E: Asset management (including US broker-dealer) and other operations

The Group's asset management operations are based in the UK, Asia and the US where they operate different models and under different brands tailored to their markets.

Asset management in the UK is undertaken through M&G which is made up of three distinct businesses, being Retail, Wholesale and Finance, and whose operations include retail asset management, institutional fixed income, pooled life and pension funds, property and private finance.

Asset management in Asia serves both the life companies in Asia by managing the life funds and funds underlying the investment linked products and third-party customers through mutual fund business. Asia offers mutual fund investment products in a number of countries within the region, allowing customers to participate in debt, equity and money market investments.

Asset management in the US is undertaken through PPM America which manages assets for the Group's US, UK and Asian affiliates plus also provides investment services to other affiliated and unaffiliated institutional clients including CDOs, private investment funds, institutional accounts and mutual funds. In addition, broker-dealer activities are undertaken in the US where trades in securities are carried out for both third-party customers and for its own account.

Other operations covers unallocated corporate activities and includes the head office functions.

a The profit included in the income statement in respect of asset management operations for the year is as follows:

 

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  Asset management operations
  2010 £m 2009 £m
  M&G US Asia§ Total Total
  • *Revenue in respect of consolidated investment funds. The investment funds are managed on behalf of third-parties and are consolidated under IFRS in recognition of the control arrangements for the funds. The gains (losses) in respect of the investment funds are non-recourse to M&G and the Group and are added back through charges and consequently there is no impact on the profit before tax.
  • NPH broker-dealer fees represents commissions received and then paid to the writing broker on sales of investment products.
  • Short-term fluctuations for M&G are primarily in respect of unrealised value movements on Prudential Capital's bond portfolio.
  • §Included within Asian asset management charges of £179 million are £60 million of commissions (2009: £57 million).
Revenue (excluding revenue of consolidated investment funds and NPH broker-dealer fees) 943 229 251 1,423 1,097
Revenue of consolidated investment funds* 11 11 102
NPH broker-dealer fees 369 369 317
Gross revenue 954 598 251 1,803 1,516
Charges (excluding revenue of consolidated investment funds and NPH broker-dealer fees) (617) (207) (179) (1,003) (744)
Charges of consolidated investment funds* (11) (11) (102)
NPH broker-dealer fees (369) (369) (317)
Gross charges (628) (576) (179) (1,383) (1,163)
Profit before tax 326 22 72 420 353
Comprising:          
Operating profit based on longer-term investment returns 284 22 72 378 297
Short-term fluctuations in investment returns 47 47 70
Shareholders’ share of actuarial gains and losses on defined benefit pension schemes (5) (5) (14)
Profit before tax 326 22 72 420 353

b M&G operating profit based on longer-term investment returns:

 

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  2010 £m 2009 £m
Asset management fee income 612 457
Other income 3 13
Staff costs (263) (205)
Other costs (123) (100)
Underlying profit before performance-related fees 229 165
Performance-related fees 17 12
Operating profit from asset management operations 246 177
Operating profit from Prudential Capital 38 61
Total M&G operating profit based on longer-term investment returns 284 238

The difference between the fees and other income shown above in respect of asset management operations, and the revenue figure for M&G shown (excluding consolidated investment funds) in the main table primarily relates to total revenue of Prudential Capital including short-term fluctuations of £136 million (2009: £155 million) and commissions which have been netted off in arriving at the fee income of £612 million (2009: £457 million) in the table above. The difference in the presentation of commission is aligned with how management reviews the business.

Assets, liabilities and shareholders' funds included in the Group consolidated statement of financial position in respect of asset management operations are as follows:

 

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  Asset management operations
  2010 £m 2009 £m
  M&G
(note iii)
US Asia Total Total

Notes

  1. Loans
    The M&G loans of £1,418 million (2009: £1,413 million) relate to loans and receivables managed by Prudential Capital. These assets are generally secured but have no external credit ratings. Internal ratings prepared by the Group's asset management operations as part of the risk management process, are £213 million A+ to A- (2009: £92 million), £873 million BBB+ to BBB- (2009: £835 million), £219 million BB+ to BB- (2009: £330 million) and £113 million B+ to B- (2009: £156 million).
  2. Debt securities
    Of the total debt securities of £1,574 million in 2010 (2009: £1,164 million) of which £1,560 relates to M&G (2009: £1,149 million), £1,468 million were rated AAA to A- by Standard and Poor's or Aaa rated by Moody's (2009: £1,072 million).
  3. M&G includes those assets and liabilities in respect of Prudential Capital.
  4. Intra Group debt represented by operational borrowings at Group level
    Operational borrowings for M&G are in respect of Prudential Capital's short-term fixed income security programme and comprise £2,311 million (2009: £2,031million) of commercial paper and £249 million (2009: £7 million) of medium-term notes.
  5. Consolidated investment funds
    The M&G statement of financial position shown above includes investment funds which are managed on behalf of third-parties. In respect of these funds, the statement of financial position includes cash and cash equivalents of £304 million (2009: £269 million), £167 million of other investments (2009: £158 million), £(13) million of other net assets and liabilities (2009: £(17) million) and the net asset value attributable to external unit holders of £458 million (2009: £410 million) which are non-recourse to M&G and the Group.
Assets          
Intangible assets:          
Goodwill 1,153 16 61 1,230 1,230
Deferred acquisition costs 9 9 8
Total 1,162 16 61 1,239 1,238
Other non-investment and non-cash assets 854 174 94 1,122 850
Financial investments:          
Loans(note i) 1,418 1,418 1,413
Equity securities and portfolio holdings in unit trusts 141 10 151 137
Debt securities(note ii) 1,560 14 1,574 1,164
Other investments(note v) 51 1 7 59 113
Deposits 33 22 25 80 63
Total financial investments 3,203 23 56 3,282 2,890
Cash and cash equivalents(note v) 1,269 39 128 1,436 970
Total assets 6,488 252 339 7,079 5,948
Equity and liabilities          
Equity          
Shareholders’ equity 1,407 122 258 1,787 1,659
Non-controlling interests 4 4 3
Total equity 1,411 122 258 1,791 1,662
Liabilities          
Core structural borrowing of shareholder-financed operations 250 250
Intra Group debt represented by operational borrowings at Group level(note iv) 2,560 2,560 2,038
Net asset value attributable to external holders of consolidated unit trusts and similar funds(note v) 458 458 410
Other non-insurance liabilities 1,809 130 81 2,020 1,838
Total liabilities 5,077 130 81 5,288 4,286
Total equity and liabilities 6,488 252 339 7,079 5, 948

Reconciliation of movement in investments

A reconciliation of the total investments of asset management operations from the beginning of the year to the end of the year is as follows:

 

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  M&G
£m
US
£m
Asia
£m
Total
£m
At 1 January 2009        
Total investments (including derivative assets) 3,216 40 47 3,303
Less: Derivative liabilities (292) (292)
Directly held investments, net of derivative liabilities 2,924 40 47 3,011
Net cash outflow from operating activities (124) (21) (3) (148)
Realised gains in the year 34 34
Unrealised gains and losses and exchange movements in the year (48) (4) (4) (56)
Movement in the year of directly held investments, net of derivative liabilities (138) (25) (7) (170)
At 31 December 2009/1 January 2010        
Total investments (including derivative assets) 2,835 15 40 2,890
Less: Derivative liabilities(note G3) (49) (49)
Directly held investments, net of derivative liabilities 2,786 15 40 2,841
Net cash inflow from operating activities 310 8 11 329
Realised gains in the year 11 11
Unrealised gains and losses and exchange movements in the year 18 5 23
Movement in the year of directly held investments, net of derivative liabilities 339 8 16 363
At 31 December 2010        
Total investments (including derivative assets) 3,203 23 56 3,282
Less: Derivative liabilities(note G3) (78) (78)
Directly held investments, net of derivative liabilities 3,125 23 56 3,204

Certain asset management operations are subject to regulatory requirements. The movement in the year of the surplus regulatory capital position of these operations, combined with the movement in the IFRS basis shareholders’ funds for unregulated asset management operations, is as follows:

 

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  Asset management operations
  2010 £m 2009 £m
  M&G US Asia Total Total
Regulatory and other surplus          
Beginning of year 85 111 126 322 155
Gains during the year 245 12 55 312 97
Movement in capital requirement 9 (32) (23) 125
Capital injection 1 1 9
Distributions made (152) (4) (38) (194) (37)
Exchange movement 3 11 14 (27)
End of year 187 122 123 432 322

The movement in the year reflects gains driven by profits generated during the year and also changes in regulatory requirements. Distributions consist of dividends paid up to the parent company.

The M&G figures include those for Prudential Capital.

i Currency translation

Consistent with the Group’s accounting policies, the profits of the Asia and PPM America asset management operations are translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. For 2010, the rates for the most significant operations are given in note B4.

A 10 per cent increase in the relevant Asian exchange rates would have reduced reported profit before tax attributable to shareholders and shareholders’ equity, excluding goodwill attributable to Asia and PPM America asset management operations, by £9 million (2009: £5 million) and £28 million (2009: £23 million) respectively.

ii Other sensitivities to other financial risks for asset management operations

The principal sensitivities to other financial risk of asset management operations are credit risk on the bridging loan portfolio (as described in note E2) of the Prudential Capital operation and the indirect effect of changes to market values of funds under management. Due to the nature of the asset management operations there is limited direct sensitivity to movements in interest rates. Total debt securities held at 31 December 2010 by asset management operations were £1,574 million (2009: £1,164 million), the majority of which are held by the Prudential Capital operation. Debt securities held by M&G and Prudential Capital are in general variable rate bonds and so market value is limited in sensitivity to interest rate movements and consequently any change in interest rates would not have a material impact on profit or shareholder’s equity. Asset management operations do not hold significant investments in property or equities.

 

Other operations consist of unallocated corporate activities relating to Group Head Office and the Asia regional head office, with net income and expenditure for the year of negative £450 million (2009: negative £395 million) as detailed in note B1. An analysis of the assets and liabilities of other operations is shown in note B6.

 

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