Spotlight on AMP

Wealth manager and insurer AMP (ASX: AMP) has been far from a great investment for shareholders over the past decade. Whether the investment time frame is calendar year 2013, 12 months, 5 years or 10 years AMP has in each instance significantly underperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

Consider for a moment that for the financial year ending December 2004 AMP earned 48 cents per share; in 2007, earnings grew to 53 cents per share. However since 2007 earnings began declining and by year end 2012, AMP was earning just 25 cents per share. With an earnings profile like this, underperformance is not surprising.

Recently a number of high profile companies, including Brambles (ASX: BXB) and Amcor (ASX: AMC), have announcing demerger plans. Within the context of demergers and shareholder value it’s interesting to look back and consider the performance of AMP in light of its Henderson Group (ASX: HGG) demerger. While this may be of limited value in some respects given the many company-specific issues involved in demergers, sometimes the whole may actually be bigger than the sum of the parts.

As the chart below shows, since January 2004, which was just after the demerger of AMP and the London-based fund manager subsidiary Henderson, shareholders have enjoyed massive outperformance from their Henderson shareholding and significant underperformance from their AMP shareholding.


Source: Google Finance

It could be argued that management at the time took a short-sighted view rather that a long-term approach when they announced the separation of the two businesses. Had management viewed Henderson as a vehicle through which to develop a market-leading position in providing international investment options to Australian investors, perhaps AMP would today own a division akin to a Magellan Financial Group (ASX: MFG). Instead, Magellan has managed in just seven years to enter the domestic market, capture funds under management of nearly $15 billion and grow its market capitalisation of $1.7 billion which equates to around 13% of the size of AMP. Not bad going for an upstart!

Foolish takeaway

AMP’s decision to demerge is obviously resigned to history now. Much more important is what does its future hold? AMP’s underperformance on the one hand creates a potential contrarian opportunity, however given the long-term nature of the underperformance there may be deeper structural issues at play, meaning potential investors should perhaps steer clear.

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Motley Fool contributor Tim McArthur owns shares in Henderson Group.

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