PGIM Investments appoints Dominick Carlino as global head of Alternative Investments
Carlino to lead firm’s private alternative distribution for financial intermediaries
Key takeaways:
- Against a backdrop of inflation, banking fragility, geopolitical uncertainty and liquidity demands, building portfolio resilience will be front of mind for many investors. In the current landscape, allocations to liquid alternatives might be considered.
- Economic uncertainty is creating opportunities within leveraged finance markets as distressed and special situations activity rises.
- Thematic equities offer strong earnings predictability through various macro cycles. Investors might consider the short and long opportunities inherent in healthcare sciences as winners and losers emerge.
- Managed futures have demonstrated resilience in recessionary environments, but exposure should be gradual.
The Landscape
The emergence of a bank crisis has injected fresh volatility into financial markets, highlighting the ever-changing nature of the investment landscape. Uncertainty around the outlook for the global economy and monetary policy, which entered the picture with the onset of inflationary pressures in 2022, continues to hover over markets today. As investors face these challenges, it is crucial to bolster portfolios to withstand uncertain and volatile periods — a goal that can be accomplished through allocations in liquid alternatives.
PGIM gathered three experts to discuss the liquid alternatives strategies and their relevance in current market conditions: Sushil Wadhwani, Chief Investment Officer of PGIM Wadhwani; Ryan Kelly, Head of Special Situations for PGIM Fixed Income; and Debra Netschert, Portfolio Manager at Jennison Associates.
Looking at the macro environment, central bankers entered this cycle of monetary policy tightening knowing they faced a difficult path ahead to both tamp down inflation and achieve a soft landing. This task was made more challenging by Russia’s invasion of Ukraine and, more recently, fragilities in the bank sector. Historically, achieving a soft landing for the economy is exceptionally difficult when starting with a high level of inflation. Although market participants grew more optimistic as wage growth eased in the US, avoiding a recession has become much more difficult amid a bank crisis that will likely result in tighter lending standards. Liquid alternatives can help diversify portfolios and provide protection against a downturn. Managed futures strategies tend to outperform a 60/40 portfolio during a recession.
60/40 Portfolio and Managed Futures during NBER-defined recessions (1972 – 2022)
Opportunities Amidst Volatility
Economic uncertainty and a reduction in central bank liquidity is likely to lift default levels closer their historical norms. This will create opportunities within leveraged finance markets as distressed and special situations activity rises. As credit markets move closer to this period of higher stress, investors should prepare their portfolios by enhancing liquidity, allowing them to pivot quickly when opportunities emerge. In equity markets, investors can look toward sectors that provide strong earnings predictability through various macro cycles, such as large-cap pharmaceuticals. Innovation in the biotech sector has separated winners from losers, and volatility may bring opportunities on the short and long side. In a challenging macro environment, investment opportunities may also emerge with names that provide value-based healthcare services.
As ever, it remains important for investors to keep a long-term view. Over the last five decades, managed futures strategies have demonstrated they can provide protection against recessions and broader market stress. Investors can gradually increase their exposure to managed futures strategies, which themselves can be quite volatile, rather than trying to time the market.
While many investors have only known a world with a central bank backstop, those days are likely over with markets entering a new regime of higher interest rates. Over the next 10 years, the best way to generate uncorrelated, equity-like returns in fixed income will likely be to own the debt of companies. It remains to be seen how this opportunity manifests itself across a range of outcomes from distressed debt to a new, creative solution that returns capital back to investors. Looking at what lies ahead for equities, there have been positive changes in the way technology is used in the healthcare ecosystem. People have a greater appreciation for their personal health in the wake of the pandemic, a trend that will likely prove supportive of equities in this space.
Investing in Alternatives
PGIM seeds, develops and manages a broad range of liquid and illiquid alternative strategies for some of the largest global institutional investors.
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All data (unless otherwise noted) is as of 06/30/2023. Percentages may not sum to 100% due to rounding. Assets under management (AUM) and assets under administration (AUA) are based on company estimates and are subject to change. For Professional Investors only. All investments involve risk, including the possible loss of capital. There is no guarantee these objectives will be met. Includes legacy lending through PGIM’s parent company, PFI.
- “30 market cycles” represents Prudential Financial, Inc.’s (PFI’s) asset management expertise through PGIM, its affiliates and its predecessors.
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- For Professional Investors only. All investments involve risk, including the possible loss of capital. There is no guarantee these objectives will be met. Includes legacy lending through PGIM’s parent company, PFI.