Pru Inc funds arm targets equity manager buy-INTERVIEW

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Thursday January 27, 2011 03:07:13 PM GMT

* Eyes acquisition to herald debut in international stocks

* Emerging mkts fixed income assets seen doubling in 5 years

* Says ETFs not a threat to mutual funds sector

By Cecilia Valente and Sinead Cruise

LONDON, Jan 26 (Reuters) - Prudential Investment Management is shopping for acquisitions to clinch a long-awaited break into global equities management, as regulation promises fresh upheaval and consolidation in the U.S. financial sector.

Chief Executive Charles Lowrey told Reuters the $520 billion funds arm of U.S. insurer Prudential Financial Inc was keen to cap "a great crisis" by taking over an international stocks manager that could help them cash in on rising U.S. appetite for overseas investment.

"As the markets begin to return, you see other opportunities being forced out as people begin to clarify their own strategy, either for regulatory reasons or strategic reasons," Lowrey told Reuters in an interview.

"We are in discussions with many people about what their plans might be so it would not surprise me if we made some other acquisitions along the way," he said, referring to Prudential's 2010 buys of AIG's Star and Edison Life insurance units.

The parent of the New-Jersey based investment manager -- unrelated to the UK insurer of the same name -- managed to ride out the financial crisis without a government bailout, leaving Lowrey free to pick up an army of new staff from ailing rivals.

While its real estate and fixed income businesses have attracted "record inflows" for three years running, Lowrey said addressing a lack of global equities expertise was a priority.

"We don't have a capability there ... it's the one area we've been looking for," Lowrey said, flagging preference for a small-scale takeover to avoid possible culture clashes that can hold up integration of two large investment houses.

The sale of Citi Property Investors to Apollo Management was dogged by delays amid concerns over fund manager exits and client upset while the future of ING's property arm remains unclear months after bankers were appointed to flush out potential buyers.

EQUITIES

Prudential's intended push into equities comes as its U.S. institutional and retail clients look to up their exposure to international assets and offset shaky markets closer to home.

Flows into all equity funds hit a five-week high of $10.1 billion in the week to Jan. 19, with emerging markets equities strategies accounting for $1.7 billion, data from fund research house EPFR Global showed.

In the same week, investors pulled a record amount of money from U.S. Municipal Bond Funds, while the ongoing sovereign debt crisis in Europe prompted further outflows from US, Europe and Global Bond Funds.

James Sullivan, head of Prudential's Fixed Income team, said his unit's assets in emerging markets could double to $25 billion over the next five years, as long as issuance continued to grow at the current pace.

"For the most part (U.S.) investors are underallocated to emerging markets so as that picks up, I expect there will be a lot more to come," Sullivan said.

Lowrey described broad hesitation towards emerging markets among U.S. investors as "a myopia" but said the potential rewards of diversification were dawning on them as the U.S. economic revival braced for "significant headwinds" in 2011.

"The U.S. clients have had the luxury of not having to go and invest overseas. But a couple of things are happening now. The dynamic between emerging and developed markets is changing and the other is the recognition that, as borne out by the last crisis, that they need to become more global," he said.

While keen to develop new areas of expertise, Lowrey said he was unfazed by the steady rise in popularity of computer-driven or exchange traded funds (ETFs), which some commentators say could drain massive sums of client money out of mutual funds.

ETFs typically track baskets of shares, bonds or commodities and are traded like stocks for very low fees.

"There is space for ETFs and there is space for mutual funds. The growth rate for ETFs is huge but they are still small relative to the size of the mutual funds business. But there are liquidity issues and a host of other issues that will have to be resolved over time," said Lowrey.

"We are in the mutual fund business, we have no plans to get into the ETF business," he said. (Editing by Jon Loades-Carter)

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