Legal & General rides an asset wave

Legal & General (LGEN) is much more focused on institutional clients and investors these days after off-loading its retail investor business to Fidelity. The half-year reflected the differing fortunes of different parts of the fund management business and makes L&G something of a bellwether for trends within the general asset management sector. What was particularly notable in the results was the relative outperformance of the company’s range of alternative asset classes when compared with its traditional pension risk transfer business and retail annuities. Investors were also cheered by another rise in the dividend.

The service that L&G offers other institutions when it comes to pension risk transfer (PRT) is still responsible for generating over half of reported operating profits. In what management describe as an “unusually quiet half”, PRT shrank by £60m to £525m. Fortunately, this was more than offset by double-digit growth rates in its other business units.

For example, L&G Capital, which has high exposure to UK housebuilders as well as a range of venture capital companies, saw a doubling of profits to £250m on the back of higher valuations for portfolio companies – these include diverse assets such as developing electric charging points for cars. Meanwhile, LGI, the retail insurance business, saw some impact in the half from covid-19 claims, though around £30m of the £110m L&G has set aside to cover these remained unused at the period-end.     

L&G is a one of those companies that benefits significantly from an ageing population, with more evidence in these results that the appetite for annuities – despite the generally poor rates available to pensioners – continues to be strong with LGRR delivering profit growth rates of 17 per cent. The other indirect impact of Covid-19 has been on overall mortality rates and the company recognised a £49m release from reserves in these results to reflect the actuarial change of view.  

L&G is a solidly diversified asset management business and with over £7.5bn of reserve capital to cover the effects of any economic downturn, income investors can look forward to a gently rising dividend in the near term. The company guided that any uplift would be in the low single to mid-digit range. Trading at about twice tangible book value, the share price reflects the importance of the dividend to income investors. With a forward P/E based on 2022 consensus, the shares are better value than most investment management peers, and we maintain our recommendation. Buy.

Last IC View: Buy, 276p, 10 Mar 2021