Financial Times Future of Asset Management Summit: The Rise and Rise of Private Capital
David Hunt, CEO at PGIM, participated in the “Rise and Rise of Private Capital” virtual session of the Financial Times’ Future of Asset Management Summit.
David Hunt, chief executive officer, PGIM, joins Bloomberg TV’s “Balance of Power” to discuss investor sentiment heading into the 2020 U.S. presidential election, the impact of the COVID-19 pandemic on globalization, the need for further stimulus measures, and more.
>> In the lead up to the election, we've been looking not just at the polls, but how the market metrics showing how investors are pricing the outcome of the election. Welcome now a major investor. He's David Hunt, President and CEO of PGIM. David, great to have you back with us. Let's start with that breaking news. Not even the election. Before that -- with respect to the stimulus. We just heard Abigail say that investors are getting their hopes up maybe there will be a stimulus bill. You're a really big investor. Does this get your hopes up? I mean, there's a lot of steps to go between here and actually stimulus.
>> Yeah. I think you're absolutely right, David. It's a -- it's a bit of a fools' game, I think, to try to project the outcome of a lot of these negotiations. We're very long-term investors and, as such, we are looking out over the next couple of years. And the thing we feel most strongly about is that a major stimulus bill is absolutely needed. The economy needs to get more money into the hands of small businesses. We absolutely need to support a series of people in our services economy in particular who are going to be out of work for longer than was originally anticipated. And last, David, we need an infrastructure plan. We need to start investing in our cities and in our fundamental infrastructure in order for productivity finally to rise. And now is the time to push these through.
>> So, David, if we need stimulus and we need an infrastructure plan, that actually necessarily takes you a little bit into politics. We've got an election coming up. Does it make a difference whether it is President Trump or a President Biden with respect to the stimulus? Some people say either way it goes, we're going to get stimulus. It's just going to take longer.
>> Well, it's really interesting, David. I would say that maybe in a sign of the times nothing is as it was in the past. So if you were to look at previous years of elections, you would say that, in general, the market cared mostly about tax policy and generally favored Republicans. And you would say that the market actually likes a split between the White House and the Senate because gridlock is actually a little bit more -- more stable. I would say neither of those is true now. I think the market is pretty clear that they, at this point, would see a Biden administration as more favorable from a stimulus point of view, whether we get a deal done in the next two weeks or not. The long term nature of a big deal is much more likely under a Biden administration. And, interestly, with kind of a blue sweep looking like it might be more possible, the markets have actually viewed that favorably. Both of these are completely different than we've seen in the past.
>> If we do have a good deal more spending coming under a Biden administration, if in fact that comes to pass, it's also going to mean more borrowing as a practical matter. Are the markets at all worried about the amount of money being borrowed by the United States government, a possible effect on interest rates, or do they just count on the Fed to keep him down?
>> So, it is remarkable how, you know, we had so much focus on tax policy and on, you know, overall spending limits before and that seems to have just completely gone -- gone out the window. My own view is that for the next couple of months those will stay under -- underground. But that in the first quarter of next year, if we did get a new administration, we did push through stimulus, we will come back to the knotty question of how in the world are we going to pay for all this? And then a lot of the second order effects on, you know, tax policy, on actually the amount of government deficit will come to the fore and, at that point, I think you will see volatility in the market as the reality of the situation begins to sink in.
>> David, you've mentioned tax policy a couple of times. You haven't mentioned trade policy and I'm curious about that because there was a time when at least long term investors were concerned about globalization, whether in fact we're really cutting back on globalization under President Trump. Is that not as much a concern or is it basically thought that maybe a President Biden would look a lot like a President Trump, at least when it comes to trade?
>> No. I think it's just kind of dropped below the radar screen, but I think the debate on globalization absolutely is still to be had. Most people believe that a Biden administration would take a more strategic view of trade negotiations and would probably use our allies more, rather than just tariff policy. But that doesn't mean that he would be any less tough on -- on our partners, either. But I think what we would see is that globalization will continue but will actually change its course quite a bit over the next couple of years. For one thing, and one of the biggest changes is that much of -- of the fake funding of globalization has come through banks. And that is no longer true. Nor is it happening through FDI. Most of the funding for globalization is now coming through the securities markets and that's one reason why you see the huge levels of global bond deals that are happening. Secondly, I would say that supply chains are to become much more diversified. People all of a sudden discovered they had way too much single country risk, particularly in China, and we are going to see that really shift as people move that out. And then last, David, is the whole service sector. So services have remained stubbornly domestic. And yet, with the huge change now in digital technology, I would say we've come four years in seven months on digital change. All of a sudden, having your x-rays read by a doctor in Poland looks a whole lot more likely.
>> So, David, I'm going to treat you as a one-person, real-time focus group of a major investor, because there's news crossing the headline, even as we're speaking right now, across Bloomberg, that apparently the proposal that the President has approved for Secretary Mnuchin to propose -- to propose to Nancy Pelosi is $1.8 trillion. As we know, the President was thought to be about $1.5 trillion. Nancy Pelosi came down to $2.2 trillion. Does that change your attitude toward the likelihood maybe we will get a stimulus package sooner rather than later?
>> No, I really don't. I mean, we -- we can react to these -- these headlines all day and I suspect we'll have a few more turns of this before anything gets -- gets resolved. We will need a stimulus package without a doubt in that realm. I also think it would be very interesting to know a lot more about what's in it and whether or not the money is being channeled to where we need it most. And as you and I have talked about in the past, one of my great fears is that we come out of this pandemic even more unequal than we went into it, and I think we -- we have done a great job of actually supporting the markets and I think hats off to the Federal Reserve and central banks. What we need now to make sure that we're getting some cash into the hands of main street, and that's really important, I think, for the sense of social justice in this country as we respond to the pandemic.
>> How do you factor into investment decisions that question of social justice? And let's be frank, the sort of flip-side of social justice is potential unrest as we've seen some of since the -- the killing of George Floyd. How do you factor that in as an investor because that could affect returns, without a doubt?
>> No, it -- it -- it absolutely could. And I think that we -- we have really focused a lot on, you know, making sure that we are -- are carefully considering all aspects of ESG as we make -- as we make decisions. We look carefully at governance. We -- we care deeply about the climate and we debate those into our investment decisions, and we absolutely do look at the degree to which companies are reinvesting back in their own communities. Because we know that companies over the long term, who take a broader view of their stakeholders rather than just shareholders, actually tend to do better for their shareholders. And that's an important long term point.
>> David, another thing that you and I have talked about at various times is a concern about long term investment for the purpose of retirement, for pensions, for money to have when you do retire. Now we have interest rates at close to the zero bound as a practical matter. Looks like they're going to be there for a long time to come. How does that affect your longer term investment thesis, both with respect to getting returns on things like government bonds, but also on hedging against risk because there's not much hedge left because the bonds can't go much higher in their value, or lower in their yield? No. You're -- you're -- you're so right, David. And then there's no question that one of the really detrimental effects on -- on society at large of these very low interest rates is on savers. And there's no bigger group that needs savings than those who are heading into -- into retirement. And so we remain extremely focused on making sure that there are a wide range of higher yielding, fixed income strategies available for -- for pension plans. And I would say that one of the biggest moves that we're seeing among large pension plans is out-of-government bonds with their negative yields and into a broad range of real estate, real estate debt, private equity, private credit, where they can continue to get income and yet will have more attractive returns. And that -- that search for yield is -- is only going to continue with more vengeance.
>> So, David, finally -- you can't get something for nothing in my experience, at least, in life. If you're going to get some higher yields in these alternative investments such as real estate, for example, do you necessarily have to increase your risk portfolio? Because you can't get more yield without more risk, can you?
>> I think it's a -- it's a very good point, although I would say that the structure of the markets are very different than they -- than they were before. So if you go back ten years, many of these markets -- real estate is an example but so is private credit -- were really dominated by bank lending. Bank lending has been pulling back out of a lot of those markets and it's allowing private investors with different structures back into -- into those markets that they couldn't compete in effectively before. I personally think that that's actually good. I think we will get higher returns in some of those areas through -- through private structures, and I also think it's good that as we do have a credit cycle those losses will not be on the balance sheet of banks, but rather will be shared amongst the LPs and GPs who I think are much better able to take that. And it won't infect the rest of the economy.
>> Okay. David, it's always a treat to have you here. That's David Hunt. He is PGIM President and CEO.
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