PPMG Has Model Performance
Andy Brown, investment director at Prudential Portfolio Management Group, describes the firm as the largest asset manager that nobody knows. PPMG controls more than £180bn ($224bn) on behalf of insurance group Prudential UK and Europe across a range of multi-asset investment funds and annuities.
John Foley, chief executive, Prudential UK & Europe, said at an investor day last November that over the long term, the With-Profits Fund had outperformed the market consistently. The average return of the life fund over ten years to 2015 was 6.1%, and total assets at that point was £116bn.
“Around a third of all with-profit assets across the whole market is represented by this fund, and it could be said this is the only life fund left in town. And crucially, this performance translates into materially better outcomes for our customers,” added Foley. “PPMG develops the strategic asset allocation and is the source of much of the performance success.”
Brown said PPMG developed a proprietary modelling system around 18 years ago. “The continuing building of that model has given us an advantage in that we can use our own model for asset allocation, capital management, risk assessment and Solvency II,” he added. Solvency II is a European Union regulation fon the capital that or insurers must hold to reduce the risk of insolvency.
PPMG has been reducing weighting to nominal assets. Before the financial crisis in 2008 PPMG allocated 50% to real assets such as equities, alternatives and real estate and 50% to fixed income and cash. The allocation has since risen to 68% in real assets.
“We are in a ‘lower for longer’ phase and we believe that returns are likely to be between 4.5% to 5% on average over the next 10 years,” Brown added. “Increased illiquidity in fixed income markets does play into our long-term strategy because insurance companies have stringent rules on coverage and the amount of cash they need to hold.”
PPMG uses its own medal to develop a long-term investment strategy over a cycle of 8 to 10 years with recommendations from the multi-asset research team, portfolio managers, actuaries and alternative asset specialists.
In 2015 PPMG appointed David Shairp in a newly created role as head of research from J.P.Morgan Asset Management where he had been global strategist and portfolio manager. In addition PPMG can also access more than 500 investment professionals around the world within the Prudential Group.
On top of the long-term investment strategy, PPMG can make short-term tactical allocations within limits agreed with the client. Brown gave the example of August 2015, when there was big shock to the Chinese renminbi. PPMG increased investments in emerging markets which provided a positive return over the next three to four months.
More than 90% of Prudential UK & Europe’s total assets are managed by fund managers within the Prudential Group. These internal fund managers include M&G Investments for the UK and Europe with £125bn, PPM America with £20bn and Eastspring Investments in Asia with £13bn. Last November Eastspring announced the appointment of Virginie Maisonneuve as chief investment officer. She was previously chief investment officer of equities at Pimco and head of global equities at Schroders.
Brown said: “We understand the style and processes of Prudential Group managers and have the benefit of being closer to data, as for example, they use the similar systems for risk, reporting and other ‘middle office’ roles.”
The remaining assets are with external managers, including alternative managers focussing on private equity, hedge funds and infrastructure and PPMG may use passive strategies to access some markets.
“With segregated accounts we can be better at defining our needs. For example, for UK equities the benchmark should not just a return above the FTSE All Share,” Brown added. “The benchmark is based on 65% of FTSE 100, capped at 5% of a single holding, and 35% of FTSE 200 – which performed well after the UK voted to leave the EU.”
PPMG monitors managers, both internal and external, to ensure they perform in accordance with their mandate. “It is harder to see inside an external portfolio, so within our multi manager products we will also use data from Morningstar in our reviews,” added Brown.
There is a manager oversight team of six people, plus two who specialise in alternative assets. They spend time with portfolio managers to review performance and how they manage risk, including their processes and systems.
“The oversight team can recommend a change of managers,” added Brown. “For example, in the early part of this century we moved the mandate for Japan to be managed from Hong Kong and Singapore, which was a big shift for us.”