There’s nothing quite like the prospect of “efficiency gains” to persuade shareholders that an ambitious takeover is worth doing. And there’s no sector where they have been so hard to realise as the ever-opaque life assurance business.

So here we go again, with Aviva’s plan to absorb Friends Life, aka Resolution II, with the prospect of at least £100m of savings from merging the businesses. Aviva is the product of too many rounds of mergers to count, and given the long-term nature of the industry, still has the ghosts of Commercial Union, General Accident and Norwich Union rattling around its City HQ. Now it proposes to add Axa UK, BUPA Life and Friends Provident to what Eamonn Flanagan at Shore Capital calls the alphabet soup of Aviva companies.

To say the move surprised the City hardly covers it. Mark Wilson, the tough-minded Kiwi who succeeded the hapless Andrew Moss, has spent two years rebuilding trust and the share price, to the point where it’s more than half the price it was a decade ago (and more than twice its nadir).  The company is still a trifle stretched for cash, one thing that Friends is generating, which is why Mr Flanagan describes the £5.3bn deal as a disguised rights issue.

Mr Wilson has not yet used the dread word “transformational” to describe what he’s doing, but to counter the rights issue jibe, he has to focus attention on those savings – while not emphasising the associated job losses. It’s a tough call. After all these years, Aviva’s back office is still a long way from being a model of efficiency and customer care.

When he quit as CEO of AIA in Hong Kong, Mr Wilson described that company as “90 years of spaghetti“, which should ring a bell with Aviva policyholders. He had opposed the Prudential’s failed $35bn bid (for a company that subsequently floated and is now worth $82bn) so if anyone can make Friends with those efficiency savings, he can.

Long ago David Prosser, then CEO of Legal & General, made it a rule not to buy another life office, and the shareholders prospered. We’ll see whether Mr Wilson can prove him wrong.

Off track, on market

Last year Warren Buffett suggested to his fans that they put their money into Vanguard’s index tracker funds. In the following 10 months, $164bn followed his advice.

The logic is simple: no nasty shocks from individual stocks, and no greedy fund manager skimming fees while quietly sticking close to his index benchmark. This activity has become less comfortable in the UK since the Retail Distribution Review forced disclosure of the cost of advice, concentrating investors’ minds no end. Some have concluded they are better off making their own mistakes instead of paying someone else to do so.

Others have gone tracking. The trend is less extreme than in the US, but it’s growing fast. The six managers controlling the biggest funds identified by the FT this week included Eleanor de Freitas, who runs Blackrock’s UK Equity tracker. Her stocks pick themselves, so she’s hardly managing in the usual sense of the word.

There are far too many pooled funds in London. Many are run for the convenience of the manager, and deserve to disappear. Yet the bigger the portion of the market controlled by trackers, the more opportunity for active investors. The indices will always contain some businesses driven to improbable valuations by market fashion (remember Baltimore Technologies?) and the more extreme the fashion, the more the trackers have to buy. Beating the index by avoiding the duds is just as good for performance as picking the winners.

Another shocker

Sir Terry Leahy is shocked at the way Tesco has lost sight of its customers. It’s true that fewer of them can be seen in the stores,  three years after he stepped down. It’s shocking that Tesco struggled on in America before 2011, shocking that his strategy of cornering the market in planning permissions for big sheds has produced white elephants, shocking that Tesco’s return on capital in the Leahy years fell even while declared earnings were rising. We’re all shocked.

This is my FT column from Saturday

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