Multi-Sector Core Conservative

Investment Objective

PGIM Fixed Income’s Core Conservative Strategy is a benchmark-focused, risk-controlled, investment grade Core strategy that seeks +25 bps excess return over the Barclay’s Aggregate Index over a market cycle with index-like risk.1,2

1 There is no guarantee that these objectives will be met.
2 On average, over a full market cycle defined as three to five years.

Investment Philosophy

We manage the Core Conservative Strategy as a lower-risk, lower tracking error alternative to other Core Strategies. Our philosophy is to construct highly diversified, benchmark-focused portfolios and implement risk exposures in areas where we have demonstrable expertise, such as research-based subsector and security selection, while constraining top-down exposures such as duration, yield curve, and sector allocation closely to the benchmark. Indeed, our Strategy seeks and generates virtually all of its excess return from just two activities: bottom-up subsector rotation within the corporate and mortgage/structured product sectors, and research-based security selection in all sectors. We believe that intensive, bottom-up fundamental credit research on both industries and securities, coupled with experienced relative value analysis, can effectively identify undervalued yet creditworthy subsectors and securities regardless of environment or market cycle. We regard these as high information ratio, lower risk activities that can consistently generate alpha across markets.

Sector Allocation:

0-5 bps

 

Subsector and Security Selection:

20-25 bps

 

Duration/Curve/Currency:

0-3 bps

Investment Process

PGIM Fixed Income employs a disciplined, three-step investment process to manage Core Conservative Portfolios:

Step 1: Develop benchmark-focused portfolio strategy

Our approach is highly benchmark-oriented. In the US Government sector, our approach is to replicate the index with the most attractively valued securities. In the mortgage sector, we use quantitative models to identify the combination of securities within the Index with the goal of optimizing expected return. In the corporate and structured product sectors, we use fundamental research to identify a small subset of subsectors and individual securities that we believe offer value.

 

Step 2: Constrain sector, quality, duration, and yield curve deviations to minimize benchmark risk

Our benchmark-focused approach in this Strategy means we seek to minimize tracking error of returns vs. benchmark to an annualized target of +25 bps. To do so, we tightly constrain sector, duration, and quality risk to benchmark, with only moderate yield curve exposure permitted. The goal of this approach is to provide index-like risk while permitting us to add excess return in select areas.

We then look to add alpha through subsector and security selection:

  • US Government and mortgage security selection are based on quantitative research using proprietary models and tools that screen the entire US Government and mortgage markets for attractive trading opportunities. Portfolio managers overlay market technicals and qualitative judgment before establishing trade positions.
  • Choose fundamentally strong credits with best relative value

Step 3: Monitor Portfolio vs. Benchmark on a Daily Basis

Each portfolio’s risk characteristics and positioning are monitored daily by both the Senior Portfolio Manager and a separate risk manager via on-line reports. A proprietary system developed by internal Quantitative Research and Risk Management Groups aggregates all risk exposures daily, for each portfolio and its benchmark. Risk exposures approaching predetermined “risk thresholds” are isolated for further discussion with the portfolio manager, and, when appropriate, are raised to the Risk Officer and Chief Investment Officer. In addition, all corporate and structured product credit positions are monitored and managed daily.

 

Senior Portfolio Managers

 

Stewart Wong

Principal and Senior Portfolio Manager