Multi-Asset with Andrew Fear, Prudential

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  • 13 mins 46 secs
Andrew Fear, Business Development Manager Investments, Prudential, discusses his analysis process behind multi-asset managers, the role alternatives have, managing collective range, making asset allocation decisions and what key resources are needed for portfolio management.


Multi-Asset Hub
PRESENTER: Joining me now is Andrew Fear, Business Development Manager Investments for Prudential. So Andrew it’s good to have you with us today.

ANDREW FEAR: Hello, good afternoon.

PRESENTER: Now let’s start with the main parameters advisers should consider when it comes to analysing multi-asset fund managers, what would you say they are?

ANDREW FEAR: Well actually I think there are two sides of the coin here. Before they start analysing the fund manager, they need to start having a look at their own clients and client suitability. So, we’ve got the fund manager and the multi-asset fund and what that’s trying to achieve on the one hand, but also what are they trying to achieve for the client and the client’s objectives on the other hand. And I think this plays in really to the FCA market asset management review, where they’re really shining the spotlight on objectives as well as value. So they should be looking at, as I say, their segmentation, what are they trying to achieve for clients, and then start to analyse the fund managers accordingly.

So from a fund manager perspective they really should be asking questions around what is your target client market, what are you actually trying to achieve, what would the client outcome be that you’re trying to deliver, and then within that how are you actually going to go about achieving that. So they might be looking at things like what is the strategic asset allocation approach and the tactical asset allocation; what’s the research capability of the fund house; and then how are they analysing and pulling all that information together. So what sort of stochastic modelling tools do they have and how are they looking at issuing perhaps fund manager mandates, how those mandates work and what’s their review process, and the whole governance piece around that.

PRESENTER: So should advisers consider multi-asset funds as a safe harbour design to provide risk-adjusted returns?

ANDREW FEAR: Well certainly the aim of multi-asset funds is to provide that diversification across the fund. But I think it’s too simplistic for us to say that this is just a safe harbour for IFAs. Even if they’re outsourcing the investment process, they really need to take responsibility for the fund that they’re ultimately investing their client’s monies into. And of course we’ve moved away from the traditional mixed or managed type, balanced managed type funds. And we’ve now got a whole myriad of different types of multi-asset funds, so multi-strategy, risk targeted, risk parity, absolute return type funds. And all of these, whilst they’re all trying to diversify the asset classes and the risk return, they’re all doing that in a slightly different way.

So clearly to match the suitability of the client’s objectives to the multi-asset fund and what they’re trying to achieve is paramount for the intermediary. So it’s not just a case of outsourcing, putting it into that safe harbour and forgetting about it; it’s obviously doing their due diligence in respect of those aims and objectives of that multi-asset fund.

PRESENTER: And alternatives, what role do they play in terms of diversification and increasing returns?

ANDREW FEAR: Yes, well I think everywhere you go now, or every seminar you might attend, there’s somebody now talking about alternatives. And of course the reason for that is the traditional asset classes that we’ve been used to over the years - so equities, bonds - are very highly correlated, so obviously they’re moving in the same direction, whether that’s up or whether that’s down. So in terms of providing the sort of diversification that a multi-asset fund requires, or the aims and objectives of a multi-asset fund, then that’s where alternative assets are coming into play. So certainly from a Prudential perspective we’d be looking at private equity, hedge funds, infrastructure, and other people would lump into that probably commercial property as well. But what we’re really looking at is the diversification that you can get on a risk-adjusted basis, and also the returns that you might be able to get out of those asset classes. So from the traditional assets as we’ve seen yields come down and longer-term returns come down, we need to both diversify the correlation of assets that we’re using but also look to increase the returns that we’re getting.

One of the things I think to look out for here is actually the exposure and how you gain exposure to infrastructure. So clients might be interested in it, but actually having the expertise or the wherewithal to invest in this marketplace takes an awful lot of skill, a lot of due diligence and also the ability to be able to invest. So we’re predominantly talking about maybe more illiquid assets. So you might be thinking commercial property, you can invest in bricks and mortar, or you can invest in a fund. With a lot of the infrastructure you’ve got similar sort of characteristics, and the same with private equity and hedge funds as well. So you’re looking to invest in a fund, and what exposure does that have to real assets, where you’re looking to invest in the real underlying asset itself. And that is one of the, I suppose, the benefits of Prudential in terms of the size of the fund, the assets that we have available to invest, and the kind of preferred partner status that we’ve achieved in terms of a lot of these alternative investments will come to Prudential, talk through what that investment is, because they know that we’re a long-term buyer and holder of assets, and looking for that long-term yield or income stream that those alternative assets might give us.

PRESENTER: Now PPMG has been managing portfolios designed to match insurance liability, so that skillset, how can that help manage collective range?

ANDREW FEAR: Well, the core of what PPMG do and the skills they’ve developed have been that liability-driven approach to investing. So that means we’ve got a fiducial duty of care to our customers to provide the guarantees, the insurances that we’ve said we would provide. So that’s put a couple of skill sets in place. One we’re very much a long-term investor, so buy and hold assets. Number two, we’re very much looking at the income streams that an asset can actually provide for us. But more importantly it’s driven the process at the core of PPMG. And that investment process can then read across both from those insurance liability-driven investments into the with-profit fund, into our proven range and the collective range, and that really means a four-stage process I guess that PPMG go through.

They very much look at the capital market assumptions. So what are the asset classes likely to do looking ahead, so eight, ten years out. Then we’re going to take those asset classes, and we’re going to do some stochastic modelling, so what’s the probability of them achieving that given different scenarios. Put that into a risk return portfolio, and our efficient frontier, and then finally move that through into a strategic asset allocation process. So that core capability that PPMG have, that can read across into the collective portfolios and give us that long-term approach.

PRESENTER: Smoothing of returns is one of Pru’s main offerings, how can that help advisers?

ANDREW FEAR: So a couple of the key benefits of smoothing are for advisers. Number one would be to help them manage a client’s expectations in terms of the type of return they can expect over the long term. And number two just to help mitigate some of the market drawdowns. So if we, we’ve seen since February of this year greater volatility in the markets, and that is more normal than perhaps the last eight/ten years that we’ve had with quantitative easing etc. So the ability to be able to manage and put a brake on that market drawdown will actually help the IFA in terms of managing the client’s expectations. And I guess if we’re looking at clients that are a bit more risk averse, they don’t want to see volatility even if they’re still growing their funds, or maybe clients that are trying to draw an income stream, then that ability to provide a smoothing of returns through our expected growth rates, or a bit of a brake on a market downturn, then again that helps the clients manage that particular client.

It’s definitely not a guarantee, and also what you would see just on the other side would be when markets take off again, the smooth fund is not going to increase at quite the rate that markets might. But obviously what we’re trying to do over that medium longer-term period is actually smooth those returns for the client, so they can have an easier journey I guess to whatever their goal is.

PRESENTER: Well lately the FCA has been focusing on fiduciary responsibilities, so do you think that the multi-asset manager has a role to help advisers in that regard?

ANDREW FEAR: Yes, very definitely. I mean we are the custodian of our clients’ assets, and I think it’s our responsibility to help advisers and the clients to understand, to a much greater extent than we have as an investment market before, what are the aims, what are the objectives of what we think we’re trying to achieve for particular types of client outcomes. And I think the more transparent the industry can be, and we can be in terms of providing that information so that an intermediary, an adviser then has a real chance of being able to match suitability of a client’s outcomes to the suitability of a particular fund.

PRESENTER: Now, outsourcers, economic scenario generators, these are used by fund managers, but you’ve actually developed one in-house, so how does that help make asset allocation decisions?

ANDREW FEAR: Yes, it’s at the core of the process that PPMG manage. And I guess there are two sides to this. I mean they’ve been managing multi-asset money since about 1946. So a long time through wars and different economic cycles, technology advancements etc. So they’ve built up a lot of understanding of different economic and market conditions. And then with the advent of technology, so about 15 plus years ago, being able to take a lot of the process and information that PPMG were already trying to analyse, but using obviously software programmes to be able to input that capital market assumptions, economic, inflation, risk premium etc., and to have a look at the future. So what are the different economic, what are the different outcomes and the different scenarios. And this proprietary system we’ve developed now produces somewhere in the region of 3,000 sets of 5,000 different types of simulations.

So an overlay onto that, it’s all very well producing 3,000 worth of 5,000 different sets of simulations, but you’ve got to have some sort of an overlay on that in terms of qualifying what’s the input of the data to get those outcomes and those simulations. But also what are those 5,000 different simulations mean. You’ve got to turn that into English. Pull that then into risk return curves again for portfolios, and then that drives through into the strategic asset allocation. But it’s very much about we can see there’s one past, but there are many futures, so it’s about trying to have a good understanding of the probability of what is the future going to be?

PRESENTER: So finally being manager of manager what skill set and indeed resources are key to deliver that aspect of portfolio management?

ANDREW FEAR: Well within the PPMG resources and capabilities is a manager oversight team. So they would be the people who would be looking at new mandates for new investment managers, as well as managing and reviewing our existing mandates. So on a monthly and a quarterly and an annual basis there’ll be different types of reviews, whether that’s looking at the type of holdings, whether that’s looking at the performance, or indeed on an annual basis with a site visit, not only to review the fund manager, but also the environment they’re working in, the research capability, the health of the organisation that they work for. So it’s really the manager mandate oversight team who are doing those reviews. And again because of the size of Prudential, and the monies that we have to invest, we’re very much looking at segregated mandates as well for most of our investments. So Prudential will be the only investor in a manager’s fund.

So again that gives us great advantages. If we take over the last year or so, or just after Brexit, when we saw investors trying to get out of say commercial property funds. Well if you were a long-term holder, or you were trying to get your monies out, you’re then at the mercy of what the other investors are doing within that fund. Whereas if we’re the sole investor, and our decision is long-term buy and hold and we just need the income stream, it doesn’t really matter then what other investors are doing. But that segregated mandate obviously brings a huge degree of insight, oversight, due diligence etc., that this mandate team are operationally there to do.

PRESENTER: Andrew, thank you.

ANDREW FEAR: Thank you.

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