Old Mutual Plc Q3 management statement- streamlined, simplified and de-risked

If you lost interest waiting for Old Mutual Plc to regroup after the shenanigans of 2008, you may have missed out. Alec Hogg conducts a really fascinating conversation between Ingrid Johnson, OM's financial director and Nkareng Mpobane, portfolio manager at Ashburton Investments. Old Mutual has shifted it's strategy to focus on areas within global wealth management where it actually does have a competitive advantage and where the markets are yielding opportunity. This interview is like being a fly on the wall between Wall Street and Main Street. Enjoy! – CP

ALEC HOGG: That's not the case with Old Mutual, which released its third quarter Management Statement today. It announced that funds, under management, are up by five-percent to 307.bil Pounds that is from Core Operations. Then gross sales, by the Group who were six-point-two billion, Ingrid Johnson who was last in our studio as the Head of Retail at Nedbank, who is now the Financial Director at Old Mutual. She is in London. Ingrid it's nice to have you on the programme, in your new guise. I guess that it's a little different in the weather but just as exciting in the kind of business role that you're doing over there.

INGRID JOHNSON: Absolutely. Hello Alec. It's great to chat with you again and it really has been a fantastic transition, although I brought the weather with us. We've got beautiful blue skies, believe it or not.

ALEC HOGG: Long may it last. The past quarter, to the end of September, and that is what you're focussing on (with your management report). You had two; really, big fund generating issues with the U.S. listing and then the sale of your German and Austria operations. Then, on the other hand, you made the investment into Quilter Cheviot. Were they hand-in-hand? When you put the strategy together did you say, "To buy Quilter we're going to have to do these sales?"

INGRID JOHNSON: Exactly Alec. This has been in planning for some time and it really is, as we've changed the shape of the group, to recognise the core market. We want to compete where we can have a competitive advantage, and the markets themselves are attractive. We recognised the opportunity to then, list the Old Mutual, Asset Management Business, and we are very delighted with that outcome and the share price has traded well. Then clearly recognising those proceeds would come in, as well as rotating out of Continental Europe, where we were able to sell some of our old Scandia businesses. That created the opportunity to then invest in Quilter Cheviot, which is a really, high quality discretionary investment manager and really add, to our overall wealth offering to build a, vertically integrated business. Equally, so delighted with the 20-percent investment in ETI now, through the conversion of our subscription rights, so it really has been a very exciting quarter and it is going to change the shape of our earnings and our group, into the future.

ALEC HOGG: Nkareng Mpobane is a Portfolio Manager at Ashburton Investments. She's with us here in the studio, in Johannesburg. You heard what Ingrid had to say. The strategy seems to have worked out so far.

NKARENG MPOBANE: Definitely, I think just even repositioning from 2012, repositioning their balance sheet, obviously in light probably of these acquisitions and disposals that they've made. I think the Quilter acquisition is probably the right strategy, also the market like that they don't pay up, too much for it. Market had expected around 650.mil Pounds and it came in almost 100.mil less than that. I think the market is expecting quite meaningful signatories out of the business. I think it was a good move and also the listing of the U.S. Asset Management business. Obviously, that was maybe disappointing in how much was listed, so just around 18 to 20 percent listed, so Old Mutual still has around 80-percent interest in that business.

ALEC HOGG: Is it disappointing in that not more was listed?

NKARENG MPOBANE: Right, exactly.

ALEC HOGG: Why Ingrid? Why did you restrict it to under 20-percent?

INGRID JOHNSON: What we recognised was where the market appetite was and, certainly with quite volatile markets. If you think about when we were actually seeking to list, we were delighted with what we were able to get away, and equally it is important, in terms of the aftermarket share trading and the share prices being extremely resilient and a lot of interest, post the up-year, which is very important. It also gives us the currency, with which to actually, grow the business downstream.

ALEC HOGG: Are you in a position that you can feed some shares into the market or are there restrictions on that?

INGRID JOHNSON: You do have a lock up in the short-term and, clearly once that's over, you could do that but for us we were a very supportive shareholder and it was around with doing the rightful owner asset management, as well as the group. Alec, I just want to let you know there's a lot of feedback on the call, so I am battling a little bit to hear your other guest as well.

ALEC HOGG: Okay, what I'll do is repeat her questions, just for your benefit. Nkareng, when you have a look at Old Mutual, at the current share price, it's been extremely volatile recently. Is it a buying opportunity, well it would have been better to buy it at R30.00 but at R34.00?

NKARENG MPOBANE: I would say at these levels, yes. It is certainly trading at lower multiples or ratings relative to its local peer group, so a South African peer group, also just the Old Mutual, Asset Management newly listed business now, in the U.S. That is also trading at a discount, relative to its peer group, as far as the rating goes, so at around 11 times multiples. Where the peer groups that is around 17, so definitely value-on-mark there, so if the multiples of that gap closes somewhat, it would definitely have benefits to the overall share price and we could say that this is probably a buying level for it.

ALEC HOGG: Ingrid, what happened to these shares? Why did they fall all the way down to R30.00, just in the last few weeks and then, of course bounce back to R34.00. Do you have any insight on that?

INGRID JOHNSON: It is always challenging to know Alec because, at the end of the day, our responsibility is to run our business really well and investors will then decide on the underlying quality and growth opportunities, relative to the investments. Clearly, the opportunity of investing in Quilter Cheviot there may have been some interest and wonder about what we would pay but clearly, when the market actually saw it was a high quality purchase (at a good price), then I think there was some positive response. Clearly, markets are volatile. It is very hard to tell. We are also exposed to sentiments around South Africa and the Rand weakness, and again Minister Nene's very positive, Medium Term, Budget Policy Statement. I think it will be positive for the country, as we want to work together and should be positive for investors.

ALEC HOGG: How exposed are you now to South Africa, overall? What's the percentage of your income that's generated here still?

INGRID JOHNSON: If you look at our AFP at the half-year, and that's after tax and minorities, roughly 65-percent of our earnings is still coming from South Africa. That represents the [inaudible: 11:37], strength and heritage of our business, and how we want to leverage and grow that, into the rest of Africa.

ALEC HOGG: So it's important that the South African operations, Nkareng, actually do still perform.

NKARENG MPOBANE: Yes, and I think in its trading update, the disappointment was probably the affluent segment, in the South African business. That was flat, I think one-percent or something, and that is the meaningful part of the South African life business.

ALEC HOGG: Let's ask Ingrid about that, the affluent part of your South African operations. Ingrid…?

INGRID JOHNSON: Absolutely, if you look at the overall number, and particularly if you look at APE sales, it would have been three-percent up, so it would have been modest. However, if you look at the context we are operating in, in fact single premium APE was actually up 16-percent and we are seeing very positive inflows into XtraMax, as well as the benefit of our new offering with our Wealth product (the whole Wealth offering), whereas the regular premium is clearly under pressure. I think it is also reflective of the consumer.

ALEC HOGG: But the whole Old Mutual story has transformed in the past ten years. I suppose they're a very different place to be working now, I know you're a recent addition there, but under the new Chief Executive is he likely to be around for a lot longer, Julian Roberts?

INGRID JOHNSON: Having been with Nedbank for 21-years, and being part of the Old Mutual Group, we've certainly seen the highs and lows and some of the challenges faced in 2009. Since Julian has been at the helm, there has been so much done to streamline, simplify, and de-risk the Group that it is in an amazing place. Our capital is strong. Our cash is in good shape, and that gives us the flexibility to do the corporate activity that we've done and we really are an inflection point for growth. An opportunity is to see us in what we could be, rather than always look back at what we have been because clearly, there were some missteps but if we look from 2009, a lot have done well. That really means we're poised for growth, on a sustainable basis.

ALEC HOGG: Only five years, not ten years, the transformation there. That was Ingrid Johnson, Financial Director at Old Mutual, and Nkareng Mpobane, who is a Portfolio Manager at Ashburton Investments.