Mark Slater, manager of MFM Slater Income Fund (GB00B905XJ71), explains why closed life book operator Phoenix Group (PHNX) is a "must-hold" stock for income funds.
"Phoenix Group is the UK's largest closed life and pension fund consolidator with around £70bn of assets under management and more than 5m policyholders," says Mr Slater. "Having recently sold Ignis Asset Management, the business model now focuses on the acquisition and consolidation of closed life funds, and their subsequent run-off to maximise economies of scale and operating efficiencies while protecting the interests of all policyholders."
In July Phoenix Group sold Ignis to Standard Life Investments for £390m.
"Market leadership is a significant attraction from an investment standpoint, as is the proven ability to generate surplus cash to support the progressive dividend policy," continues Mr Slater. "The current yield approaching 7.5 per cent makes Phoenix a must-hold stock for income funds."
Holding Phoenix Group has recently helped MFM Slater Income's performance because although markets continued to drift sideways and downwards in July as the holiday season approached, during that month Phoenix Group's share price increased 8 per cent on persistent demand from income-seeking investors. The share was MFM Slater Income's ninth-largest holding at the end of July accounting for 2.11 per cent of assets.
Investors Chronicle rated Phoenix Group a 'buy' at 735p on 26 August 2014. We said that regulatory threats look minimal and strong cash generation is supporting an attractive dividend yield. Acquisition-led growth prospects look good, while the shares are trading well below forecast embedded value: analysts at JPMorgan Cazenove expect year-end embedded value of 1,158p a share. Phoenix Group's shares were trading at 717p as at 15 September 2014.
Phoenix Group reported in its half-year results last month that cash generation reached £332m in the first half of 2014, over half way to its £500m to £550m target for 2014.
