s.5 ep.4: Trading Up - How Active ETFs Revolutionized Investing
Exploring the continued evolution of the ETF landscape, fueled by rapid growth in active ETFs and an expanding universe of investment choices.
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 experts to discuss the liquid alternatives strategies and their relevance in current market conditions: 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.
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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s.5 ep.3: Raising the Stakes - Investing and the Art of Risk Taking
Insights on the benefits of probabilistic thinking, the best methods for analyzing portfolio decisions, and how investors could develop a sound decision-making
PGIM Private Capital provides $14.9B of senior debt and junior capital globally in 2024
The pace of originations was strong throughout 2024, surpassing the previous year.
All data (unless otherwise noted) is as of 12/31/24. Assets under management 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.
- Public and Private Alternatives AUM/AUA includes hedge fund, mezzanine and other private credit, real estate and infrastructure strategies across all PGIM businesses.
- PGIM Private Alternatives manages $324 billion gross in private alternatives strategies across private credit, real estate, agriculture, sustainable investing, infrastructure and private equity. These strategies are managed by PGIM Real Estate (est. 1970), PGIM Private Capital (est. 1925) and Montana Capital Partners (est. 2011); underlying investment strategies and portfolio and originations teams remain distinct, with each affiliate maintaining its own governance. Note: AUM/AUA includes $7.2B from Deerpath Capital, in which PGIM acquired a majority stake in late 2023. PGIM Real Estate net AUM is $132.5B and AUA is $47.3B.