berkeley Group
Berkeley Group may be a small housebuilder that completes fewer than 4,000 homes a year, but it has a very large reputation. It is considered to be one of the savviest developers on the block — excuse the pun — knowing when the winds of demand are turning. Yesterday, however, a mixed set of messages sent its shares falling.
On the face of it, there was absolutely no need for those shares to slide 244p to £38.93. The group reported a 15 per cent rise in profits to £934.9 million. And, yes, you read that right, a company that built only 3,536 homes in 2017 made nearly a billion in profits. It had a net cash position of £687.3 million and paid out £146.7 million of dividends and £140.4 million in share buybacks.
The group warned that profits would fall by about 30 per cent to £600 million this year and £500 million next year, but it has said that twice before and investors should not have been surprised.
The fall comes because the group has run out of its bank of very cheap land. Tony Pidgeley, founder and now chairman, was savvy enough to buy lots of land in London in the aftermath of the financial crisis, when everyone else was still too nervous. The company then timed the houses on that land to be sold just as the market was starting to heat up again, meaning that it sold houses for £750,000 that it thought it was going to sell for £450,000. That led to enormous margins and profits that surprised even Berkeley. We are talking here of an operating margin of 29 per cent.
Now, however, that land has been used up and Berkeley is saying that profits will return to a more normal level, like the £480 million it made in 2016 and £450 million in 2015. It also has a net cash position that is nearly £400 million higher than last year, which suggests a group that is worried about the future and is not on a growth trajectory.
Its lower profit guidance means that it is sitting at a price-to-earnings ratio of 14 times for the next two years. Its housebuilding rivals Redrow and Bellway are on six times, Taylor Wimpey and Barratt on nine times. That means you can find better value elsewhere.
Advice Hold
Why The shares are looking overvalued and there are little signs of growth ahead
