Making a prudent(ial) punt
Prudential Investment Managers is one of the crop of boutique managers, including Investec Asset Management and Coronation, that were launched in the early 1990s. It grew more slowly than others but is now one of the larger players, with more than R200bn under management. Its largest shareholder is Prudential Plc, but it has never been run as the investment division of a life office — management and staff have ultimate control. And the long-term performance has been strong; over 10 years its flagship Balanced Fund has returned 12.9% a year compared with the category average of 10%. Clients are served by the local team in Cape Town and global manager M&G Investments, one of the largest active managers in London.
At its main annual client conference this week, head of unit trusts Pieter Hugo made the case that even (or perhaps especially) after retirement, people should still invest in funds that are rich in growth assets such as equities and property. Prudential Balanced is about 75% invested in real assets, close to the
maximum permitted under regulation 28 of the Pension Funds Act. Many people don’t realise that regulation 28 does not apply after retirement, only during the build-up phase. There is nothing to stop investors who insist on investing their entire living annuity capital in a discretionary share portfolio. But this wouldn’t be a good call unless you are fortunate enough to be able to treat your living annuity as Monopoly money.
Hugo makes the point that aggressive exposure to equities subjects investors to sequence risk. In the buildup to retirement, investors can usually afford to wait for the market to recover, but after retirement, when a fixed pension is being drawn down, a downturn can erode capital much more seriously. In its worst year (to February 28 2009), Prudential Balanced lost 21.1%.
A compromise between the volatility of equities and the poor real returns of cash and bonds would be a low-equity fund such as Prudential Inflation Plus, which has a 53% exposure to real assets. In the year to February 2009 it was down a more modest 6.2% and over 10 years its 10.6% return is comfortably ahead of its objective of inflation plus 5%.
Shock absorbers
Hugo says balanced funds are a good option if you are looking for inflationbeating returns over five years or more. The main asset classes — local and global equities, bonds and cash — perform differently to each other in many market conditions. The other advantage, for investors and financial advisers alike, is that fund managers take on the responsibility of choosing asset classes and deciding when to change weightings. Investing in growth assets means the risk of capital loss in the short term. At least balanced funds do not have the same spiky return profile as equity funds, however. Prudential Balanced, for example, has 6% in cash and 19% in bonds to act as a shock absorber.
The fund has outperformed the average of its peers 99% of the time over rolling five-year periods. Prudential used to call itself a value manager, but it was never comparable to the bottomfeeding funds run by zealots such as John Biccard and Adrian Saville.
It is a relative-value manager, with the humility to admit that it makes sense to watch the benchmarks.
The largest holdings in its equity fund look quite different to those of its deep-value peers, which might invest 25% of the fund into an Impala Platinum. Pru’s three largest shares are Naspers, Anglo American and British American Tobacco.