Financial advisers have long sought the holy grail of investment for their clients, which is a long-term return ahead of cash but whilst minimising risk and volatility. As Pru celebrates the 18-year anniversary since the launch of the first PruFund, it’s track record of delivering consistent long-term returns to date indicates that the range of smoothed funds goes some way towards this lofty ambition.
In this Q&A with IFA Magazine, Parit Jakhria, Director of Long-Term Investment Strategy at M&G Treasury and Investment Office (T&IO), and Mark Riggall, Head of Client Portfolio Management, T&IO, reflect on the fund range’s success which, as at the end of September 2022, is home to a body of assets totalling circa £59bn – and how it continues to support advisers in managing client expectations by providing a smoothed investment journey.
IFA Magazine: A lot has happened since PruFund Growth was launched in 2004. Can you give us a brief overview of the long-term investment philosophy and process and also explain how it’s evolved over that period?
PJ: Our philosophy and process – which differentiates us from our peers – hasn’t actually changed that significantly over the years. We have a few central tenets, which have served us extremely well:
- We have a deep and broad understanding of the long-term capital markets and the relationships across asset classes; allowing us to look at the best balance of risk, return, and diversification.
- We understand that whilst there has been one realised past, there are many potential futures. Therefore, we do a great deal of in-house scenario modelling and analysis.
- We have regular and dynamic asset allocation exercises that consider the evolving capital markets, business cycles, and any opportunities that arise across both the public and private markets.
Although the process has remained consistent, the portfolios themselves have changed considerably. For example, the fixed income part of the portfolio has been transformed completely over the last 18 years – it is now a lot shorter in duration and invests more in Emerging and Asian capital markets, as well as private debt.
In addition, our real asset portfolios have evolved from having a domestic i.e. UK bias to being global portfolios – with nearly £6bn invested in a diversified basket of overseas real estate. This has been a significant contributor over the years.
We have also been very successful through opportune changes in risk allocations, that take business cycles into account. A key example of this occurred in the summer of 2019; we carried out a big reduction in risk (taking approximately £5bn out of risk assets) due to the late stage economic cycle being more prone to exogenous shocks. Furthermore, we then faced a seismic event in the first quarter of 2020: the Coronavirus pandemic. In response to governments’ and central banks’ actions to inject liquidity in order to mitigate the worst economic impacts of the pandemic, we subsequently took the reverse action and increased risk assets to the tune of £5bn. Ultimately, by taking opportunities at the right time in the business cycle, we have managed to consistently add incremental value for our investors.
IFA Magazine: How scalable is the PruFund range proposition?
PJ: PruFund has proven itself to be extremely scalable – the life funds are now over £100bn in assets, of which PruFunds comprise over £50bn which simply wouldn’t have been possible had the range not been scalable. The size of PruFund allows us to access niche asset classes, which are simply not available to other funds. This means that PruFund offers particularly good levels of diversification. If we look at our international real estate investments for example, average lot sizes in Asia (for offices in Hong Kong and Taiwan for example) are often $500 million or more. This means that professional investors like us are only able to diversify in this asset class if they have an extremely large fund. We are in that fortunate position. Similarly, within other private markets – such as infrastructure and private assets – projects tend to come in large sizes too. I’d highlight these examples to demonstrate that our size and scale really does benefit PruFund investors and looks set to continue to do so for the longer term.
IFA Magazine: What are some of the longer-term investment themes that you are building into the fund that will see it through the next number of years?
PJ: The fund’s success is due to a combination of risk, return, diversification, and grasping opportunities when they appear. In terms of themes – firstly, for some years we have had an Asian and Emerging Markets bias, as part of our mandate to capture global growth from areas which we believe offer the greatest potential returns. Another area of focus for us is the current inflationary environment. We have to some extent anticipated scenarios similar to today’s challenging market conditions by investing a significant proportion of the fund in high-quality, diversified real assets over the years, with currently over £25 billion in high quality real assets. This protects investors when equities and bonds decline in value at the same time (which has, unusually but not unsurprisingly, been the case throughout 2022).
Most importantly though, we place huge importance on the customer’s investment journey. Thus, although the fund has achieved excellent returns, ensuring that customers have experienced a smooth journey through turbulent markets has been an equally important priority over the last 18 years.
As a result, by sticking with the successful formula that juggles risk, return and diversification , we believe we are well-positioned to help all customers to continue to achieve their financial objectives for many years to come.
IFA Magazine: You’re often out speaking to advisers about PruFund. What are you hearing from them in terms of how they use it as part of the financial planning process and how this has benefited the relationship with their clients?
MR: PruFund has established an extremely successful track record. It’s been great to see that it has gained a lot of support from financial advisers over the last 18 years across many different planning scenarios – both accumulation and decumulation. The PruFund range enables investors to access a range of different asset classes in addition to the traditional bond and equity investments, the scope of which are not available to many of our multi-asset fund peers . This additional diversification provides a different choice for advisers with a Fund that provides a more palatable journey for investors which also delivers from a risk vs return perspective. Furthermore, from speaking to advisers, we have found the expected growth rate or EGR (which is the average annual return looking forward 15 years) is a particularly important factor for them and their clients. Clearly, it can be helpful for clients who are looking at drawdown in retirement to have an indication of what the future returns from the fund may be. This makes retirement planning easier. Many advisers are using PruFund as the core investment in a clients retirement strategy to reduce sequency risk and to help sustain income for a longer period in retirement.