PruFund Growth & PruFund Cautious Investment Update from the M&G Treasury & Investment Office (T&IO)

Author Image Adrian Gaspar Investment Director, T&IO
10 minutes read
Last updated on 2nd Nov 2021

Summary

  • Markets positive for most of the 3rd quarter but fell towards the end of September due to several negative factors

            o Concerns that inflation could be more persistent
            o Changing narrative from central banks
            o Headlines around about Chinese real estate
            o Economic growth slowing

  • Positive underlying performance year to date
  • Work continues to evolve underlying portfolios using internal and external fund managers
  • Good progress made on further evidencing how stewardship and responsible investing have been more formally embedded 

Economic Overview

Global economic growth remained buoyant during the third quarter, as much of the world continued to resume economic activities following the rollout of COVID-19 vaccines internationally. While most economic data was strong, much of the developed world appears to be at or just past the peak rate of growth, according to recent global business surveys. The recovery also appears increasingly uneven and fragile among some countries, with many now experiencing a variety of challenges, including renewed virus outbreaks, varying vaccination take-up rates, supply chain blockages and constrained energy markets.

A difficult September caused most major stockmarkets to either fall flat or dip into negative territory for the quarter, as a variety of fears weighed on investors’ minds. In China, power supply shortages and doubts over the health of the property sector upset investor appetite in the region, contributing to underperformance from emerging market shares and bonds more broadly. 

Inflation remained elevated in the US, UK and some emerging market economies but was relatively more contained in other advanced economies. Most monetary easing policies from the world’s major central banks were left in place, boosting economic conditions for businesses and consumers.

In the US, UK and Europe, fears over persistently high inflation and various discussions about the potentially imminent withdrawal of central bank support measures also contributed to volatile financial markets in September. In commodity markets, the price of oil and energy products more broadly increased significantly, while prices of precious metals struggled. 

In UK commercial property the trends of the past few months remain in play, with ongoing strong demand for industrials.  Out of town retail is also recovering, as economic factors look favourable to support a bounce-back in the sub-sector and a strong pick-up was seen in retail warehouse transaction activity. The attractive long-term fundamentals of London offices remain intact, in our view. 

Portfolio performance overview

The key drivers of returns for the underlying PruFund portfolios to end September were the regional equity allocations and continued good performance from underlying active equity managers. 

The UK, US, European, Japan and Asian equity holdings have all produced strong positive returns during 2021.  Total returns from the Asian, Emerging Markets and China equity sleeves were negative in Q3.  

The China equity mandate remains the only one to post a negative return so far this year. 

UK commercial property returns continued to improve in the third quarter of 2021, with total returns from all sectors providing a positive contribution. Europe and Asia have also performed positively with US the only negative. 

In fixed income, UK, Europe and Asian investment grade is negative with US just in positive territory. Pleasingly, some of the more specialist, diversifying assets like Private High Yield, Global High Yield and African Bonds continue to produce positive returns. 

Finally, the alternatives portfolios have had another good year so far, with Private Equity performing particularly well.

Underlying manager changes

T&IO are always working to enhance portfolios, source new investment ideas and scour the globe for fund managers to put policyholder money to work.

While M&G fund managers are appointed across many asset classes, this is subject to them passing the same due diligence process that would be employed when searching for an external manager. 

Several external managers have been appointed recently and long-time readers will know that most of the alternative assets are also run by external managers. 

Much of this activity has been covered in previous updates but we felt it would be appropriate just to summarise the key changes to underlying managers over the last 12-18 months 

US Equities

M&G (ACS) BlackRock US Equity Fund

This Blackrock ESG passive fund was introduced to give a more deliberate ESG factor exposure into PruFund portfolios.

A fuller note on this vehicle is available here; M&G (ACS) BlackRock US Equity Fund (pruadviser.co.uk)

US Small Cap

M&G (ACS) Granahan US Small Cap Growth Fund

M&G (ACS) Earnest Partners US Small Cap Value Fund

These funds were selected as part of a strategic change to portfolios which introduced a new allocation to the asset class. Two high quality external managers were awarded mandates following a following deep due diligence process. One value and one growth manager were selected to blend and form a core exposure.

Asian Equities

M&G APAC ex Japan Equity Mandate

M&G bought a new Asia/Japan team into the business and they were subsequently selected to run this allocation. The T&IO Manager Oversight (MO) team have a high conviction view on the key individuals, an investment approach that is suited to our requirements and the additional resource committed to the team and asset class.

Japanese Large Cap Equities

M&G (ACS) Japan Equity Fund

The allocation was changed to M&G Asian team.  

The rationale for the change is the same as for Asian equities. The M&G team were appointed due to MO’s conviction in them and the deterioration in their views of the previous managers following the departure of key individuals.

Chinese Equities

M&G (ACS) Value Partners China Equity Fund

M&G (ACS) China Equity Fund

These managers were appointed following the introduction of a new position within the strategic asset allocation. 

Value Partners, another external manager, were awarded a mandate following a selection process, including deep due diligence on the manager, which led to a high conviction top quartile view. This view is driven by their commitment and access to both onshore and offshore markets in China, as well as their local market expertise.

A more constrained M&G mandate was added recently to provide diversification and allow for additional deployment of capital to the asset class.

Emerging Market Equities

M&G (GSAM) Global Emerging Market Equity 

M&G (MFS) Global Emerging Market Equity 

M&G (Invesco) Global Emerging Market Equity 

M&G (Lazard) Global Emerging Market Equity

A recent review of the mandate by the MO team pointed towards the need for a different approach. They assessed the market and following an in-depth due diligence process and detailed analysis of a shortlist of managers, the decision was taken to allocate the mandate across four complementary external managers.  

Transition to the new managers will happen over time to minimise transaction costs.  

Core exposure is via two highly rated, but differentiated funds: 

GSAM (Goldman Sachs) is marginally tilted towards ‘growth’, and ‘size’ (small/mid cap bias) 

MFS (Massachusetts Investment Management) has a slight tilt towards ‘value’

For the satellite funds: 

Invesco Canada were selected for their depth of coverage and strong stock picking ability, to provide a ‘quality growth’ style

Lazard Asset Management brings balance to the overall portfolio with a more ‘traditional value’ approach

US Fixed Income

M&G US Total Return Fixed Income Mandate

M&G US Short Dated Fixed Income Mandate

The newly established M&G team were hired to run the mandates based on a high conviction view, their previous experience of running PruFund assets and the additional resourcing commitment to the US by M&G.

Global High Yield

M&G Global High Yield Fund

The new allocation to this asset class was driven by a change to the strategic asset allocation of portfolios.

M&G were selected based on a high conviction view of the manager/strategy.

Emerging Market Debt

M&G Emerging Market Debt Fund

Similarly, to Global High Yield, the allocation to Emerging Market Debt was driven by a change to the strategic asset allocation of portfolios.

M&G were selected based on a high conviction view of the manager/strategy.

The table at the end of this article provides a full summary of all the main mandates/funds within PruFund Growth.

Environmental, Social and Governance

An important aspect of how T&IO oversee PruFund portfolios has been the integration of ESG factors into investment decisions. We believe this can help manage risks and generate sustainable, long-term returns.

Several important milestones have been achieved since the last quarterly update.

UK Stewardship Code 2020

Teams across T&IO have worked on the first M&G Asset Owner UK Stewardship Code submission this year. This was successful, meaning that both Prudential Assurance Company (PAC), the asset owner within the Group, and M&G Investments, the asset manager, are now signatories.

Why is this important?

‘The UK Stewardship Code 2020 sets high stewardship standards for those investing money on behalf of UK savers and pensioners, and those that support them. Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.’*

*Source – Financial Reporting Council

Net-Zero Asset Owners Alliance (NZAOA) / United Nations Principles for Responsible Investment (UNPRI)

New membership of two other important organisations was also recently announced;

‘On behalf of over £120 billion of assets held by PAC for its policyholders and savers, M&G plc has also joined the UN-convened Net Zero Asset Owners Alliance (NZAOA), the global institutional investor group acting to help limit global warming to 1.5 degrees in line with the Paris Agreement.

To provide transparency on how PAC is delivering on its climate commitments, it has also become a signatory of the PRI (Principles for Responsible Investment), the UN-backed organisation promoting the integration of environmental, social and governance (ESG) factors in asset ownership decisions. PAC’s responsible investment activities will be assessed by PRI annually from 2023. M&G Investments, the asset management arm of M&G plc, became a signatory of UN PRI in 2013 and is currently rated A+ and A across the nine categories in which it is assessed.’

Full press release here; M&G plc joins Race to Zero – M&G plc (mandgplc.com)

 

Summary

For markets, the key question that remains is whether in the face of slowing growth, central banks will have the desire and the leeway to continue with stimulus rather than to take steps to unwind it. It looks like inflation will remain higher for longer than many had anticipated although the Long Term Investment Strategy Team in T&IO still believe it will fall closer to central bank targets over the longer term.

The recent rise in government bond yields suggests that markets expect monetary policy to tighten sooner rather than later, but after several false dawns in recent history, investors will continue to pay close attention to data and the messaging to try and help determine what action the main central banks are likely to take.

The end of September reminded us of the volatility that comes with a potential change in direction of monetary policy, but global rates are still at low levels compared to history.  

Amidst the market uncertainty T&IO have continued to work hard to make adjustments to ensure they capture new opportunities that enhance portfolios whilst at the same time developing the structures and processes required to meet the increasing demand from advisers and their clients for evidence of sound stewardship and responsible investing. 

PruFund Growth – Main mandates/funds
PruFund Cautious – Main mandates/funds

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