Ap­pro­pri­ate risk-re­ward propo­si­tions for in­vestors

Finweek English Edition - - PRUDENTIAL -

One of S o ut h Af r i c a ’ s pre­em­i­nent i nvest­ment houses, Pru­den­tial I nve s t ment Man­agers con­tin­ues cau­tiously to ap­ply a val­u­a­tion­based ap­proach to as­set al­lo­ca­tion in the cur­rent fi­nan­cial en­vi­ron­ment.

A con­sis­tent as­set man­age­ment process is fol­lowed across all its multi-as­set funds, be it the Bal­anced Fund, En­hanced In­come Fund or In­fla­tion Plus Fund.

The only dif­fer­ence be­tween them, ac­cord­ing to CEO Bernard Fick, is lon­grun strate­gic as­set al­lo­ca­tion rel­a­tive to in­di­vid­ual per­for­mance ob­jec­tives. “Typ­i­cally, we de­vi­ate from the for­mer depend­ing on our view of val­u­a­tions. The dif­fer­ence be­tween prod­ucts is sim­ply the dif­fer­ence be­tween risk­i­ness and real re­turn tar­gets,” he says.

Pru­den­tial’s bench­mark do­mes­tic Bal­anced Fund is cur­rently 45% weighted in eq­ui­ties and 16% do­mes­tic cash. A max­i­mum 25% is in­vested in off­shore in­stru­ments.

Says Fick: “We’re neu­tral on eq­ui­ties, pre­fer­ring off­shore mar­kets to the JSE. Lo­cal eq­ui­ties in par­tic­u­lar have run hard, be­come ex­pen­sive, and although they still ar­guably of­fer the high­est real re­turn ex­pec­ta­tion, they’re the most volatile and risky as­set. Con­se­quently, we’ve switched some re­cent cap­i­tal gains to cash.”

Ac­knowl­edg­ing that cash is cur­rently the most ex­pen­sive as­set over­all on a prospec­tive re­turn ba­sis, he ex­plains that Pru­den­tial’s rel­a­tively high cur­rent hold­ing is premised on risk re­duc­tion and the pro­vi­sion of fire­power should there be a pull-back in the gen­eral mar­ket. The Bal­anced Fund has taken prof­its fur­ther­more from listed prop­erty and switched from its pre­vi­ous over­weight po­si­tion to un­der­weight. Listed prop­erty, Fick points out, was the stand­out as­set class for the past five years and rose more than 40% in the 12 months to March alone.

Ex­po­sure to nom­i­nal gov­ern­ment is­sued bonds, inf la­tion-linked bonds and cor­po­rate bonds ac­counts for about 12%, he points out. Cor­po­rate bonds are cur­rently of­fer­ing an ap­prox­i­mate 4% real re­turn, nom­i­nal bonds 2%-2.5%, and inf la­tion-linked bonds a tad lower than 1.5%.

“You’ve got your long-term recorded his­tory go­ing back 115 years, but in­cluded is the past seven or eight years which has been an un­usual sce­nario. A doc­toral the­sis can prob­a­bly be writ­ten on what the ap­pro­pri­ate long-term re­turn on cash should be and once cash rates across the world begin to rise, at what level th­ese will nor­malise.”

Fick main­tains that we’re still in a pe­riod of dis­e­qui­lib­rium. “For ex­am­ple,” he says, “you’ll prob­a­bly never again see a re­turn of the re­cent 20-year bond bull mar­ket. Con­se­quently, you need to re­cal­i­brate your as­sump­tions on the ex­pected re­turns of all as­set classes.”

Since be­com­ing CEO in 2010, as­sets un­der man­age­ment have grown from R94bn to above R200bn. Fick at­tributes this growth to the ex­cep­tional team at Pru­den­tial and their un­wa­ver­ing fo­cus on putting clients’ in­vest­ment out­comes first.

An­other rea­son for this phe­nom­e­nal growth has been con­sid­er­able re­peat busi­ness. “Many pen­sion f unds, for in­stance, start off by award­ing us one man­date and then add to this over time. It shows that we’re do­ing some­thing right and en­gen­der­ing good re­la­tion­ships with clients.

“True, we don’t al­ways do things per­fectly, but, by and large, clients seem to like the prof ile of our in­vest­ment per­for­mance de­liv­ery, man­age­ment style and qual­ity of client ser­vic­ing. We aim to pro­vide a rea­son­ably con­sis­tent record of out­per­for­mance and lim­it­ing the sever­ity of un­der­per­for­mance, even if it means oc­ca­sion­ally giv­ing up on the up­side,” he says.

Fick says that Pru­den­tial hopes to con­tinue de­liv­er­ing much of the same, but con­cedes that the house will need to nav­i­gate its way through chal­leng­ing mar­ket and in­dus­try con­di­tions. Among sig­nif­i­cant in­dus­try chal­lenges will be a re­set­ting of the value chain and an in­creased pas­sive in­vest­ment pres­ence.

“We have suc­cess­fully de­liv­ered out p e r f or mance re­lat ive t o ou r bench­marks dur­ing our 20-year plus ex­is­tence and stand ready to face up to th­ese new chal­lenges,” he says.

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