Thursday 12 September 2013

The Mousetrap Dilemma - Portfolio Buy: Phoenix Group Holdings (LSE:PHNX)

Doesn't that cheese look good?
I am constantly looking for high yields from my new investments but always with the proviso that I don't want to throw my money away on something that is likely to go belly-up in a few months.

Risk and reward are inseparable - however, I try to remember to find out what it is about the company the market does not like, so I can make my own assessment. So I take my time - a bit like a mouse sniffing around a mousetrap...

FTSE250 Phoenix Group Holdings provides life insurance and asset management services, as well as pension fund management. However, it does not write policies for new customers, it operates as a 'closed life fund' that only writes increments to existing policies. To that extent, its commercial future depends its skill in matching its liabilities with its investment income - and minimising the costs of doing so.

In fact it claims to be the 'largest UK consolidator of closed life assurance funds'.

The group reports £67.1bn of assets under management and more thab six million policy holders. The business has two core segments: life assurance (Phoenix Life) and asset management (Ignis Asset Management), which together employ around 1,200 people across the UK and Channel Islands.

The origins of the company are fascinating - take a look at the Phoenix Company Timeline: I spotted several companies that I have owned shares in, had a bank account with and even a small pension! The names include: Pearl Assurance, London Life, AMP, Britannic, Royal, Sun Alliance etc. Phoenix is also appears to be closely related, historically, to another closed life company Resolution, which I also own.

PHNX offers a dividend yield of over 6% with a massive dividend cover of over 4. A 2013 interim dividend of 26.7p per share was recently declared, representing an increase of 27% compared to the 2012 interim dividend. For an income investor that is like finding the Holy Grail!

The 2013 Half-Year Interim Results look impressive, painting a picture of a company that has dramatically changed its financial structure: 'transformational' is how they call it. Firm and forward-looking corporate actions are always a positive factor on share price. However, wading through the detail of the results did not help me understand why the yield is so high.

So. left to my own devices, I guess that the most obvious explanation is related to the potential future unwinding of QE - life companies hold a lot of fixed-interest securities, including gilts: these have been pumped up in value and will almost certainly fall in the medium term, as interest rates rise.

What has sparked particular interest in the company recently (and a rise in share price) is a potential tie-up with Swiss Re - what are described as 'preliminary discussions' in relation to a possible combination of Phoenix and Swiss Re's Admin Re business units, resulting in Swiss Re taking a minority shareholding in Phoenix.

So, in this case, I have to accept that the City does not seem to like PHNX: however, the potential future income stream looks good to me - so I have bought some.

[Purchase price: £7.46]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. If they have done a good job matching assets and liabilities, they should be relatively insensitive to movements in interest rates because the value of the assets and the liabilities should move broadly in line.

    Surplus assets (ie the assets over and above those backing liabilities) will change in value with interest rates.

    A comparison of market cap to embedded value versus the other companies in the sector might give some clues as to whether its a company or sector issue.

    Depending on the run-down rate of the business, the yield may appear high at the moment because there's only a few years left before the cash stream starts to tail off (a fixed set of policies running off leads to rising overheads which means the only way out for a firm like this is to buy more policies or be bought out).

  2. Also if you mean the FTSE100 resolution, they share a few people but that isn't a closed book company, it still sells new policies through the Friends Life brand?

  3. I really should have actually thought before commenting. Apologies for the number of posts! The Resolution in the Phoenix group history was a closed fund aggregator run by Clive Cowdery, when that got bought out by Pearl (in something of a takeover battle sparked by the a proposed Resolution:Friends Provident merger) he set up a new company, also called Resolution, which had the aim of consolidating the UK life industry in general, not restricting itself to closed books. That bought Friends Provident, most of AXAs Uk business and BUPA and has jammed them all together into the Friends Life brand underneath Resolution which is the listed company in the LSE

  4. I seem to have missed the boat with this one - 746 when you recommended it and this morning (18th Sept), having fallen four points yesterday, it was at 775. I thought you said the city didn't like it! Maybe I should see what is going to happen next?

  5. I work there. I buy their shares through a SIP and a SAYSO. I think you will do well with this one.