Despite the significant challenges that have prevailed so far this year and with much uncertainty still to come, as economies begin the process of re-opening, with Brexit fast approaching and a US presidential election in November, the teams within T&IO have re-assessed markets to understand where attractive long-term investment opportunities lie and how these can be implemented in PruFund portfolios.
The market moves over the last few months highlight the importance of diversification and re-assessing the relative value of assets, particularly after an indiscriminate sell-off. T&IO have looked to understand the economic impact and how vulnerable different economies and regions may be. Some regions are structurally more vulnerable than others, whilst some may have been impacted despite better long-term dynamics, domestic demand and the intrinsic benefits of the lower oil prices.
Finally, the likely short-term versus long-term economic impact of COVID-19 and the subsequent monetary and ensuing fiscal policy responses has been considered.
The key changes
Key changes are summarised in the table below for PruFund Growth.
Asset class positions
The main headlines for the equity allocation within PruFunds;
T&IO continue to monitor current market pricing in terms of what it implies for future earnings growth in relation to how the pandemic unfolds and believe that equities offer value to portfolios on a forward-looking basis
equities have recovered during April and May, but many markets are still down 10 – 20% in 2020 with some sectors suffering worse than others
the allocation to UK equities has been increased across all PruFunds as T&IO believe the medium-term valuation for UK equities are very attractive relative to other major markets, particularly the US
whilst this is contrary to the theme of gradually moving away from UK equities over recent years, T&IO have always sought to adapt to the changing market environment
even allowing for Brexit risks and UK market exposure to some low-growth sectors, UK valuations look very depressed compared with developed market peers
T&IO also remain constructive on emerging markets where long-term structural factors remain positive
A modest allocation to Indian equities has been added
A small increase in exposure to China will also be implemented
The team have taken the opportunity to further diversify away from developed market corporate bonds, whilst still holding very meaningful allocations. T&IO believe portfolios will benefit from diversification across more regions that offer better potential yields. Overall three themes will be implemented;
investing in emerging market debt for higher yields and exposure to a diversified set of monetary and fiscal regimes, with more room to stimulate
further taking advantage of illiquidity and origination premia available within private credit
reducing the duration of fixed income portfolios to be less exposed to future increases in developed market yields
Overall positioning remains stable but with an increased allocation to infrastructure to capture more of the long-term themes and opportunities across the globe.
The table above reflects a reduced allocation to property although it is important to note that this is more a function of portfolio drift and allocating more new money to the asset classes already discussed.
Prudential has not made an active decision to sell any holdings and the underlying portfolio managers will still look to acquire assets when appropriate.
Tactical Asset Allocation
T&IO believe volatility may remain elevated in the near term which could present opportunities. The team responsible for TAA are best placed to exploit these so a small increase to the TAA mandate has been applied.