Appropriate risk-reward propositions for investors
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.