PGIM appoints Linda Gibson as new CEO of QMA
Quant specialist announces rebrand, launches Defined Contribution Solutions group.
David Hunt, President and Chief Executive Officer at PGIM, joined Funds Europe’s Romil Patel for a discussion on the rise of ESG investing. During the conversation, Hunt shared his perspective on PGIM’s approach to ESG investing – from fostering non-consensus views from a cultural perspective to precisely where in the garden the flowers of sustainability must bloom. He also explored the growing range of asset classes and the maniacal search for yield in today’s market environment.
*Interview hosted by Funds Europe and conducted by Romil Patel, International & ESG Editor, Funds Europe.
>> Hello, and welcome. My name is Romil Patel, and I'm the international and ESG editor at Funds Europe. Today, we're joined by David Hunt, president and chief executive officer of PGIM. A top 10, global asset manager with more than $1.5 trillion in assets under management across seven autonomous businesses. David, welcome, and thank you for joining us today.
>> Romil, thank you so much for having me. I'm really looking forward to our discussion.
>> When it comes to returns, what do you see as the three biggest investment themes over the coming decade? And why do you identify these as the key drivers?
>> So I think that one of the things that's exciting about the industry at the moment is that the range of possible asset classes to invest in is growing larger and larger. And we believe that that will continue. In particular, I would point you to the large and growing alternatives area. That makes up things like private equity, private credit, real estate, infrastructure, agriculture, and a whole range of assets that we think have pretty unique characteristics that provide not only benefits from a return point of view, but also add real diversification to a portfolio. I mean, think back, really 20 years ago, most people invested in stocks and bonds. And nowadays, you know, even reasonably large institution, let alone the very largest, are in a very full range of asset classes. And I think that's a very exciting trend, and I think it's one that we expect to continue. Most of our clients are increasing their allocations to alternatives. PGIM manages almost 300 billion in alternatives. Right now, we're one of the largest players in this. And we expect to continue to grow our capabilities to meet our clients' needs. The second biggest trend that we see is the really almost maniacal search for yield. So we've been in this low rate environment now for quite a while. And in fact, I would argue that this year is probably the most punitive it's ever been to be sitting in cash. So our clients are looking everywhere they can find to find something that's going to pay above that. So we see lots and lots of interest in whether or not it's structured products or high yield or emerging markets. Or, again, some of the alternatives players that have income with real estate debt. That search for yield is, I think, a major theme. And we don't see that going away anytime soon. And then the third theme that I would highlight is one you just mentioned. And that's the incredible focus that investors have on ESG. And more broadly, I think we can talk more about this kind of extending that into impact investing and sustainability more broadly. This has been something obviously, that I think the major European institutions have led the way on. But we're now seeing this take hold right around the world. Certainly in the United States in the last year, I would say that the level of discussion and interest in ESG has gone up dramatically. And we're seeing it in Asia as well. So while Europe has been clearly the leader, it is now truly a global phenomenon.
>> You mentioned three, three quite key themes. The first is diversification. The second is the search for yield and the third is ESG. How do you view China as those three elements relate to China? I mean, China has a low correlation with the rest of the world, foreign investors are relatively under-invested. So it offers diversification on that front. It offers returns that are unlikely to be found in many other parts of the world. And with its sights set on carbon neutrality target of 2060, China is likely to throw everything at trying to achieve this. And therefore ESG is a big opportunity not only for domestic investors, but also for institutional investors looking to play a part in the growth story of ESG in China and raising standards globally.
>> As I talked to CIOs around the world, they are pretty universal in their view that their biggest problem is that they are under invested right now in China. The benchmarks that we all use have still a relatively small weighting to China. If you look more broadly at where is growth, global growth going to come from, it's a much higher proportion we expect from China than you see in those benchmarks. So we've been doing a lot of work with clients on creating customized approaches and ways to actually increase their waiting in China. And we obviously have been investing ourselves in China to make sure that we have the capability to be able to meet some of those needs. We think that China will be increasingly an important part of global investors portfolio's going forward. And in a way, it's kind of ironic that the more kind of geopolitical tensions rise, the more important this is. Right? Because it used to be that you could get a lot of exposure to China by owning Apple. But what happens if that doesn't happen anymore? What happens if we do increasingly have a split? It does mean that you'll need actually more exposure to Chinese companies that are going to do well directly rather than relying on people who sell it. And so strangely enough, as the political tensions rise, I would say the need for increased collaboration on the securities front actually goes up in order to meet those kinds of diversification needs that institutional investors have.
>> But your leadership philosophy advocates for letting people who are knowledgeable and close to the assets make decisions rather than moving it up the hierarchy where there's less information. Now, the COVID-19 pandemic has highlighted social issues and gaps in social infrastructure, which have always been but they're been ignored. So as a fiduciary, how are you engaging with people and communities who are often more closely linked to social and by extension, often environmental problems in your investment decisions to achieve better outcomes? Because some people might say that this is financially material, proprietary information on the E and S fronts, which are key to making good G decisions.
>> So I really do believe in a leadership philosophy that tries to keep investment decisions as close as possible to the assets that they're responsible for. I am a great believer that as you move up any kind of hierarchy, and you get further and further away from the people who know the most about that office building, or know the most about the credit underlying a bond, that generally worst decisions get made. And so I think that empowering and encouraging the kind of decisions, investment decisions as close to the asset as possible, gets you the most power. Now, a important corollary to that is obviously, you need to have a risk management system that sits over and above any individual assets selection process, that actually makes sure that you're staying within the risk parameters that you agreed. So I'm not simply saying we need a thousand flowers to bloom, I do want a thousand flowers to bloom, but I'm pretty clear about, you know, exactly where in the garden they need to bloom. So having that risk control framework, and having it very rigorously managed, is as important as the autonomy that I'm trying to create as well. They both go together. Now maybe to answer your second question about the kind of responsibility in communities for investment products. We think this is going to be something that more and more investors are taking stock of. We see this mostly in our real estate business. So we know that we can transform communities by the way in which we approach our real estate investment. We've seen that in senior living. We've seen that in affordable housing. We've seen that in a lot of the development we've done for student housing, for example. And we do more and more. Look, not just at the financial returns of these strategies, but also at the impact that they have in their communities. And indeed, most recently, we've been launching strategies, which we call impact investing strategies, which don't just do this generally, but actually have specific, yes, financial returns for sure. But also, you know, actually measure and report on what's happened to literacy rates, joblessness, homelessness, etc, in the communities where we're investing. And we think investors increasingly will want a more holistic view of their investment's true impact on the community. And we'll want to see more of these measures. And so we've absolutely been at the vanguard of trying to support these.
>> So how do you measure what constitutes true additionality and put that across to potential investors to convince them that this is a good investment on either the environmental side or the social side?
>> Well, I would love to tell you that there's an exact science for doing that. But I really, I suspect I couldn't convince, I can show you absolutely the very good figures on what literacy rates are, what's happened to employment. But the question of okay, but how much of that is because you build the multifamily place and [inaudible]. And how much of that happened from other factors is a much harder one to tease out. The good news is that we've done this in a lot of communities now. So we kind of know what the situation is where we don't invest, versus situations where we do invest. And so we can actually kind of compare somewhat similar communities and see where we have invested in habit and make a judgment about how much of it is truly due to what we've done. I can't tell you it's a perfect science. But it's much better than what we have. And I think it's directionally absolutely accurate. If you were to say, "How do I judge the asset management industry overall, not just any individual firm?" I would say, "How good a job that we do at actually identifying and investing behind the really good ideas and then moving capital out of the businesses that have actually a bit lost their relevance?" And I think that's always been important. But now, it's absolutely vital that we are good at that because, that basically, the securities markets is how savings are being invested, you know, moved around the world, almost sold.
>> Do you think future generations will judge the people that do that in the years to come, given that it's not only for their retirement savings, but it's also for the future of their planets as well?
>> Absolutely. I mean, whether or not we do a good job, and we've talked a lot about climate, but I think it's, whether we do a good job of finding the right new technologies that will be important that in getting money to those, those companies and those venture capitalists and others, whether we do a good job at figuring out exactly the right pieces of electronic vehicles, and electric vehicles. I think importantly, healthcare is another area. The advances that we've seen, I mean, the vaccine was a wonderful example. But, you know, this whole new technology is remarkable genetics if we can find these new advances and make sure that we're funding the good ones. And I do think the second part that is important, taking capital out of businesses that are no longer as relevant. I think that's going to be the judgment that people in 20 years will make as to whether or not we fulfilled this really, really important role that we have in the society.
>> President, you're almost balancing allocating that capital to the best opportunities that are going to provide the best social and financial returns going forward with the reality of unjust transition and not being able to make people redundant and jobless overnight, how big a challenge is that?
>> I think it's a very, a very significant challenge. But I also think that it's the reason that active management, who makes that decision, based on a forward-looking view of an individual company's prospects, rather than passive management that just invests depending on how big the company is, regardless of what it actually makes. That's why active management is actually so much at the vanguard of getting those decisions right. And I would argue that passive, for the most part, is simply investing in the status quo.
>> So that was David Hunt, President and Chief Executive Officer of PGIM. I'm Romil Patel, international and ESG editor at Funds Europe. Thank you very much for watching.