Lansdowne Partners Ltd., the biggest European hedge-fund firm focused on stock picking, said it abandoned a more than four-year bearish bet against Prudential Plc after suffering “meaningful” losses.
Lansdowne’s $8.6 billion Developed Markets Fund exited the short position in the first quarter after determining that the stock won’t fall “any time soon,” according to a letter sent to clients this month. Lansdowne has been betting against the U.K.’s biggest insurer by market value since at least January 2009 in a wager that had a value of 259 million pounds ($395 million) last month, regulatory disclosures show.
Shares of Prudential, led by Chief Executive Officer Tidjane Thiam, have more than doubled since the start of 2009 on Asian growth and U.S. annuity sales. Lansdowne said the insurer can’t sustain its Asian profits and that the annuity business is “far riskier” than investors and regulators assume.
“Given our ongoing belief in the long-term thesis,” the decision to close the short is “doubly frustrating,” London-based Lansdowne wrote in the letter, which was obtained by Bloomberg News. “We suspect our ability to judge the point at which evidence is accruing will be better done through a neutral position for the moment.”
Andrew Honnor, a Lansdowne spokesman, declined to comment on Prudential and how much money the hedge-fund firm lost on the investment. Robin Tozer, a spokesman for London-based Prudential, also declined to comment. Lansdowne manages $12.4 billion of assets for investors.
Prudential has risen 162 percent since the end of 2008 to 1,091 pence, valuing the company at 27.9 billion pounds. The stock fell 0.6 percent today in London trading.
In a short sale, traders bet stock prices will fall by borrowing shares from a broker and selling them. Traders plan to buy back the stock at a lower price, return the shares to their broker and pocket the difference as profit.
Lansdowne reduced its stake in Prudential on March 13, when the insurer announced a record Asian profit for 2012 and a dividend increase of 16 percent, according to disclosures with U.K. regulators. The stock surged 9.3 percent that day.
Thiam, 50, was paid 7.8 million pounds last year after operating profit rose 25 percent to 2.53 billion pounds. Prudential increased Thiam’s compensation 66 percent even after he became the first serving CEO of a FTSE 100 company to receive a public reprimand from the U.K.’s finance regulator. The Financial Services Authority fined Prudential 30 million pounds and chastised Thiam last month for not informing it earlier of the insurer’s $35.5 billion bid for AIA Group Ltd. in 2010.
Prudential is the second-biggest pan-Asian insurer by market value. The company operates in 13 markets including Hong Kong, Singapore, Malaysia and Indonesia, selling life and health insurance in countries where an emerging middle class is buying protection for the first time. Asia became the largest contributor of cash to Prudential’s earnings in 2012.
Prudential’s U.S. division, Jackson National Life, has grown rapidly in the last four years as it took market share from competitors such as Hartford Financial Services Group Inc. that were hurt by the 2008 financial crisis. Operating profit at Jackson, which sells variable annuities to retiring baby boomers, was about 1 billion pounds last year compared with 413 million pounds in 2008.
Variable annuities are investment products tied to the performance of the stock market that offer guaranteed annual payouts to retirees. While annuities provide investors protection against falling equity prices, the products can hurt insurers if not adequately hedged against market declines.
The FSA sent a “huge delegation” to inspect Prudential’s Jackson unit in 2010 as sales grew at record levels, Thiam said in a June 2011 interview with Bloomberg News. Prudential and the regulator worked together to ensure Jackson’s annuities weren’t being “mispriced” or “mis-sold,” he said at the time, adding that the FSA was “comfortable” with the product.
Jackson’s profit may come under pressure in the future as interest rates remain low, Andy Hughes, a London-based analyst at Exane BNP Paribas, said in a note to clients last month. The unit’s operating investment return of 5.4 percent isn’t sustainable with U.S. Treasuries yielding 2 percent, he said.
Hughes is one of only four analysts who have a sell rating on Prudential, according to data compiled by Bloomberg. The insurer has 17 buy ratings and six hold ratings.
The Lansdowne Developed Markets Fund, overseen by former Merrill Lynch & Co. investment managers Stuart Roden and Peter Davies, gained 7.3 percent in the first quarter and has posted an annual return of 13.4 percent since its inception in August 2001, according to the client letter. Competing hedge funds focused on stocks rose 5.2 percent in the first three months of 2013, according to Chicago-based Hedge Fund Research Inc.