SIRG’s investment philosophy is based on the proposition that skill exists among active managers. The best approach to identify manager skill is to apply the same framework of active portfolio management. That manager skill or alpha is a function of forecasting skill, implementation efficiency, and the manager’s range of opportunities. Through a framework that combines manager selection with time-tested principles of modern portfolio theory, a better risk-adjusted portfolio can be achieved.
The investment team within Prudential’s Strategic Investment Research Group is tied together by a common set of beliefs that drive their approach toward investment consulting and portfolio construction. The principles are well grounded, academically proven beliefs that help our clients achieve their goals and objectives. Those principles are:
- Risk is related to reward.
- Asset allocation helps explain performance. The ability of investors to achieve a long-term performance advantage depends on the right asset allocation strategy fulfilled by appropriate asset managers.
- Active management can add value. Markets trend toward efficiency, but are not efficient.
- Certain performance results are persistent.
- No single firm possesses all the talent across investment management disciplines.
- Portfolio costs—fees, trading market impact, taxes—have a meaningful impact on portfolio result.
SIRG can also be viewed as a “different” type of asset manager. Currently, our team of three portfolio construction analysts is actively engaged in the management of multiple risk-based asset allocation portfolios, providing single and multiple asset class fulfillments for Prudential's internal asset allocation providers. We also manage a discretionary, alternative mutual fund, fund-of-funds portfolio; the fulfillments of a discretionary mutual fund/ETF (exchange traded fund)-based “completion” model portfolio; and, in conjunction with oversight by a Board of Directors, multi-manager, single asset class funds.
In our Portfolio Construction role, we seek to maximize expected return for a given level of risk and look to avoid large deviations in short-term relative performance. We do this by creating and managing multi- or single-manager fulfillments using a risk-based and disciplined investment manager evaluation process (see “Investment Consulting” above). We add value through our proprietary research and unique access to managers.
With risk and return expectations established for each fulfilling investment manager, we use quantitative tools to identify the “neutral” allocation between managers. Portfolios can be tilted toward high conviction, “alpha generators” (alpha measures the manager's relative value-added, as compared to a market index, given its level of market risk) in a manner consistent with a client’s established risk tolerance. The use of quantitative techniques helps enable us to ensure that the amount of active risk is appropriate, that the percentage of total portfolio risk allocated to each manager is consistent with our qualitative judgments and confidence level in that manager, and that unintended risks are minimized.
SIRG’s Investment Strategy team serves two primary functions.
The first is providing market perspective in support of our Investment Consulting and Portfolio Construction teams.
Style and macroeconomic factors can be an important driver of an investment manager’s excess performance. For example, managers that emphasize "cheap" companies with low earnings multiples will tend to outperform the broader market at different times than a manager that emphasizes higher quality companies with stable earnings. A manager’s style is a byproduct of their investment process and tends to be persistent over time. However, investment styles tend to cycle in and out of favor, depending on the market environment. As such it is important to have a forward looking perspective to avoid chasing recent returns, which may reflect style more than skill, when selecting or terminating investment managers.
The second is providing thought leadership research. Investment markets and investment strategies are constantly evolving. SIRG is committed to maintaining our position as a thought leader in the industry to bring our clients innovative solutions to meet their investment challenges.
Implementation, Cash Flow Management, and Reconciliation are tasks often lost in the consulting world. We have a dedicated team of experienced trading and operations investment professionals that help manage investment portfolios and aid clients in managing risks borne by changing allocations among investment managers. In dealing with multiple asset allocators, multi-manager funds and subadvisers, our group has experience working with investment managers, custodian banks, and portfolio administration teams in directing portfolio implementation. In this structure, we trade mutual funds and ETFs for asset allocation funds (including pre-trade compliance checks with client-directed guidelines), communicate cash settlement moves with investment managers for subadvisory separate accounts, reconcile daily cash for external asset allocation providers, provide performance reports for use by our analysts, and aid in the ongoing build out of our technology infrastructure.
The SIRG Global Partners Research team is responsible for investment oversight of Prudential’s international local market asset management businesses in China, India and Taiwan.
While these businesses serve distinct investor bases, each reflects PGIM’s mission to seek superior and consistent risk adjusted returns for our clients. To assist the local markets in fulfilling that mission, the SIRG Global Partners Research Team employs a consistent framework to support the local market team in implementing robust investment management, oversight and risk management processes.
Investing involves risks. Some investments have more risk than others. Fixed income investments are subject to interest rate risk, where their value will decline as interest rates rise. The investment return and principal value will fluctuate and the investment, when sold, may be worth more or less than the original cost. Past performance is not a guarantee of future results. Asset allocation and diversification do not assure a profit or protect against loss in declining markets.
Since no one manager/investment program is suitable for all types of investors, this material is provided for informational purposes only. Clients' investment objectives, risk tolerances, and liquidity needs must be reviewed before introducing suitable manager/investment programs. There is no guarantee portfolio managers will achieve their objectives. For tax advice, clients should consult their tax professional regarding their particular situation.