Institutional Investing in Commodities
Commodities can serve an important role in a multi-asset institutional portfolio, both strategically and tactically, as a return enhancer.
The recent surge in volatility and wide price dispersion in global markets should have provided a favorable scenario for hedge fund strategies, but central bank actions around the world have made price discovery more difficult than ever. It’s with this challenging climate in mind that PGIM brought together a host of experts across a handful of asset classes for our first installment of the PGIM Alts Forum, focusing on the potential benefits of allocating to liquid alternative strategies. Following are a few highlights of the wide-ranging discussion:
Part II of the PGIM Alts Summit will feature insights from a new set of PGIM speakers, with expertise across illiquid alternatives, and will cover a host of alternatives-related investment themes. To see all of PGIM’s thought leadership, visit our insights page here.
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>> Good morning and good afternoon all. And welcome to our inaugural PGIM Alts forum. We're very excited for this new initiative, which brings together talent from across PGIM's affiliates on the alternative investment side. I'm sure we're all very tired of working from home. Perhaps some of you are lucky enough to be working in your offices. I'm stuck here at home, but at least I live by the sea at Brighton, which means I can go for a swim in the English Channel whenever I choose. PGIM is the investment management business of Prudential Financial in the U.S. We are an active investment manager with some 1.4 trillion in AUM, making us the world's eighth largest active investment manager, or I should say managers, as PGIM has a multi affiliate structure. Our affiliate forms are PGIM Fixed Income, Jennison Associates, QMA Wadhwani, PGIM Real Estate, and PGIM private capital. Each pursues out performance with a focus on their specialist area. We're also one of world's largest alternative asset managers. And PGIM Alts is designed to help bring the alternative investment world to know us better in the alternative investment space. Today, we are showcasing our alternative investment talent from three of our affiliates. But we're also showcasing some other high performing talent in the form of some musicians from the Julliard School, but more of that later. Our session today looks at liquid strategies. And over the months ahead we will arrange event initially on online that will feature investors across a range of liquidity profiles and investment disciplines from private credit through concentrated real estate equities, credit opportunities and other head strategies and credit fixed income derivatives and commodities. My name is Stephen Oxley. I'm a managing director in the Institutional Relationship Group here at PGIM. We're responsible for client relationships and thought leadership across all of PGIM's affiliate managers. I'm joined today by three senior investment managers -- Sushil Wadhwani, who is Chief Investment Officer of QMA Wadhwani, Debra Netscert, who is managing director and health sciences portfolio manager at Jennison Associates, and Erik Schiller, managing director and head of liquidity at PGIM Fixed Income. Our purpose is to educate, inform and also perhaps to entertain. It may come as a surprise to you that such a large investment manager should be able to successively manage alternative investment talent and capability. Our view is that provided you get the culture right, then the alpha producing talent can thrive as well, arguably better in a behemoth as it can in a boutique. Taimur Hyat, who is PGIM's COO is going to share some thoughts on that subject in a few moments by way of introduction to the forum. He will be followed by a brief musical interlude from students of the Julliard School, who will be introduced by my colleague Jenny Staley. And the bulk of the 90 minutes will be reserved for our investment discussion, which I know from our preparations is going to be fascinating, as we hear from three global leaders with different investment disciplines. Before I had over to Taimur, just a few house rules and practical guidance. You can ask questions of the panelists at anytime by typing into the box at the right of your screen. Jenny will be monitoring the questions as they come in and we'll pose them to the relevant panel members. All investments involve risk and we will not be discussing any individual funds or mandates during this session. There will be an email address at the end that you can send any specific questions you might have about anything you've heard to us and we will respond. This session is being recorded and we will send all participants copies of the exhibits at the end of this session along with the slides. We aim to end in about 85 minutes time or so. So it now gives me great pleasure to introduce PGIM's Chief Operating Officer, Taimur Hyat.
>> Thank you, Stephen. Welcome everyone. Thank you for joining our inaugural Alts forum session. I think it's going to be a fascinating discussion. But just to set the stage a little before we have our panelists, we thought we'd lay out the alternatives landscape, and also the shifting nature of our different kinds of players are increasingly dominated in that landscape. I just wanted to start by laying out for everyone, this is I'm sure quite familiar to folks how the role of alternatives in portfolios increase quite dramatically. And that's for a range of reasons. One, I think is for the low for long, or perhaps low forever interest rate environment and many of the developed market economies with negative rate of returns that has had people reaching for yield, clients looking for extra yield as they try to meet their beneficiaries and portfolio goals. The second is, I think greater awareness of the fact that alternative is not just a way to seek extra out flow, well there is of course is that. But also a way to get more diversification and lower drawdown risk in a portfolio. And more and more communities of investors even beyond been down in foundations and sophisticated institutional investors are seeking that benefit as well. And then, of course, I know Stephen mentioned there would be a separate discussion on the private side, but more and more if the economy is moving into the private side, maybe not needing to go into public markets and had been an excursion in private debt alongside private equity has different ways and different risk returns spectrums to play on the private side. So we've seen quite fast growth and quite dramatic on to some of the more traditional long owned areas. We wanted to lay out how PGIM approaches [inaudible] before we deep dive to specific hedge fund strategies that will be the bulk of this panel discussion. But as Stephen said, PGIM is 1.4 trillion asset managers. And that seems like a large number on the surface, but we really do see asset management and investment management as a craft, not as mass production. And we divide it into dedicated asset class boutiques, each of which focuses on one area and the portfolio managers of which are dedicated, focused, incentivized only to generate affine dry performance in that particular area, not distracted by the larger organization. And that is a structure that really needs to focus on client accountability and really driving results from an investment lens first. We don't see ourselves as a technology company, even though technology is often key to what we do -- alternative data sources, machine learning, but very much as an investment manager looking to generate risk adjusted returns for our clients. We have three boutiques that focus on public markets. That's PGIM Fixed Income looking at the fixed income markets, Jennison Associates and QMA playing in equity markets from a fundamental and quantitative angle respectively. And then on the private side we have PGIM Private Capital that plays in private debt, both private debt both private placements, direct landing and mezzanine And PGIM Real Estate that really plays across the real estate spectrum from debt to direct real estate to rates. For many years it was believed, and I think there are good reasons and a good case for why small is beautiful in hedge fund land. That's true at the level of an individual hedge fund in terms of capacity, something I'm sure the panelists will discuss later on. It is also true that at the level of the company, the particular manager, and we do believe over the last -- maybe since the global financial crises, but particularly over the last five years, that has moved in a direction when more and more of our clients and we see the benefits of scale in the company that underpins those hedge fund strategies. Maybe one example is just access to both the private and public side of alternative strategies. And while we keep those separate, there is definitely a cross current of thinking and ideas where each market informs the other and both the private and public side gives us access to that thinking. Second, I think even though we do see investment management and hedge fund strategies as a craft with a portfolio manager and his or her team generating risk adjusted returns for a client, alternative data has become more important. The next wave of technology is upon us, whether it's AI and machine learning, helping fundamental portfolio managers make better decisions. And we think large scale to asset managers will be the ones who can make the investments that are sizable to be at the cutting edge of how the technology can be used to generate better returns for our clients. Heard is just the scale in investment research and deal origination. We do believe larger platforms give access to more ideas from more sources. In the case of PGIM fixed income, for example, we have one of the largest credit research groups on the by my side. And we do believe that that research, those ideas inform not only our traditional business, but also our hedge fund strategies and we have access to that wealth of talent that we can maintain within our structure. We have a deep global advantage of client advisors. Clients are increasingly looking for more clients servicing or more support and we gain and have client advisors in different markets. And finally and maybe most importantly the regulatory environment has become much more stringent, much more complex around the world. And larger managers are able to provide the consolidated global compliance and backbone infrastructure that allows our managers to focus on generating returns while giving clients all the compliance and regulatory backbone that they're looking for. And perhaps, finally the ability to whether long and volatile market cycles. We've seen a lot volatility with the U.S. elections coming up with all the discussions around Brexit, with the pandemic. There is a lot of volatility in markets, a lot of uncertainty. And we do think we have the ability to whether multiple market cycles due to our scale and global presence and our diversified portfolio. And increasingly we believe clients will be coming to platform like this, not just PGIM, but on the large scale managers who can bring technology, bring a modern infrastructure, have the ability to whether multiple cycles and provide access to both public and private and private alternative capabilities to our clients. I think it's going to be a fascinating discussion. I'll hand it back to Jenny for the next session.
>> Thank you, Taimur. COVID-19 has impacted all of our lives in one way or another. For those who have followed a career path in the performing arts, they have experienced significant challenges this year as status and venues have placed restrictions for most of 2020. At PGIM, we have a long standing sponsorship at the Lincoln Center, an art center based in New York. Our CEO, David Hunt, has been on their board for 20 years and PGIM is committed to supporting the development of performing talent. Therefore, to show our support, today we are hosting a five-piece student band for the Julliard School. The Julliard School is one of the Lincoln Center's ten organizations and is a world leader in performing art's education, offering studies in dance, drama and music. As an introduction to the liquid alternatives panel, the band will play an excerpt from "Blues Up and Down," by Gene Ammons and Sonny Stitt. They will also close out the event with a longer performance, which we invite you to stay for. We hope that you enjoy it.
>> Good afternoon ladies and gentlemen. Thank you for joining us, the PGIM Alts forum. My name is Joe Block and I'm currently a student at the Julliard School. On behalf of my fellow students, I'd like to take this opportunity to express our appreciation for PGIM's ongoing sponsorship of Lincoln Center. We wish we could be performing for you live and in person, but we thought you might like a special virtual performance. Joining me on stage is [inaudible name] on bass, T.J. Reddick on the drums, [inaudible name] on the alto saxophone and Jacob Melsha [assumed spelling] on the trombone. Thank you very much and enjoy the rest of the event.
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>> Students of the Julliard School there, bringing a whole new meaning to "working from home." Notable alumni of the Julliard School include Miles Davis, Nana Simone, Nigel Kennedy and jazz clarinetist and economist, Alan Greenspan. So who knows, you could have just seen the future chair of the Federal Reserve, which as good as segway as I can think of to our panel today. We're going to hear from three leading investors managing liquid alternative strategies. Tushil Wadhwani will discuss the economic environment and markets in the context of his systematic macro approach. Erik Schiller, a very experienced relative value fixed income trader and finally Debra Netscert, a specialist in the long short healthcare space. Each of them is going to introduce themselves and make some opening remarks. And this will be followed by the panel discussion. Please submit your questions to the box in the right, in the panel, type them in there in the chat. And without further delay, I would invite Sushil Wadhwani to introduce himself. Sushil.
>> Well, I just wanted to say good morning or good afternoon wherever you are. Thank you, Stephen. In terms of just telling you a little bit about myself, I am, as Stephen said, Chief Investment Officer at QMA Wadhwani. We are assisted, I think, macro asset management company. And in my background I was an academic at the London School of Economics in the 1980's where a lot of my research was around financial markets. I then when on to Goldman Sachs and Tudor. At Tudor I headed up the quantitative portfolio group. And then after Tudor I went to the Monetary Policy Committee at the Bank of England. And it is only after that that I set up in this hedge fund firm. And it was done so with the help of Paul Tudor Jones, who was obviously my ex-boss at Tudor. Now, Stephen asked me to talk in essence about the macro outlook. I should have, of course, also explained that PGIM bought our company in January 2019. And the logic of that transaction was entirely consistent with the very interesting remarks made by Taimur. Stephen wanted me to focus on the macro outlook and the implications for portfolios, so clearly COVID is front and center in terms of any macro outlook. If you look at the numbers the OECD has put together, you'll see that they too posted alternative scenarios and their scenarios depend on whether or not you might see just a single hit that we had to global economy from the initial set of knock downs, or whether you might, in fact get a double hit. You know, with subsequent lockdowns in some regions. You know, clearly Europe appears to be heading that way. Asia because of superior testing and tracing has been largely immune to this kind of double head scenario. And the U.S., well we just have to wait and see. Now, in terms of the timing and magnitude of the recovery, key to this is the vaccine. Obviously you will hear from my colleague later on about that scene, so I won't say too much here, except that our own working assumption is to go along with what I guess is super forecasters are arguing. They are certain that there is about a 50% to 60% that a meaningful fraction of the U.S. population will be inoculated by the end of March '21. And it's something like a 90% chance that a meaningful fraction would have inoculated by the end of September '21. If you accept that scenario, then while there may be a little bit of volatility in terms of courts at a GDP, it seems to be not unreasonable to cost it that by September '21, large parts of the world will be gradually heading back to normal or with considerable scarring. Now, one question that I get asked quite often is the issue relating to infection. Now, a number of my clients have expressed concern and alarm about charts of this. So this is essentially a chart of money supply growth going back to 1850. And what's notable is that if you look at in one growth in the U.S., it's literally off the charts. It's unprecedented. Now, of course naive monetarism went out of fashion a long time ago, and for most of my career I have not actually, in general paid too much attention to monetary aggregates, in part because of [inaudible], i.e. the moment policy makers started paying attention to them, the aggregates essentially abandoned us. However, I have to say charts of this kind worry me in part because when you have magnitudes of this kind, you've got to make human assumptions about what might happen to velocity. Now the consensus view is that velocity will remain depressed. Surely, and the post vaccine will also pick up meaningfully. If you accept that proposition, then it seems to be that you then need to worry about where the central banks will be able or willing to essentially take the punch on the way. And in that regard I will point both to the recent policy review by the Federal Reserve and their pledge to be patient. And I would also point to high end rising levels of public debt, which I think will stay in the hands of several central banks around the world. So this is certainly a risk that we should be worrying about. And this really matters for portfolios, because as professor -- the late Professor Franco Modigliani, reminded us some years ago high end unanticipated inflation can be very subversive for the equity market, because it can do nasty things to equity multiples. You can see the clear association between nominal means and the earnings. And we could indeed go back to the big bad world where equity multiples are undermined by inflation again, and there may be very few places to hide. When I talk to clients, they talk about gold, they talk about inflation linkers. And one needs to be careful. I think gold and inflation linkers work if you get high end persistent inflation, however, if you get an inflation shock, which is then followed by central banks behind the curve becoming aggressive, that is certainly a different kettle of fish. In that situation gold and inflation linkers will let you down and consistent with what Taimur was saying earlier, that's when there is likely to be diversification. In one case you might find diversification is indeed in the managed future space. So, the last time we had a big pronounced unanticipated bout of inflation was 1974. And you can see that a 60-40 portfolio, I'm looking at the top row, was down 24% or so, while the manage futures group actually went up 40%, because they were able to take advantage of the huge dislocation in markets occasionally by unanticipated inflation. If you look at the way fixed income is priced at the moment, you know the year ahead, [inaudible] is only around 1.3, 1.4%. I don't think markets are prepared for a long-term inflation shock. I'm over on my time, Stephen, but thank you very much.
>> Thank you, Sushil, very interesting. Erik, please tell us a little bit about yourself and what you do at PGIM Fixed Income and your thoughts on where you see the opportunity for your strategy in the current environment.
>> Yes, thank you very much, Stephen. Good morning, everyone. It's absolutely a pleasure to be with you today. And I'll shift the conversation a little bit from what Sushil was discussing in the macro backdrop, to diving into a little bit more about what PGIM fixed income can offer and our expertise in the more micro oriented sense of the bond markets in particular. A brief introduction for me. Again, my name is Eric Schiller. I am the Head of Liquidity at PGM Fixed Income. And by liquidity that encompasses developed market interest rate vectors, the global government bond markets that are very liquid and deep around the globe, as well as the agency mortgage vector here in the United States where we have homeowners that take out mortgages and those loans are packaged and sold in the investment universe. And that also is a very large portion of the assets that we manage. My team comprises 11 people We oversee roughly $200 billion out of PGIM fixed income's total of $920 billion out of that for management. So a very large deep footprint in the global bond markets are for the clients in which we're investing in these global bond markets around the world. My team is extremely experienced. And around ten year in looking at our global bond markets and identifying opportunities, we also are going to be looking to exploit this location. They are very persistent and troubling in those markets, but maybe unfounded by some macro investors, but we think offer actually very attractive relative value opportunities that we can exploit to add alpha consistently and most importantly in an uncorrelated way for our clients. So, bonds that are fundamentally cheap we think offer attractive excess returns. But we may be taking pure directional risk by implementing that. So those relative value natures in terms of adding uncorrelated alpha strain are extremely important and an attractive feature that we offer at PGIM fixed income. As Taimur had highlighted, and also a little bit more about myself in counter to Sushil's very broad and deep experience that a number of different organizations through his career, I have been with PGIM my entire career. I've been with the firm for 20 years. And I want to stress that the culture that we offer is exceptional. And one of the reasons why I have been with the organization for so long and my team remains with me and has continued through their ten-year with me as well. You know, the breath and depth that we offer as a large fixed income asset manager and the ability to express talent within that broader organization, while managing both, you know, moderate, portfolio risks, as well as more aggressive, in which we'll discuss today, long-short strategies, that again, deliver those uncorrelated returns are very attractive for, you know, high talent to come into the organization and remain tethered to the very opportune culture that we offer. I do want to stress that PGIM Fixed Income very much is an active manager in fixed income. You know, we are looking to add return for our clients, not by purely investing into securities, which they may outline as a benchmark, but by going on a benchmark and really picking those securities that we think offer very good value proposition for them to out perform those benchmarks over the long-term. And that really encompasses the bulk of that platform of the $200 billion of AUN that I discussed, but also outside of that, a very more aggressive posture in a long-short type of strategy where we have many more degrees of freedom be able to go outside of the box and position in all of the different instruments in global government bond derivatives that we think are fundamentally mispriced and offer an arbitrageable return. So the ability to cast the wider net in a long-short strategy is extremely important. And then finally the ability to use leverage. A long only platform is very leverage constrained. We're typically taking investors cash and investing that in the very attractive securities that we see. But in a long-short strategy we can employ leverage to these different dislocations that we identify to amplify the returns to get things that are much more satisfactory from the alternative investments base in terms of what general investors are looking for return in that space. And this is something we've been doing for quite a long time. We've been managing relative value strategies at PGIM fixed income since 2002, so an 18-year history. In the space I think we're relatively unknown. Much more well known and prominently known in the active management fixed income space. But this is something that we have extensive experience and a long history in really understanding the evolution of how these opportunities have been created and how they've evolved over the years both in the U.S. and global. So with an introduction I'd like to turn now to how we identify the opportunity set, how we're looking that and really positioning in those different dislocations where alpha creation for our clients. And it really starts with a very bottoms up fundamental quantitative lens. We use mathematical models that are looking at yield curves. Identifying fair value yield curve models in which we're comparing all of those government bonds in that particular market. I'll use an example of the U.S. Treasury Market or the German Bund Market. Now, we will create a fair value yield curve. That is what we call an arbitrage free curve in those countries. We'll then compare all these individual securities, in the U.S. there's roughly 350 individual treasury bonds that comprise that yield curve, but all have very idiosyncratic stories about why they may be fundamentally rich or cheap relative to that fair value yield here. Very similar in the German Bund Market, all though much fewer securities given the amount of debt that Germany has outstanding today. But a very similar model is employed in terms of identifying those dislocations. And again, we're doing that in all of the global bond markets around the world -- Japan, Australia, the U.K. Gilt Market. And also expressing that and identifying the fundamentally misplaced derivatives off those markets being future's contracts, interest rates bonds. All of these different instruments are extremely diverse and generally, to some degree, fundamentally misplaced. Now, the other factor that we looked for in these relationships, and you may say, "Well, this sounds very somewhat uninteresting how dislocated can treasure securities actually get, or German Bunds actually get, versus their fair value. And the answer is they can get quite dislocated and have an episodic period through history. But not only have they been raging in terms of their dislocation, but these dislocations are highly mean revered. Bonds that are cheap can not stay cheap for very long. Instruments that are rich and not stay rich for very long. And the reason for those dislocation are because the end user investor of those bonds in those different government bond markets, or the asset managers for macro fund, that position and derivative, like futures contracts are doing that and they have a preference full of liquidity. Now I'd like to turn to slide 13 to give you a perspective on some liquidity premium that has existed in one of those evolved markets, which is the U.S. Treasury market. And what we're identifying here over roughly the seven years is the premium that investors have paid for owning the most liquid, on the run, which is most recently auctioned ten-year treasury bond in the United States. That price value deviation is the y-axis and that has ranged from what we see today, which is roughly zero. But at times that has been half of a percent, as high as 1.3% price deviation of that liquidity premium that we reach in the peak of the liquidity prices here at March of 2020, as we [inaudible]. Extreme amount of liquidity preference has historically been imbedded on the run of treasury securities. And that is a great opportunity for a long short strategy to actually go short that liquidity premium and earn an alpha as it decays over time. That happens very rapidly. What we're showing is a ten-year bond, versus a nine-year bond with just over one year we may capture as much as 50 bases point to price deviation. Now, for an [inaudible] investor, if they put all of their assets in to that one particular opportunity, that may get them 50 bases points of return. That's very attractive for the long only perspective. But now in a long short strategy you may employ leverage, maybe that's two to three turns out of your total ten turns of leverage in a portfolio venture. Now you're taking that half a percent return and amplifying it to potentially 1.5% of a return for an investor that is from a relative value, liquidity premium dislocation that is completely uncorrelated to broader equity credit risk premium, another beta factor from the macro level. That is one example of some of the opportunities that we look for. Other things that cause these dislocations, aside from that liquidity preference both market segmentation, but for habitats, you know, investors have certain preferences in terms of maybe the segment of the yield that they want to invest in and other preferences that they have. There's also preference for access to leverage. Regulations that were created in the Dodd-Frank era, really impinged the access to leverage in the fixed income markets to a significant degree. I'd like to turn to now slide 16 please, to show how much leverage has been restricted in the system coming out of the post financial crisis period relative to the size of the broader market that that leverage was available on. So what we're showing here is going back to 1997. The dark blue line is the size of the U.S. Treasury market in marketable debt outstanding over the last almost couple of decades. And what you see is the treasury market is gone from up at a $3 trillion market back in the late 90's. We were in a budget surplus situation in 2000, very limited amount of treasury debt, to now the reaction to the global financial crises in the increase in fiscal stimulus in the bump that we saw in the treasury market debt at that time. You know, push treasury market debt up to about $12 trillion coming out of the financial crisis. And now the next push to north of $20 trillion of outstanding Treasury bond. Every one of those treasury bonds is available for collateral against the loans for cash. That's called repurchase agreement. In that repurchase agreement value in the marketplace has gone from a high of roughly $3 trillion in 2007, to now only $2 trillion. That is defining the access to leverage, the leverage in the system that's embedded on Treasury bond has come down a magnificent degree relative to the [inaudible]. That restriction on leverage as a result of regulation is creating some of the opportunities that we see. Investors prefer leverage by using derivatives. They overpay for futures contracts, because that leverage best mechanism is through an exchange. They can go and purchase a futures contract. They don't need a bond versus a repurchase agreement with it, but it's synonymous with that futures contract. And the graph on the left shows the richness of futures contract relative to the deliverable bonds over the last few years. You see those futures contracts that then persistently rich. That offers an opportunity to short that future, buy the bond that's deliverable and earn that arbitrage over very consistent stable [inaudible.]. Turning a little bit more to more macro opportunities, there's very much a dissection and a dichotomy between the amount of supply the governments are bringing as a result for the fiscal response in a number of different countries to battle the coronavirus economic shock, along with the Central Bank purchasing of those bonds in a number of different countries to unprecedented time. And that push and pull of the issuance of the underlying economic bond issuer, the buying of the Central Bank for opportunities for relative value orientation as well, in a number of these distant countries where the Central Bank are. As an example, in Europe this morning the support for the unemployment recovery scheme, the sure bonds, roughly $100 billion of bonds that they're brining in Europe have a very attractive access return potential from our perspective. We're able to participate in those auctions of relatively new issue. And that provides some risk compensation given the new issue premium that can be earned by investors like us, by tactfully in those. So what I want to leave you with before we turn it to Debra is that, you know mispricing, all though perceived to be very efficient in global government bonds and derivative markets are extremely frequent for diverse across the opportunity sects, and they offer very stable and attractive risk adjusted returns. And a manager's able to exploit their expertise and their talent to mine out and find those opportunities and position them in their portfolio. So with that I would like to thank you for your time and turn it back to Stephen.
>> All right, thank you very much, Erik. Yes, well from relative value to perhaps more fundamental value, at least in growth equity space, we turn now to Debra. And very interested to hear your comments on the healthcare space at the time of a global pandemic.
>> Thank you, Stephen. Good morning and good afternoon everyone. I'm delighted to be here today. As Stephen said, my name is Debra Netscert and I am part of Jennison Associates, which is the Fundamental Growth Equity Manager in the PGIM family. At Jennison, I'm the Co-Portfolio Manager of several healthcare strategies where I invest on both the long side, as well as the long short side. I have been at Jennison for 13 years and I have been in the industry for 20 years. For those of you who know Jennison, it's a really special place with nothing short of an amazing culture. And it's a place where true collaboration really happens between the portfolio managers and the research analysts. And there's just a deep commitment to bottoms up fundamental investing. The nice thing about working at Jennison is that we are a large firm with lots of resources and great access to management teams. And we have a good reputation of being thoughtful long-term investors and management teams really want us to be their shareholders. I have the pleasure of working with a deeply experienced and long tenure and healthcare team at Jennison. I believe the average experiences are around 19 to 20 years now, and the average tenure at Jennison is around 11 years. So we're not yet up to Erik in terms of tenure at Jennison, but we're trying to catch up. You know, our focus is really to identify the most innovative companies in the healthcare space and that will have sustainable growth for multiple years, regardless of subsector region or market cap. And as you can see on this side, we look for the disruptive technologies across the healthcare landscape. At our improving outcomes, increasing diagnoses, improving access or low end call. And while we're geography or market cap agnostic, the majority of our focus has been in the U.S., as this is really where the majority of the innovation has been happening. I do, however, think that this is starting to change and we have been increasing our OUS exposure, especially in China, where you're really starting to see some of the changes in both the regulatory, as well as the reimbursement frameworks starting to award innovative companies. Healthcare, in it of itself is really an inherently volatile sector, which just lends itself willed to a long short approach. The sectors like PULS and MEDTECH and more sensitive to the macro factors, where a sector like Bio Technology, with all of the clinical data readouts really just produces its own binary risk. So with our deep expertise across the board, we really have the ability to diversify the portfolio across the sectors of healthcare to create a more balanced portfolio, and also to give us the capability to be more nimble and exploit the dislocations that we see, as well as -- as well as, you know, changing as the macro is changing or things in healthcare overall are changing. It really also just helps us to dampen our volatility given the inherent volatility of the sector. Our portfolio management construction perspective, given the amount of innovation that we see across the healthcare sector, we continue to remain long bias. We spend a lot of time understanding the businesses, not just the stock. What does the company do? Who are the customers? What do they sell? Who do they compete with? What are the industry drivers? What are the company drivers? All these are really simple questions, but deep diligence in all these areas is really key. So the analysts on my team, as well as myself, spend a lot of time reading company filings, press releases, going to medical meetings, meeting with doctors and industry experts, we really try to get to, you know, understand a drug or a trial or a device or what's happening in one of the industries better than anyone else. So really, once we understand the business or the drug and decide what the important questions are, we do what everyone else in the industry does. We, you know, we try to build the model, refine our assumptions, go through our evaluations and our expected analysis and our relative risk return and of the risk adjusted return and try to really figure out what is this company worth? And in the most simplistic terms the winners wind up being in a long book and the losers wind up being in the short book. Our long book when we look at it, it really winds up being a more concentrated best ideas version of our long-only product. While the shorts are more fundamental and tactical investments designed to generate alpha, as well as serve as natural hedges for the rest of the portfolio. So, as I said earlier, we really are focused on finding the most innovative companies in the healthcare sector. And as you can see on this slide, we really are in the golden age in innovation right now. So I just wanted to spend a couple seconds looking at this slide and just talking about, you know, what are then innovations that we're seeing and where do we think that the good opportunities are. So if you look at Biopharma, you can see just based on this list we have a number of ways that we are going after treating diseases. And the number of technology is being employed are increasing at a rapid rate. I mean I've bubbled so many things into one work when because this slide would be just so long all the innovation that's happening. But regardless of what we're looking for, you know we are just trying to find a treatment that is going to dramatically improve outcomes compared to existing therapies. And something that can be improved by regulators, reimbursed by insurers and then adopted by physicians and patients. So none of this is easy, which is why there are so many opportunities in Biopharma and also why many of our investments tend to be in that space. On the tools and diagnostic side, we look for technologies that are going to take the guess work out of care and make it easier and more convenient for patients to be engaged in their health. We also look for tolls that can accelerate the research process and help us to further interrogate biologics systems so that we can develop more efficacious therapies and devices. An example of something, a cool technology that's happening now that you hopefully don't, but may bear about is liquid biopsy. And this is really an area where you can take a vial of blood, and that vial of blood can tell you the mutations that are driving a persons answer, and then can also pair those mutations to the right drug that a patient should be taking. And this is really just goes in and replaces the tissue biopsy that needs to be done in a more invasive way with the needle. On the medical devices side, you can see that what we're really looking for are devices that can improve or simplify surgical processes by making it easier or less invasive, or just making it more automated. We're also looking for technologies that can lead to faster outcomes. A simple example of this is the continued glucose monitor, which is just a small little patch that goes on a diabetics arm and really just takes all of finger sticks out and allows someone's blood glucose to be monitored throughout the day by both themselves, as well as their doctors. And finally, for healthcare services companies, we're really looking for technologies that can lower the coast of care and improve outcomes. So think about a technology that catches errors before they happen, or initiatives that keep patients out of the hospital or efforts that shift procedures to lower coast in place of care. I think telemedicine is something we've all become increasingly familiar with during the pandemic and is really a great example of innovation that we've seen in that area. I just wanted to spend a little bit of time just thinking about COVID and I often get asked, you know what do you really think is going to change in terms of COVID? How is healthcare going to change over the next ten years? And I really think that COVID is going to have a particularly positive impact in the healthcare sector and really permanently change the way we approach healthcare. So the past six or seven months have really highlighted the inefficiencies that we unfortunately have in our healthcare systems, as well as the potential and the U.S. side for mass mismanagement of a government run healthcare problem. The pandemic has highlighted this need of discovery available and multiple modalities that are available in technology, life sciences and just healthcare technology to really address these medical needs. So I think what you're going to see is just an acceleration for many of these companies to penetrate their [inaudible]. Instances, companies may be able to achieve penetration in the next 12 to 24 months. I didn't expect them to be able to penetrate for five years from now. So it's not an exhaustive list, but I came up with a little list at least of things that I think we're going to see that's going to really -- that's really going to leap forward because of COVID. So I spoke about telemedicine. I think that's really here to stay. I think people got comfortable talking to doctors and trusting that they could get care remotely and over their phone. I think, you know, as I said before you're going to continue to see this accelerated shift to alternative sites of care. So more surgeries and procedures will be done in ambulatory centers, as opposed to hospitals. You're going to continue to see people having an increased awareness of their health and an increased use of technologies to do both monitoring, connected care, and also to do care management. You're going to see touchless check-ins. So instead of walking in and sitting inside a doctor's office and filling out, you know the clipboard of paperwork, you're going to be sitting in your car, sitting at home filling out all your paperwork on your phone or your mobile device. You're going to continue to see an increased in robotic surgeries, so we can extend the number of hours that the OR has used. And then I think, on the drug development side, there's two things that I think are going to be exciting is one you're going to start to see -- you're going to see virtual clinical trials. And then you're also going to start to see, you know, tools that are going to really take drug development away from the benchmark -- sorry, away from the benchmark -- the bench top in to computers. And you know, and that's really going to help to increase the pace of drug development and keep the cost down. And then I think the one last thing that I think you're really going to see is an increase in companion animal health. Right. I often to say to everybody, like how many people do you know right now that have a puppy. Right, it's like everywhere you look there's a cute little puppy, so that's really just going to [inaudible] . On that side, I really think that this speed at which we're developing vaccines against COVID and the rise of new technologies to develop these vaccines has been nothing short of amazing. And you know, clearly a big part of it has been the amount of government funding that is been put towards all of these companies to help in this. And it also just has to do with where we are in innovation and drug development and how fast we're able to actually do things now. And I really do think that the role of vaccines is going to be crucial to getting the COVID-19 pandemic under control, because we really need to achieve our immunity to slow the spread of these diseases. Right now there are four companies that are in large scale, these trials in the U.S., with a few more that are expected to enter phase three before the end of the year. And I would say based on all the data that we have seen to date, we do think that there is a high probability of success and belief that we should start to see data in the coming weeks and into 2021. We have seen some of the trials get paused for safety over the past few weeks. Interestingly, the trials that have gotten paused for safety are the ones that kind of use the more tried and true methods versus the other ones who then haven't been paused or the ones that are using the most up and coming technologies and where they're actually delivering genetic material to the body for the body to start building its own immune response. And so, you know, I do think that right now I think, at least on my side of the industry weren't really questioning which one is going to be the safest and the most efficacious and we don't really -- I don't think we're overly worried that we think there's significant safety issues in any of the trials. We think right now it's just an over abundance of caution. And when you've been watching clinical trials for as long as I have, you know that these clinical trials stop for, you know, issues that sometimes are just not as scary as they seem, just when you hear that they stop. So I do think that we are super excited about the vaccines and we hope that, you know, we are going to start to see the most high risk patients being vaccinated in the end of this year into the beginning of 2021. And then starting to see a broader roll out to people like me and you in the summer and fall of next year. I just wanted to end from a macro perspective, obviously when we think about healthcare, you really have to think about politics. It's always a big consideration when investing in healthcare. And it's clearly a topical subject now given the upcoming election. Our general thought is that healthcare is going to be in second place to stimulus package, jobs, taxation and the environment. However, that being said, we continue to think that there's going to be a focus on drug pricing and a focus on how to make drugs more affordable and expanding healthcare coverage as a way of reversing inequality. I think Trump's recent executive orders show us the directives of where he is trying to take things. And we believe those are really going to be manageable for the pharma sector. And then if Biden wins, we really expect to see increased focus to save his legacy and Obama's legacy, the Affordable Care Act and really try to increase coverage and expand Medicaid. We generally think that the expansion of coverage is a good thing for most sectors of healthcare, but of course the devil will be in the details, meaning what at rate will hospitals be reimbursed and if we're increasing Medicare. You know, if it went from commercial rates from Medicare for hospitals -- sorry, if rates when from commercial to Medicare and hospitals that would be a big negative. But I would say, you know, we continue to think that as we get through this election and we start to see the results this election, healthcare, which has been a little bit squishy for the past couple of months going into it will start to come back heavily. So Stephen, that's it for me. So I will pass it back to you.
>> Well, thank you Debra. That was fascinating. Yes, I'm sure I'll come back to you with some questions. Let's start the panel session now and Sushil, if you don't mind I'd like to start with you. And perhaps I can bring in a couple of points that Debra made. We've seen recently that performance in managed futures and some trend following strategies has not perhaps been as strong as we might have hoped recently. What are the reasons for that, do you think? And how are you dealing with it? What sort of research are you conducting, particularly thinking about perhaps some of the impacts of the COVID pandemic on the markets?
>> Well, thank you very much, Stephen. I think I counted three questions there. In terms of what's been going wrong for, you know, the so called smart [inaudible] strategies, I think fundamentally that it could become very crowded and it's really a question of simple demand and supply. And crowded strategies tend to underperform. And our response to that right through my lifetime has always been in both, in research and continues improvement. To me that anomalies that were present a few years ago are likely to be less effective moving forward. And our research effort is evolutionary in that sense, may be replace our strategies with strategies that we thing about in review. In terms of trend following, I think they've actually been handicapped by two things. One is low inflation, which is then fed into the fact that central banks have become -- have been able to be more risk averse. In the good old days, if I may use that phrase, if equity markets started falling because inflation was high, inter banks didn't come to the rescue. Ever since inflation has been low, inter banks have been able to come to the rescue, and thereby they short circuit protect, which them means conventionalize of a part and following subset. However, going forward, if I'm even half right about inflation coming back, inter banks are going to have to get more aggressive. They won't be able to bail out conventional asset. And I believe then following we'll do better. If I'm wrong about that and trend following doesn't do better, we have invested a lot of our research into known prim direction, which do well even when central banks are risk diverse. I think that answers two of your questions, Stephen. Can you possibly remind me of the third one?
>> I thought you were going to say that. It was about diversification, I think.
>> OK yes.
>> And actually --
>> Yes, please.
>> You know, what I would like to ask you is you talked about the possibility of inflation, but it depends, I think, you said on the velocity of money and it's very hard to time. So have you any thoughts about when we might be confronted with the inflation that you think might be possible in the economy?
>> OK, right. So if I take those question in terms of diversification, the strategies that we've developed is to have a long correlation with each other, non-trend direction and a correlation of 1.5 or so. And they tend to have a lower correlation with that. And then tend to be conveyed in the sense that they do particularly well when equity is due mildly. Or they do particularly well when equity is really well. So in that sense they fit in quite well, I hope, in portfolios. I also now remembered your earlier question about how models have adapt to improve it. And if I may take that before I come to your question about the timing, in terms of adapting to COVID, in line with our philosophy of continuous improvement, we have ensured that we have done a lot of [inaudible]. So at the beginning of the crisis, in January, we were able to go back to our models dating back to 2003, which we have used to navigate stars. However, after that, things departed from the 2003 script, in particular relating to the banks. And therefore we were quite quick off the mark in terms of coming up with quantitative vaccine indicated. And currently our research is preoccupied with trying to attest the extent of the lockdowns that we might see in countries that do experience a proper second wave. Now, to come back to your question about inflation, our best guess is that over the next 18 months or so, inflation is likely on the downside, because they saw respect of capacity, because the labor market is all ready displaying bangs of enormous weakness in many countries, meaningfully. My concerns about inflation are beyond that. It's not that I' need to preposition the portfolio in any material way for that now, it's more that we run the second models, which are agile and which respond to the incoming news and we hope that would respond to the incoming news on inflation. And certainly, you know, my own historical experience of running money here and running money other places is very much that frigidity is key. Because as economists have to be humble and recognize how little we actually know, we think the key feature of our models is their ability to respond to the known unknowns and the unknowns, known as they arrive.
>> Thank you. Jenny, I think we have a question from the audience. I'm getting a message from you.
>> You can just say if there are any questions please send them and Jenny will ask them.
>> So Erik, this one is directed to you. So what purpose would you use the fixed income relative values strategy within a portfolio?
>> You know, looking at the characteristics of what this type of strategy offers in terms of a high expected sharp ratio, you know greater than one so returns commensurate with expected volatility. Expected volatility in the range of 5% to 10%. Certainly, when you put that into broader portfolio construct and efficient frontier if you will, we do this for a number of our clients when we prepare the relative value strategy versus what your sectors of the fixed income markets offer, whether that structured credit, corporate credit, high yield bonds, verging market. All of those sectors have much lower than a one expected. Equities have a much lower than one expected ratio. Maybe we can talk about [inaudible] expected return with 15% to 20% volatility. Bonds in general, fixed income in general, if you're going to invest in the [inaudible] market, even with the diversified credit portfolio outside of the government bond market, much lower than a one expected. So, I think it's extremely attractive when you consider the risk adjusted return and the correlation in a broader portfolio. It would almost want to buy all of it when your [inaudible]. So dependent upon the underlying investors goals and risks, so if you're trying to achieve a 15% return then it would be very difficult to allocate a lot of that strategy because it's not meaning of return. But if you're actually looking for high sharp ratio it would allocate quite onto it. And then just in a broader portfolio context depending again on return and risk characteristic it would sit very nicely on the efficient frontier portion of that optimization. So again, a lot of different moving parts, but overall getting underlying characteristics of strategy are quite effective.
>> Thanks, Erik. And so that leads into a question for Debra. The way you describe the opportunity, I'm surprised that you're running along short strategy. It seems that it's all opportunity on the upside of the moment of that. Why do you choose to be long short. And what does your short portfolio look like in general? Is it there for risk management or are there other opportunities on the individual?
>> I mean, at the end of the day we're trying to add value, right. So if you can identify their winners, you should also be able to identify the losers. And I would say this has allowed us to uncover strong investment ideas on both the long and the short side. So I think if we're trying to add value on an absolute basis, we really want to be able to take advantage of both sides. I think, as I said before, help is inherently a really volatile. So a long approach is certainly not a bad approach and it's one that I take as well, but over the long term, you know, given the nature it can be on a volatile ride. And that volatility can really lead to utilize, you know, to utilize fundamental as well as different options for around pioneering events to manage the downside risk and optimize the upside risk as well. We managed the long only strategy for multiple years. We're adding the long short, it really just -- we were seeing so many opportunities to exploit dislocations and to make money on the opposite sides of the trades that we were making. So I really do think that it's the factor that allows you to do both. And yeah.
>> Thank you, Debra. Erik, if I may turn to you, I had a question about the impact of both fiscal and monetary stimulus of which there has been an enormous amount recently. And I'm thinking of your first slide where you show the liquidity premium and on the run, off the run government bonds, yes government bonds. It seemed to me that looking that slide, the opportunity recently had declined somewhat, probably because of the amount of money that's being pumped in by governments. How do you see the outlook for your other relative value strategies in terms of what's been happening with central banks and government stimulus?
>> Absolutely. You know, those opportunities like that liquidity premium that I had showed are very fluid. There are episodic periods and we've seen that in the past where potentially that opportunity set is not extremely attractive. Most financial crisis period, 2011 to 2013 comes to mind as a similar period to now when we were running a significant budget deficit to stimulate the economy coming out of the financial crisis. Issuing a lot of new on the run treasury sectaries and that supply effect combined the fact that the Fed -- Federal Reserve -- was buying securities through quantitative easing and actually reached their peak amount of quantitative easing in 2013. And that resulted in a compression of that opportunity as well. We're seeing that even to a larger degree today in terms of the amount of our budget deficit in the U.S., the amount of the supply that we're bringing in. So every new ten year bond today is $104 billion of ultimate issue side. Five years ago we were issuing $45 billion. We've doubled the auction size of those particular, nodes if you will, in the ten year with it. So that certainly has compressed that opportunity locally. That gives us the ability to not have risk dedicated to that particular strategy and rather wait for that particular strategy to reinvigorate and express other strategies that we think are more attractive offer better risk adjustment return. But to your point Stephen, very much that the fluidity of the government policies between the supply dynamics, the Central Bank involvement in particular, very relevant today in terms of compressing some of those.
>> Thank you. Jenny, I believe you have another question from the audience.
>> Yes, so Sushil, this is directed to you. So if we're talking about a possible regime shift over the next few years where bonds and equities don't balance each other off, can asset allocators time allocations to manage futures, or is it best to hold an allocation to these diverse buying strategies as a long term hold?
>> That's a great question. I think essentially waiting to allocate is quite risky and quite dangerous, because these things can come upon us very suddenly and very quickly. We saw that in March. Management did well in March. And we will doughty see that again. There have been many, many samples of crises in the past where it essentially come out of a blue sky and it's been very important to be in possession with the core allocation to manage futures. But I think that's the first point by me. The second point is that if this is not just an episode, but is a longer lasting regime share, which I think is increasingly plausible, then for example about Professor Charles Goodhart recent book, "The Great Demographic Reversal," where he talks about in in the secular sense, inflation could actually be high for the next 20 or 30 years. And I think one should never underestimate Charles Goodhart. If you accept a sort of longer lasting regime with higher inflation, then it may be that you will have time to add that core allocation to manage futures, I would certainly grant you that. But I think one needs to be prepositioned for that initial shock.
>> Debra, quick question for you before we round up. And it's about whether the current trends that you see, how they differ from the Biotech, bubble if you like, and how do you protect yourselves in situations like public market, your real protection or other ways, perhaps upon research do you protect your investors getting involved in things that may not be all they seem to be.
>> Yeah, I mean I think when you think about the earlier Biotech boom, right, it was really just about hopes and dreams. And so a lot of stemmed from when we sequenced the human genome back in 2000 and the reality was that was a huge advance, but it took multiple years for us to actually be able to interrogate the, you know use that information to interrogate biologic systems to come up with new therapeutics and new ways of actually developing drugs and devices and actually advance there. And so the reality was the industry at the time was just too immature and there was no way to truly monetize on the science that was happening at the time. I think now we are at a completely different time period where as these scientific innovations -- you know, we've sequenced the human genome, you know, we understand what it means, we understand how to utilize it. We understand how to use it to interrogate biologic systems and importantly we have the tools and technology to be able to use that monetize it and create devices or tools or diagnostics or drugs to actually be able to advance there. So I think, this time around it's just a very different level of maturity of the industry. And then I think in terms of your Theranos question, I absolutely think that being in the public markets is a protection from something like that, right? Theranos was just a story where there was a company that was telling people that they had a device that was going to do a certain thing, right, like we're going to be able to diagnose all of these things and yes, we're telling you that we're going to be able to do it. And whenever people asked for the data they didn't how it, right. So you just had to believe what they were saying. On, you know, number one now people are much smarter, right. So nobody is going to invest in a company without any data whatsoever, and if you're a public company you have to release the data that's material, right. So there's just regulations that create a forced disclosure of material information to make sure that people don't mind that equation with.
>> Thank you. Now we need to wind up because I want to leave some time for the end so that the students from Julliard can play some more music for us, and I hope there will be time. But may I ask each of you to give three points that you would like the listeners and investors on this call to take away with them.
>> Conventional portfolios have done very well in recent years. This is a good entry point that gets some diversification into one's portfolio, especially at a time when if we look out over the next five to ten years and think return expectations have to be moderate and the macro environment is going to be hostile. And having liquid diversifying strategies, which have a lower correlation, the conventional assets make sense. Thank you, Stephen.
>> Thank you. Erik?
>> Yes, I would I like to leave you with the perspective that, you know, there's consistently been throughout history a number of different dislocations in the fixed income markets as a result of investor preferences, hopefully you've been able to glean that from some of my graphs today. And particularly now that the size and scope of these government bond markets with all the fiscal stimulus that has been enacted and that our growing scale is creating even more dislocations in the future for those segmentations. So a broad diverse opportunity set that really sets the stage for an active manager would be able to exploit those dislocations, I do think over the long term is extremely attractive. And then finding a manager that has a season tenure, breath and depth of resource and the ability to exploit those dislocations in a consistent way across their platform, I do think is also a very attractive [inaudible]. And then finally, to echo some of Sushil's comments that those alpha sources that manager can deliver are uncorrelated. I think we've all talked a little bit about today on the macro environment the turn, but our impact given the level of asset values that we've seen today between very low interest rates, relatively elevated equity prices, what the future may bring in terms of the expected return in those asset classes, is particularly, you know, there's a risk that it creates may reverse [inaudible]. So that uncorrelated return aspect is extremely important. That I think could very much [inaudible]. Thank you.
>> Thank you very much, Debra.
>> I mean I echo's Erik's comments in terms of the managers and how important they are. In healthcare, I think it's a real -- you know, a lot of what's happening in healthcare is super complicated. When you look at Biopharma and you look at the clinical data sets and you look at the amount of information that needs to be processed and then you also just look at the just the density of the competition and the number of companies that are going after the same target or the same disease in a different way, you need a team of experienced people who have been in this industry for a long time who have seen the story play out again. I think pattern recognition is something that is just something that is just an unrecognized benefit of an active manager who has been doing this for a long time, and I definitely think it's something that time and time again we feel brings such just, you know is such a great advantage. You know, I think a long short strategy in healthcare because of the volatility, because of the inherent volatility of the space is really the way to go and really allows us to think about exploiting the dislocations that happen and being able to also protect on the downside. There's a lot of binary risk in healthcare whether its a clinical data package, whether it's an election, which we're always dealing with, and you know, or just whether or not it's reimbursement and the way that the government is involved, I think when you look at these past strategies, they're not nimble enough and they're not able to change when they need to change. They have been -- we are processing information every single day and we are adjusting our portfolio based on the new information at hand. We're not waiting for and given date or time to do that or given market caps to make the adjustment. We're making these adjustments real time. And so, I really do think that asset management, especially in healthcare is the way to go.
>> Well, thank you, Debra. That brings us to the end of what has been a fascinating discussion. And I think I'll pick up on a point that Sushil made earlier that the only free lunch in investment is diversification. And you've certainly heard from three very different diversifying strategies today. It only remains for me to thank our participants. Thank you to Sushil, to Erik and to Debra. Thank you also to [inaudible name] and the team in the back room. They did a marvelous job and made all this possible. And thanks to Jenny, my colleague for asking the questions and introducing Julliard., who we are going to play out with today. So do stay around to listen to them. As you can see from your screen, we have a further PGIM Alts forum, which is going to be happening sometime in January. The date is yet to be set. And also you can see the date of our EMEA conference, which is going to be talking about a much wider range of strategies and all participants today are welcome to join that. While you are listening to the music that we're playing out to, please take time to fill in the very simple four question feedback questionnaire, which is in the chat box. Thank you again, and we look forward to seeing you again soon. Goodbye.
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