Q3 LF Prudential Risk Managed Active and Risk Managed Passive Investment Update

Author Image Adrian Gaspar Investment Director, T&IO
9 minutes read
Last updated on 20th Oct 2021

Summary

  • Markets positive for most of the quarter but fell towards the end of September due to several negative factors
    • Concerns that inflation could be more persistent
    • Changing narrative from central banks
    • Headlines around about Chinese real estate
    • Economic growth slowing
  • Positive performance year to date
  • Property continues to add value for Active portfolios
  • New funds added to the Active portfolios

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.

Headlines about Chinese real estate

Despite the challenging end to the quarter all ten portfolios produced positive returns.

Developed market equities outperformed Asia, China and Emerging Markets. Japan was the best performer. Passive equity was largely ahead of the active funds, except in Europe.

The Alternatives and Property positions again produced positive returns over the quarter. All three property funds, the iShares UK Property Fund, the L&G UK Property Fund and the M&G Property Portfolio all contributing.

In fixed income, investment grade and high yield performance was largely flat. We continue to be pleased with the overall performance of the active managers.

M&G Strategic Corporate Bond and Royal London Corporate Bond funds outperformed the passive iShares Corporate Bond Index although the Royal London fund was the only one to just creep into positive territory.

The M&G Emerging Market Bond fund produced a solid positive return whilst the M&G Global High Yield was marginally negative with the Evergrande default saga impacting the sector.

In local currency terms, the M&G European Credit Investment Fund and the Eastspring US Corporate Bond Fund were broadly in line with their passive equivalents. Sterling was largely unchanged, mildly benefiting the performance of iShares European Investment Grade, M&G European Corporate Bond and iShares US Corporate Bond Fund. 

  3m 1yr
LF Prudential Risk Managed Active 1 P Acc in GB 0.29 7.45
LF Prudential Risk Managed Passive 1 P Acc in GB 0.30 5.07
 LF Prudential Risk Managed Active 2 P Acc in GB 0.54 10.62
LF Prudential Risk Managed Passive 2 P Acc in GB 0.32 7.31
LF Prudential Risk Managed Active 3 P Acc in GB 0.23 12.82
LF Prudential Risk Managed Passive 3 P Acc in GB 0.40 10.22
LF Prudential Risk Managed Active 4 P Acc in GB 0.78 17.00
LF Prudential Risk Managed Passive 4 P Acc in GB 0.47 13.62
LF Prudential Risk Managed Active 5 P Acc in GB 1.43 19.76
LF Prudential Risk Managed Passive 5 P Acc in GB 0.84 16.51

The table shows the annualised performance of each fund in the LF Prudential Risk Managed Active and Passive range over 3 months and 1 year to 30 September 2021. Outperformance relative to the comparator benchmark for each fund is indicated by the green boxes.

Source and date – FE, total return bid-bid month end (30 September 2021) performance table from UK Investment Association universe.

Activity within portfolios

In the Risk Managed Active range two new emerging market equity funds were added;

M&G (GSAM) Global Emerging Markets Fund and the M&G (MFS) Global Emerging Markets Fund.

The T&IO Manager Oversight (MO) team believe these via two highly rated, but differentiated funds offer a good, blended exposure as the GSAM (Goldman Sachs) fund is marginally tilted towards ‘growth’, and ‘size’ (small/mid cap bias) and the MFS (Massachusetts Financial Services) has a slight tilt towards ‘value’.

The transition to the M&G Asia Pacific excluding Japan Equity Fund has commenced. M&G bought a new Asia/Japan team into the business and they were subsequently selected to run this allocation. The 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.

The core US holding was switched to the M&G (ACS) BlackRock US Equity Fund from the previous internal vehicle. Allocating to this fund has provided an opportunity to introduce more deliberate ESG factor exposure into the Active portfolios.

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

These vehicles are all used within PruFunds thus further aligning underlying portfolios.

In early July, with equities having performed well and with a bit more uncertainty on the outlook for inflation and interest rates, the tactical positions across equities and fixed income were all removed.

A diversifying overweight to alternatives has since been maintained. 

Outlook

The portfolio manager continues to assess the prospects for markets.

A key question that remains is whether in the face of softer growth, central banks will have the desire and the inflation leeway to continue with stimulus rather than to take steps to unwind it. 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 attention to the volatile macro landscape for insights into the state of the global economy and to determine the actions that 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 absolute and accommodative levels compared to history.

Portfolio holdings as at end September 2021 (Source T&IO 30 Sept 2021)

LF Prudential Risk Managed Active

  Active 1 Active 2 Active 3 Active 4 Active 5
UK Equity 6.89 10.75 14.77 19.34 23.99
FTSE 100 Index 0.46 0.54 0.64 0.58 0.79
M&G (ACS) UK 200 Index Fund 2.09 3.31 4.42 6.04 7.46
M&G (ACS) UK All Share Index Fund 2.10 3.35 4.49 6.20 7.65
M&G (ACS) UK Listed Equity Fund 1.13 1.77 2.31 3.17 4.03
M&G (ACS) UK Listed Mid Cap Equity Fund  0.29 0.47 0.58 0.84 1.05
M&G Recovery Fund 0.82 1.30 2.33 2.51 3.00
European excluding UK Equity 2.69 4.22 5.81 7.61 9.43
Euro Stoxx 50 0.30 0.26 0.26 0.12 0.24
M&G (Lux) European Active Fund 0.90 1.38 2.15 2.89 3.52
M&G (Lux) European Passive Fund 0.60 0.99 1.36 1.80 2.26
M&G European Select 0.89 1.60 2.05 2.80 3.41
US Equity 2.55 3.88 5.41 7.15 8.87
M&G (ACS) BlackRock US Equity Fund 0.96 1.45 2.27 3.20 4.42
M&G North American Val 1.36 1.79 2.52 3.27 4.11
E-Mini S&P 500 0.23 0.63 0.62 0.68 0.34
China Equity  0.37 0.56 0.77 0.99 1.25
FTSE China A50 0.02 0.02 0.04 0.05 0.06
M&G (ACS) China Equity Fund 0.20 0.25 0.37 0.48 0.61
M&G (ACS) Value Partners China Equity Fund 0.16 0.30 0.36 0.46 0.59
Asia excluding Japan Equity 3.10 4.81 6.63 8.69 10.80
Eastspring Dev. & Emerging Market Asia Fund 1.93 3.00 4.14 5.34 6.73
M&G Fund Asia Pacific excluding Japan Equity Fund 1.17 1.82 2.50 3.35 4.07
Global Emerging Markets Equity 1.17 1.81 2.49 3.27 4.04
Eastspring Global Emerging Markets Fund 0.77 1.15 1.54 2.02 2.60
M&G (GSAM) Global Emerging Markets Fund 0.11 0.16 0.22 0.23 0.29
M&G (MFS) Global Emerging Markets Fund 0.29 0.51 0.73 1.03 1.14
Japan Equity  1.51 2.24 3.06 3.91 4.92
M&G (ACS) Japan Equity Fund 1.11 1.87 2.75 3.61 4.55
TOPIX Index 0.39 0.37 0.31 0.30 0.38
South Africa Equity 0.33 0.57 0.78 1.00 1.25
FTSE/JSE TOP 40 0.33 0.57 0.78 1.00 1.25
UK Property  3.63 4.69 5.64 6.24 6.85
iShares UK Property Fund 1.10 1.72 1.92 1.78 1.46
L&G UK Property Fund 2.06 2.06 2.72 3.56 4.28
M&G Property Portfolio 0.47 0.92 1.00 0.90 1.11
US Treasuries 2.35 1.94 1.51 1.10 0.68
US 10 Year Note  2.35 1.94 1.51 1.10 0.68
US Investment Grade 14.51 11.60 8.86 6.25 3.59
Eastspring US Corporate Bond Fund 14.51 11.60 8.86 6.25 3.59
Europe Investment Grade 9.01 7.14 5.48 3.87 2.19
M&G European Credit Investment Fund 9.01 7.14 5.48 3.87 2.19
UK Investment Grade 27.93 22.36 17.00 11.68 7.06
M&G Credit Income Investment Trust 0.87 0.69 0.51 0.36 0.22
M&G Strategic Corporate Bond Fund 13.59 10.85 8.24 5.69 3.43
Royal London Corporate Bond Fund 13.47 10.82 8.24 5.64 3.41
Asia Fixed Income 6.96 5.71 4.59 3.37 2.07
Eastspring Asia Dollar Bond Fund 1.64 1.36 1.03 0.87 0.51
 Eastspring Asia Local Currency Bond Fund 5.32 4.35 3.56 2.50 1.56
Convertible Bonds 1.73 1.42 1.09 0.77 0.48
M&G Global Convertibles 1.73 1.42 1.09 0.77 0.48
Emerging Market Debt 2.12 2.01 1.91 1.82 1.48
M&G Emerging Market Bond Fund 2.12 2.01 1.91 1.82 1.48
Global High Yield 4.45 5.04 5.01 4.46 3.30
 M&G Global High Yield Bond Fund  4.45 5.04 5.01 4.46 3.30
Cash 5.26 5.01 4.30 3.18 1.85
Private Equity 1.16 1.41 1.66 1.77 1.93
Harbourvest Global Private Equity 0.72 0.88 1.02 1.09 1.17
HgCapital Trust plc 0.29 0.35 0.43 0.44 0.49
NB Distressed Debt Investment 0.04 0.04 0.05 0.07 0.08
Princess Private Equity Holding 0.12 0.14 0.16 0.18 0.20
Hedge Funds 1.16 1.41 1.64 1.75 1.98
BH Macro Limited 0.30 0.36 0.42 0.43 0.51
BioPharma Credit plc 0.39 0.47 0.55 0.59 0.68
Blue Capital Alternative Income Fund 0.00 0.00 0.00 0.00 0.00
Boussard & Gavaudan Holding 0.33 0.42 0.48 0.52 0.56
Round Hill Music Royalty Fund 0.14 0.16 0.17 0.20 0.23
Infrastructure 1.14 1.40 1.59 1.77 1.98
BBGI Global Infrastructure 0.26 0.33 0.37 0.42 0.45
DP Aircraft Limited 0.00 0.00 0.00 0.00 0.01
Ecofin U.S. Renewables Infracture Trust plc 0.19 0.22 0.24 0.28 0.32
NextEnergy Solar Fund (NESF) Limited 0.21 0.26 0.30 0.33 0.35
Renewables Infrastructure Group 0.18 0.22 0.26 0.28 0.32
SDCL Energy Efficiency Income Trust 0.30 0.37 0.42 0.46 0.53

LF Prudential Risk Managed Passive

  Passive 1 Passive 2 Passive 3 Passive 4 Passive 5
UK Equity 8.96 12.46 16.66 21.04 25.83
FTSE 100 Index 0.53 0.70 0.60 0.69 0.80
iShares UK Equity Index 6.00 10.47 11.59 16.76 18.57
L&G UK Index 2.43 1.29 4.47 3.59 6.45
European excluding UK Equity 3.32 4.71 6.32 8.10 9.89
Euro STOXX 50 0.31 0.43 0.55 0.66 0.91
L&G European Index 3.01 4.27 5.77 7.45 8.99
US Equity 3.23 4.48 5.96 7.55 9.26
iShares US Equity Index Fund 3.18 3.92 5.09 6.37 7.54
M&G (ACS) BlackRock US Equity Fund 0.00 0.27 0.31 0.66 0.89
E-Mini S&P 500 0.04 0.29 0.57 0.52 0.83
 China Equity 0.47 0.64 0.86 1.07 1.35
FTSE China A50 0.02 0.04 0.05 0.08 0.08
M&G (ACS) China Equity Fund 0.20 0.31 0.41 0.50 0.64

M&G (ACS) Value Partners China Equity Fund

0.25 0.30 0.40 0.49 0.62
Asia excluding Japan Equity 3.80 5.44 7.27 9.26 11.36
iShares Pacific excluding Japan Equity Index Fund 3.80 5.44 7.27 9.26 11.36
Global Emerging Markets Equity 1.48 2.08 2.79 3.46 4.27
iShares Emerging Market Equity Index 1.48 2.08 2.79 3.46 4.27
Japan Equity  1.90 2.60 3.38 4.19 5.10
iShares Japan Equity Index Fund 1.83 2.35 3.02 3.68 4.63
TOPIX Index 0.08 0.25 0.36 0.51 0.47
South Africa Equity 0.42 0.64 0.86 1.07 1.32
FTSE/JSE TOP 40 0.42 0.64 0.86 1.07 1.32
US Treasuries 2.34 2.04 1.69 1.28 0.84
 iShares $ Treasury Bond Fund 2.34 2.04 1.69 1.28 0.84
US Investment Grade 17.54 14.85 11.92 8.89 6.03
iShares US Corporate US Bond Index 17.54 14.85 11.92 8.89 6.03
Europe Investment Grade 10.82 9.24 7.39 5.48 3.65
iShares European Investment Grade Corporate Bond 8.67 7.41 5.90 4.37 2.96
M&G European Corporate Bond 

2.16

1.83

1.49 1.11 0.68
UK Investment Grade 32.56 27.64 22.11 16.59 11.23
iShares UK Corporate Bond Index Fund 25.78 21.97 17.65 13.21 8.87
M&G Strategic Corporate Bond Fund 6.78 5.67 4.46 3.38 2.36
Emerging Market Debt 2.08 2.08 2.08 2.06 1.83
M&G Emerging Market Bond Fund 2.08 2.08 2.08 2.06 1.83
Global High Yield 2.99 3.24 3.26 2.90 2.27
M&G Global High Yield Bond Fund 2.99 3.24 3.26 2.90 2.27
Cash 5.68 5.04 4.16 3.64 1.92
Private Equity 0.81 0.96 1.13 1.14 1.30
Harbourvest Global Private Equity 0.50 0.62 0.72 0.71 0.81
HgCapital Trust plc 0.20 0.24 0.29 0.30 0.34
NB Distressed Debt Investment 0.03 0.01 0.02 0.02 0.02
Princess Private Equity Holding 0.08 0.09 0.11 0.11 0.13
Hedge Funds 0.80 0.94 1.07 1.16 1.29
BH Macro Limited 0.20 0.24 0.28 0.29 0.34
BioPharma Credit plc 0.27 0.33 0.37 0.42 0.44
Blue Capital Alternative Income Fund 0.00 0.00 0.00 0.00 0.00
Boussard & Gavaudan Holding 0.23 0.28 0.31 0.34 0.39
Round Hill Music Royalty Fund 0.10 0.09 0.12 0.11 0.13
 Infrastructure 0.80 0.92 1.09 1.13 1.25
BBGI Global Infrastructure 0.18 0.23 0.27 0.28 0.30
DP Aircraft Limited 0.00 0.00 0.00 0.00 0.00
Ecofin U.S. Renewables Infrastructure Trust plc 0.13 0.11 0.14 0.12 0.15
NextEnergy Solar Fund (NESF) Limited 0.15 0.18 0.20 0.21 0.24
Renewables Infrastructure Group 0.12 0.16 0.18 0.19 0.20
SDCL Energy Efficiency Income Trust 0.21 0.25 0.29 0.31 0.35

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company. The Prudential Assurance Company and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.