Last month’s shock leadership reshuffle at Eastspring Investment has further stoked speculation about the future of the firm, the Asian fund management arm of British insurer Prudential.
In one stroke, the Singapore-based asset manager is waving goodbye to chief executive Guy Strapp, chief financial officer Ted Pull and chief operating officer Phil Stockwell.
Replacing Strapp is Seck Wai-Kwong, the former Asia head of State Street. Stockwell is succeeded by Jeroen Buwalda, previously head of strategic transformation, and the firm plans to appoint a new CFO. An Eastspring spokeswoman said the trio had all decided to move on.
However, the abrupt senior management clean-out suggests that Prudential Corporation Asia wasn’t satisfied with the performance of its in-house fund manager.
Also understood to be a factor in the changes is a shift in approach under Nic Nicandrou, PCA’s CEO since mid-2017 and before that the chief financial officer of Prudential group.
A Hong Kong-based recruiter said PCA is moving from being "heavily top-line driven" – with a focus on premiums from assets under management, among other things – to looking at the business revenues in more detail.
“The culture is changing [at PCA and Eastspring],” he told AsianInvestor, and that has led to departures – some voluntary and others not.
Eastspring could not immediately provide comment on this.
Sources familiar with Prudential say another issue is that PCA – which accounted for £68 billion of Eastspring’s £138 billion in assets under management as at June 30 – had been dissatisfied with the fund house’s investment returns and its range of investment capabilities.
The performance figures for PCA's mandates run by Eastspring are not publicly available, but research house Morningstar provided AsianInvestor with data on returns for the firm’s 10 biggest mutual funds.
None of Eastspring’s three largest products – US corporate bonds ($6.37 billion as of February 11), Asian local bonds ($3.98 billion) and Asian bonds ($3.76 billion) – have posted top-quartile performance over three or five years. For both time frames, the Asian local bond strategy was in the second quartile, while the other two fell within the third or fourth quartile. Still, all three funds have grown in size over the past three years.
The only product in the list of 10 to have produced top-quartile returns over three and five years is the Japan large-cap equity strategy.
Past performance is of course not indicative of future returns, but if PCA’s mandates with Eastspring reflected the latter's mutual fund returns, it would help explain why the insurer was nonplussed.
It would also help explain PCA’s move to install experienced chief investment officers for several of its key businesses in the region over the past two years, including in Hong Kong, Singapore and Malaysia.
The departure of the three senior executives follows a period of substantial resource-building at Eastspring, particularly since Virginie Maisonneuve joined as CIO in January 2017.
It has built out capabilities in alternatives, emerging market debt, multi-asset solutions and quantitative strategies; as well as setting up a wholly foreign-owned enterprise in China last year as part of its mainland expansion strategy.
According to the spokeswoman, 18 new investment professionals joined last year: five in alternatives, three in emerging-market debt, three in multi-asset solutions, two quant specialists and five for the onshore China growth equity team in Shanghai.
The fund house also acquired a majority stake in Thailand’s TMB Asset Management in July, thereby adding some $13 billion to its AUM.
The aim of these developments is presumably to develop a business that can better cater to Prudential’s needs and attract third-party client money. And it has helped Eastspring to nearly double its AUM over the past five years from $100 billion to $195 billion (as at September 30), while doubling its profitability, said the spokeswoman.
Yet it remains to be seen whether these efforts will be enough to satisfy PCA.
Fund industry experts have frequently noted that middle-tier asset managers like Eastspring can lack sufficiently extensive product ranges and economies of scale of genuinely global players, yet they are too large to be specialised boutiques.
That’s a potential problem for PCA’s ultimate owners: its shareholders.
“[Asset management is] a commoditised industry with shrinking margins and growing capex needs,” an insurance executive familiar with the group told AsianInvestor. “Given this, shareholders won’t reward [Prudential’s] management for Eastspring – in fact, it should probably punish them – and Eastspring will never reach a big enough scale within PCA to be worth anything.”
If anything, Eastspring’s C-suite shakeup has been viewed positively by Prudential shareholders: the group’s stock price has gained 2% as of February 12 since January 23, when AsianInvestor broke the news of the departures. But it is still heavily down over the past year, by 23% from its historical peak of £19.81 on January 19, 2018.
OPEN FOR BIDS?
Certainly, the latest developments at Eastspring have fuelled more speculation – both within and outside the Prudential group – that PCA would be willing to consider bids for the fund house, either to satisfy its shareholders or to raise capital.
There would be no shortage of interest among asset managers for what would be “an exciting M&A opportunity”, one Hong Kong-based investment industry veteran told AsianInvestor.
Indeed, multiple industry sources suggested that Seck, the new CEO, looks more likely to be a safe pair of hands for a potential business transition than a long-term appointment. They note the 62-year old has never run a fund house before but has overseen other businesses, many linked to Singapore.
However, the spokeswoman said Prudential is not looking to sell Eastspring and that its strategy and business plans would remain unchanged under Seck.
“The company is committed to accelerating growth for the business across the region, and Wai-Kwong’s appointment reflects Eastspring’s commitment to accelerate growth for the business across the region,” she said.
The insurer could change this official tune if it looks like it could secure a different strategic goal. The insurance executive familiar with Prudential suggested the insurer might want to use money from a sale of Eastspring to gain control of its Chinese insurance joint-venture with Citic Capital.
Prudential established the JV in 2000, but it was only allowed to hold a maximum 49% stake. Until late last year, that is, when the mainland authorities changed the rules to permit majority foreign ownership of insurance JVs.
It’s quite likely that PCA would like to buy majority or even full control of the business, given the rapid growth of the insurance industry in China. That would not come cheap, and would likely require a lot of negotiation with Citic. But a sale of Eastspring could help offset this cost.
Asset managers are usually valued at somewhere between 10 and 15 times their annual earnings, said another source familiar with Prudential. However captive fund houses that manage a substantial amount of money for in-house affiliate firms tend to attract lower valuation multiples than standalone investment businesses.
A valuation of 13 times annual earnings for 2017, the latest figures available, would value Eastspring at £5.47 billion, based on operating income before performance-related fees, or £2.29 billion based on operating profit.
Another possibility mooted by industry sources is that Prudential internally consolidates Eastspring for greater economies of scale, as part of the planned demerger of its global business.
Prudential is carving out its UK and European insurance divisions and another fund house, M&G, into a separately listed entity called M&G Prudential. That will leave it with its Asia, Africa and US life insurance operations – plus Eastspring, according to its stated plans.
But it may be Prudential merges Eastspring with Prudential Portfolio Managers America, its $111 billion North American funds unit. Or M&G Prudential could buy Eastspring and either merge it with M&G or keep it as a separate fund house.
The PCA spokeswoman declined to comment on these possibilities. But she added: “The [Prudential group] demerger isn’t about combining the Asia and US businesses, but separating the UK business from Prudential’s international businesses, which have strong growth prospects. Asia and the US will continue to focus on their distinct strategic priorities in their chosen geographies.”
However things pan out, the developments at Eastspring will be watched closely by other insurance firms with captive asset managers – as well as by its own clients. The company’s final fate could prove to be very instructive.
Richard Morrow contributed to this article.