The Future Means Business: Webinar ReplayTheFutureMeansBusiness:WebinarReplay

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  [DESCRIPTION: Opening screen, featuring PGIM logo, the Rock symbol, with the title "The Future Means Business: The Investment Implications of Transformative New Corporate Models". At the bottom of the screen is written: "For Professional and Institution Investor Use Only. Not For Further Distribution."]

  [AUDIO: Hello, and thank you for joining us today at exclusive preview webcasts. My name is Taimur Hyat. I'm one of the authors of Our New Megatrend report, The Future Means Business, which includes research from across all our PGIM businesses, fixed income, equities, real estate, and alternatives, and represent the views of over 25 portfolio managers and researchers across our business. Let's start with some logistics on your screen are multiple buttons you can use but the most important one is the Q and A pane.]

  [DESCRIPTION: New screen, with a screenshot displaying where the Q and A pane would have appeared during the webcast. Onscreen text is "Logistics, Q and A pane, On-Demand Replay - Use Same Link".]

  [AUDIO: We do encourage you to submit questions at any time to make this as interactive as possible. And we'll try to answer many of the questions during the webcast. But if we do run out of time and we didn't answer your question, we make every effort to answer your question via e-mail in the coming days. Also, there is an on-demand version of the webcast which will be available shortly after the webcast. If the colleagues would want to catch this, they can access this using the same link that brought you here today. I have a distinguished panel of experts that will help us explore our latest Megatrend paper today, The Future Means Business.]

  [DESCRIPTION: New screen. To the left is written "Resources - Over 25 investment professionals and researchers: Public Equities and Fixed Income; Private Debt; Real Estate; Alternatives". To the right is the heading "Proprietary Survey 300-plus, Public and Private Companies", below which is a map of the world with the U.S., Germany, and China highlighted.]

  [AUDIO: And we will also draw on the insights along the way from proprietary research we've done of over 300 public and private companies across Germany, China and the United States. Our panelists today are Joshua Livnat, Managing Director QMA. Sara Moreno, Managing Director at Jennison Associates and an emerging market equity PGIM, Jennison. And Nathan Sheets, Chief Economist at PGIM Fixed Income.]

  [DESCRIPTION: New screen, with images, names, and titles of the aforementioned participants.]

  [AUDIO: So on to our findings, maybe a quick summary to kick things off, and then we can move into Q and A with our panel. But the origins of this paper was the fact that a lot has been written about the demographics of human populations, the aging of the world, millennials. But very little has been written about something that represents over 50 percent of most institutional investor's portfolios and with over 16 trillion of sovereign debt in negative territory, more and more corporate debt in yields is part of -- and equities are part of institutional portfolios.] 

  [DESCRIPTION: New screen, titled "Three Transformative Corporate Models", with three boxes beneath. Inside box one is written: "Weightless Firm: Rise of Intangible Assets; Capital, labor and real-estate light". Inside box two is written "Superstar Firm: Winner Takes All; Leveraging proprietary data and network effects". Inside box three is written "Purposeful Firm: The Rise of Purpose Alongside Profit; Balancing objectives from a broader range of stakeholders".]

  [AUDIO: So we decided we'd take a look at companies, and the fact that their demographics are changing quite rapidly as well. And a whole new host of archetypes has emerged in the corporate space that actually has pretty profound implications for how institutional investors should think about their growth, about their profitability and their investment returns. There were three models that crystallized the changes that are taking place around the world and corporations and therefore how investors should think about investing in these companies. The first is what we call the Weightless Firms. The fact that firms are doing more with less, that they're shifting away from physical assets like factories and equipment and machinery, and employees to a capitalized, labor-like model, centered on investments in intangible assets by which we mean things like R and D, software, intellectual property, brand and design. This, of course, is the era where the digital native firm has arrived. But there are many examples even well outside the strict technology sector. We've seen intangibility and weightlessness become more important. The second archetype we will talk about is what we call the Superstar Firm. These are firms that are leveraging their proprietary data, the network effects to build scale, and of course, technology platforms to dominate in an increasingly concentrated winner takes all environment. The results are clear in the macro data that you see in concentration across all sectors around the world but what does that mean for investors is what we'll explore here. And the third archetype is what we call the purposeful firm, which is a far cry from the days when Milton Friedman calls for shareholder supremacy and quarterly earnings being the primary or only driver of our firm should think about itself. Some have a complex web of stakeholders, customers, employees, regulators, politicians that are asking them to do much more than just think about quarterly earnings, at times thinking about a broader set of community values. And we wanted to explore what this means for investors, but those with an ESG Lens, and others who wonder what the purposeful means for the investment opportunity set. So let's begin with the Weightless Firm and maybe to kick things off, I'll ask Nathan Sheets to give his view on what's from a macro perspective, Nathan driving the shift from physical assets to intangible capital globally?]

  [DESCRIPTION: New screen, titled "Weightless Firm: Rise of Intangible Assets". Two graphics are featured. The first is a line chart, explaining how intangible assets as a share of S and P 500 market value have increased dramatically over the past 40 years. The second is a table, explaining how in 1990, the Big Three automakers had revenues of 250 billion dollars and 1.2 million employees, while today, the top three tech companies have twice the revenues and fewer than one-third the number of workers.]

  [DESCRIPTION: Nathan Sheets is now speaking.]

  [AUDIO: Great, thank you Taimur. I think this question is one that's profoundly important. And I think it taps into some of the key underlying trends that are impacting the global economy. So if you go back a few decades, research has shown the GDP in the United States and particularly other advanced economies tended to get heavier until -- when I say heavier, I mean, actually its poundage. It was getting heavier until the 1960s. At that point in time, the weight of production and heavy manufacturing was seen as an indication of economic mind. But in recent decades, these measures of global GDP have lightened up. And I think this taps into some of these trends that you were alluding to, that the key underlying driver in my mind is the incessant march of technology. And this technological advance is primarily in sectors in toward applications that are lighter. And I think we can list all sorts of different examples of this. But today, I would say tech, computers, IT are on the cutting edge. And now they will ultimately be artificial intelligence and machine learning, et cetera, et cetera. But compare that kind of technology to the technology that was generating steel and autos 40 or 50 years ago. Now hand-in-hand with this element of technology, I think our economies as a result of that are also becoming more services based. And those old kinds of manufacturing products just account for a smaller share of GDP than they used to as a result and services are larger. And again, here we can think of the rise of sophisticated services sector. Some you mentioned software, healthcare even entertainment applications, comparing those to the kinds of production that dominated GDP some decades ago. Another factor that's reinforced this is I think that in recent decades, there has been an increasing awareness of environmental costs. And as a result of that, there's been an increased focus on efficiency and reducing our resource footprint and so forth. I think this has also reinforced the drive for weightlessness. And then finally, related to that is incentives for cost efficiency. The more you utilize resources in production, the more you've got to pay for those resources so you can use them more effectively, production's more efficient. So these are all powerful trends that are at work. Now, let me just very briefly conclude that see, there are also a couple of concerns that I see that I think we need to be aware of here. One is that much of this heavier stuff, we're still consuming in one form or another. We're just importing it from abroad, particularly from China and other emerging markets. And I think it's important to think about these issues from a global perspective. The second concern, if that there was something unique about manufacturing in the sense of being able to combine a worker with a machine in terms of its capacity to be able to drive productivity growth in the economy. And as we move to a more services based economy, we've seen a slowdown in productivity growth. And I think, you know, there is an argument well maybe we're not measuring services productivity accurately. And I think there may be an element of truth in that. But will a services based economy yield itself to the kinds of rapid productivity and GDP growth that people expect?]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: I mean, that's sort of physical capital to kind of intangible activities Nathan. What we've debated a lot and discussed with you and other researchers is also what's happening to employees and labor and there's a striking statistic on the screen around how in 1990, the Big Three automakers had about 250 billion in revenues with 1.2 million employees. And right now, the Big Three tech companies have twice that amount of revenues with just one-third the employees. And we haven't even talked about the gig economy that this is just kind of like labor capital ratio changing. You've done a bunch of thinking on this what you call the hollowing out of the middle class. Can you talk a little more about that?]

  [DESCRIPTION: Nathan Sheets is now speaking.]

  [AUDIO: So the performance of the labor market is a very important implication of some of these deep underlying trends that we've discussed. And a first observation that I think is important is that in aggregate, employment in the United States and elsewhere in the world has remained quite strong. So labor markets in many countries right now are performing well in aggregate in the sense of providing employment for their workers. Now, in a recent white paper, some colleagues and I try to go a little bit deeper. Particularly with respect to the US labor market, and we say, yeah, we are creating jobs but are they good jobs? And what we found was pretty striking. And that is the US economy during the post crisis period has created a lot of very attractive, high paid jobs in sectors like management, consumer -- computers, business and finance, [unclear] in healthcare, et cetera. And these are very attractive, well paid, knowledge based, et cetera. But we in the United States have also created a lot of low paid jobs, like jobs in food preparation and personal care and services and so forth. What the economy hasn't generated is a lot of those jobs in the middle. Traditional middle class jobs like sales, and office and administrative support and production, and some of the less sophisticated kinds of jobs in healthcare. So it's a really striking kind of hollowing out that we see in the labor market in the United States. I think it broadly echoed in many other countries. And again, I think what's driving this are the same kinds of factors that I discussed earlier. It bears the imprint of advancing technology and innovation, allowing machines to do some of those kinds of jobs at cost efficiencies, and globalization and global competition.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: Maybe moving a little bit to the investment implications of this kind of brave new macroeconomic world that Nathan has laid out. Sara, I would ask you. You spend a lot of time thinking about weightless firms in emerging markets. What are the implications of the weightless firm in the emerging market? Can you share examples of either industries or companies that have adopted that model in Asia and emerging markets?]

  [DESCRIPTION: New screen, titled "Portfolio Implications", with the following four bullet points: Exploit opportunities in public and private corporate debt issued by weightless firms; Evaluate increasing developed-market allocations to privates given the changing investment opportunity set in a weightless world; Realign public equity investment by increasing allocations to emerging markets; Reposition real estate portfolios for shorter leases, flexible office model and the gig economy.]

  [DESCRIPTION: Sara Moreno is now speaking.]

  [AUDIO: Yeah, so it's interesting because with the ability to be able to leverage technology and create that network effect, a lot of the companies have been able to leapfrog the traditional path to emergence that we saw in developed markets. And you see this most notably in something like retailing with e-commerce. The element of e-commerce and be able to move on from offline to online, lowering the need for your traditional brick and mortar infrastructure. This is most notable in China, where really the-- if you think about mall space that the country will actually need. It's not as much as we'll ever be a sense it has been in the United States. It's also moved into the digital arena for banks. You see companies like Alibaba with financial that have created huge network effect bringing not just convenience and lower, much lower cost than what a traditional to transact much lower cost than the traditional bank, but really brought about the inclusion of swaths of the population that would otherwise not be included. We see this more notably in Latin America where, you know, in a country like Brazil, where a monthly interest rates or credits are expensive and very limiting credit fees for banks are very high. So a lot of people are unbanked or underbanked. You're seeing that move, that learning that we're getting out of China that's far ahead across the world in terms of digital payments, bringing that in through democratizing and allowing for people to move more rapidly to the formal economy. So you see platforms like Mercado Libre who already had the ecommerce ecosystem and the knowledge, and the eyeballs if you will to switch into become a digital company creating a behemoth of an opportunity within that market. You also see in healthcare. You have a system that is overburdened in many emerging market countries. For example, in China, you would traditionally have to wait at a hospital just to pay to get a consulta-- the line is consistent across the entire change from how you get to see the doctor, how you get your prescription, how you ultimately get, you know, the healthcare that you need. The drug prescriptions for whatever ill you have to now shifting that online and be able to do a, you know, a digital interaction with doctors having more accessibility at a faster pace with medical professionals. And then on the other side, using AI and imaging technology to allow to better detect and hopefully have earlier detection of complex diseases such as cancer. With China having, you know, 4.2 million new annual cases of cancer patients, one of the biggest population cohorts in the world. These are, you know, advances that allow the economy to leapfrog a very overburdened system and creates investment opportunities for those that are, you know, doing bottom up fundamental research looking for, you know, the next opportunities in these economies. And what's interesting is that they protect in a way -- because they're anti-cyclical as we see the continued emergence of the middle class across emerging markets. And as the middle class wishes to access the type of services we have in developed markets. They're doing so at a faster and more cost-effective pace and the companies that are addressing the local needs but leveraging the technologies that have been developed in developed markets offer very unique and very sustainable long duration investment opportunities.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: This is fascinating to me how this is so much more beyond just the technology companies and is -- and it really hits a lot of companies in the traditional space. Maybe then to summarize some of the investment portfolio implications before we go on to look at the second model, the Superstar Firm. I think some of the key highlights from the report were summarized on the page. First, I think it's exploiting opportunities in public and private corporate debt issued by weightless firms. Because we're still seeing the credit rating agencies haven't quite caught up with how to analyze and value the debt of companies that have a lot of intangible centricity. And they still look for machinery equipment kind of asset backed collateral, and haven't quite recognized perhaps the advantages from having a variable cost model greater flexibility to respond when you don't have to restructure that big physical capital base. And that's certainly created a range of opportunities in weightless firms which will probably go where those rating agency models catch up. But right now, we are seeing a lot of re-ratings of companies and a lot of arbitrage opportunities and database. I think a second one is the fact that with intangible assets, heavy firms that don't have as much CapEx need as firms in the past did and they need longer R and D cycles than tangible heavy firms did. And for both those reasons, the public desire for transparency around the expense, which is harder to provide if you're doing proprietary R and D, the less need for CapEx if you are intangible, heavy rather than tangible heavy. We are seeing a lot of opportunities for intangible heavy weightless firms in the private sector. And investors will probably want to look at how they're balanced their public and private investments to make sure that capturing investments in areas which aren't going to public markets. In addition, there's probably lots more, you know, burdens in the public markets. But if there's no need for them to bear it, if there's enough venture capital and private sector capital, there is really no need to come to the public markets. There, you already covered the points around realigning public equity investments to think about emerging markets. And then, of course, there's a piece around real estate portfolios and the fact that notwithstanding some of the restructuring that is going on as we work, the idea of changing the real estate corporate model to allow for shorter leases and more flexibility is really having some pretty major implications for how real estate portfolios are structured which we covered in the report. But maybe moving on to simpler stuff from then as the second model. There, I know you've again, looked at this in terms of the fact that there are some small set of firms that really have kind of leapfrogged, as you said, and have built really dominant positions. We've certainly seen that in the U.S. I think of Amazon. I think of Facebook [unclear] is an obvious example. But is this also happening in emerging markets?]

  [DESCRIPTION: New screen, titled "Superstar Firm: Winner Takes All", with two pie charts demonstrating that in 1975, 50 percent of the earnings of U.S. public corporations came from 109 firms, while today, it comes from just 30 firms.]

  [DESCRIPTION: Sara Moreno is now speaking.]

  [AUDIO: Yes. And it's been interesting because with the ability to now leverage technology and have, you know, build your own network effects, it sort of has changed how things have that that the investment opportunity sits within emerging markets. Because in the past, it used to be that global leaders came from developed markets and sort of cut and pasted the business models. But with the ability to leverage technology and build your own network effects, it's been and the needs of the local population are, can be different and very subtle and things like logistics are more complicated. And you really need that local know-how and the local relationships to overcome the inherent differences in developing markets.]

  [DESCRIPTION: New screen, featuring logos of the following companies: Tencent, Alibaba, Google, Facebook, Careem, Flipkart, Mercado Libre, Amazon, and Apple.]

  [DESCRIPTION: Sara Moreno continues speaking.]

  [AUDIO: You've had the emergence of these superstar firms that cobbled together an opportunity. For example, Mercado Libre came out of Argentina, very entrepreneurial management, who saw a huge opportunity not just in Argentina which is a very tough place to do business but they thought of it on a pan-regional basis. Becoming a superstar firm but realizing their biggest market was actually Brazil. And even though the logistics was tough and continues to be challenging, they could become a superstar firm and a weightless firm and create a very attractive return profile. And so you have this very interesting combination. And, and we've seen this, that one interesting statistic from the report was, you know, in 2006, only 138 emerging market firms ranked in the global top 1,000 by revenues compared to 250 today. So it certainly has been, you know, very fast, and it still continues to be a very nascent opportunity. Once you think about it, there's still only 2.7 percent e-commerce penetration in Latin America. So we're just starting to see the superstar firms start to really access that opportunity that we're seeing in emerging markets.]

  [DESCRIPTION: New screen, the previously displayed screen titled "Superstar Firm: Winner Takes All", with two pie charts demonstrating that in 1975, 50 percent of the earnings of U.S. public corporations came from 109 firms, while today, it comes from just 30 firms.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: And obviously, once the superstar firm becomes a superstar firm once it's priced in that is going to be the dominant leader, it might be too late for investors to generate outsized returns from that. What are some of the early indicators? How do you identify what subset of firms and then maybe ultimately one or two firms will dominate a particular sector?]

  [DESCRIPTION: New screen, the previously displayed screen featuring logos of the following companies: Tencent, Alibaba, Google, Facebook, Careem, Flipkart, Mercado Libre, Amazon, and Apple.]

  [DESCRIPTION: Sara Moreno is now speaking.]

  [AUDIO: Yeah, certainly. I mean there is a -- it's essentially because in the end, we haven't seen a winner takes all but there are winners takes most. And most of the opportunities that we're seeing of that shift from offline to online across different industries that is the case. So you do have to be early because the profits are highly concentrated. And I think the key is to look at how that company is leveraging the technology, how they're building that network effect, focusing very carefully that network effect is leading to operating leverage and increasing returns to scale. It's not just adding the active -- the user base, but how active is that user base, and continuing to build the moat with strategic M and A but high internal R and D.]

  [DESCRIPTION: New screen, titled "Portfolio Implications", with three bullet points: Tread cautiously into venture capital given the "kill zone" surrounding superstar firms; Develop an investment framework to identify next generation national superstars; Monitor the IPO market closely given the potential public-private dichotomy in valuing the trade-off between profitability and network size.]

  [DESCRIPTION: Sara Moreno continues speaking.]

  [AUDIO: So we can look at some of these metrics, as the companies evolve. And when we see that there is very strategic M and A and very good R and D that's generating increasing returns, and ultimately addressing and keeping the customer engaged, these are the type of companies that we can position to into early and initially you probably position in four or five. But over time you start to really, within the portfolio, start to concentrate on the companies that you see as having that edge. And what's interesting is, as these companies get bigger, their moat can actually widen. And they really do become, you know, dominant in specific areas.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: And what about politicians, bureaucrats, antitrust regulators, I'd love to get your perspective and then maybe Nathan's on whether that risk is growing. We're seeing it in Europe and the US. Tell us about emerging markets. And then maybe Nathan tell us about how it's playing out in the US and Europe.]

  [DESCRIPTION: Sara Moreno is now speaking.]

  [AUDIO: Yeah. So it's interesting to frame this because we're seeing some but not to the level or to the degree that we're seeing in more developed markets. And I think it's the nature of where we are in the maturity cycle and where we are in the emergence of the emerging markets. And so, you know, you see in China, you know, Tencent looking to really curtail, you know, the access to gaming of young, the younger audience, there's certainly more involvement in the Chinese government is more active in the corporate space. But if you look across the globe, still in growth in emerging markets and because penetration is still so low, and the network effects are just starting to flex their muscles. And the difference here is that it's not just convenience. It's about inclusion.]

  [DESCRIPTION: New screen, the previously displayed screen featuring logos of the following companies: Tencent, Alibaba, Google, Facebook, Careem, Flipkart, Mercado Libre, Amazon, and Apple.]

  [DESCRIPTION: Sara Moreno continues speaking.]

  [AUDIO: A lot of the things that these companies are addressing are truly a limitations or limit to access or an overburdened healthcare system. And so they're actually addressing a need. So they are in many cases, initially partners with the government, the government can no longer fund, you know, social healthcare. They can no longer and they also don't want to allow to continue with the oligopolistic nature of their financial systems, so Fintech's digital payments. And there's also low levels of-- it's the high levels of informalization in some of these economies like Mexico. The informal economy is bigger than the formal economy. That inclusion factor means that for now, some of these companies are partners with the government and not yet quite so big that the government feels compelled to restrain or limit.]

  [DESCRIPTION: Nathan Sheets is now speaking.]

  [AUDIO: So, in the United States and Europe, I do think that the possibility of increased regulation and antitrust policy, I think that is a distinct risk for many of these large firms. I think in these countries, there's a rising narrative that many of these big players are impeding competition, that in some sense, the tech moat has become too wide. And as they limit our competition, they're limiting productivity growth, economic growth and so forth. 

  [DESCRIPTION: New screen, the previously displayed screen titled "Portfolio Implications", with three bullet points: Tread cautiously into venture capital given the "kill zone" surrounding superstar firms; Develop an investment framework to identify next generation national superstars; Monitor the IPO market closely given the potential public-private dichotomy in valuing the trade-off between profitability and network size.]

  [DESCRIPTION: Nathan Sheets continues speaking.]

  [AUDIO: And frankly, there is some evidence for the United States of rising concentration in some key sectors. Now, as I say that a related issue that's of great importance in this debate, it's how you define the relative and relevant market. Is there only within the United States or only within the European Union, or is it globally? The tech moats may not look quite so wide from a from a global perspective. And I think that's an important question for policymakers and probably also for investors, which kind of just summarizing this. I think the, the deep question is, are these, you know, particularly leaders in high tech, are they, you know, on balance, facilitating innovation. Because if we went out and asked people, you know, on mainstreet to name firms that are innovative would end up with these leaders, or are they impeding it? I think the answer is probably a little bit of both. They're just a couple of related thoughts here. I think that another driver of this concern is rising populist pressures in a number of countries. That populism by its nature is skeptical of agglomerations of power. And these large firms are very economically powerful. And we're also seeing that manifests itself in a related way that's also very important. And that is they have agglomerations of information and agglomerations of data. And I think that there's an increasing concern that maybe these folks have too much information and too much data. And that's given rise to regulation in Europe, it may give rise to certain kinds of regulation into the United States as well. And then the final angle on this is I think at some level, this is also being framed in terms of a clash of national champions. So you see this, you know, by the US action to sanction Huawei. I think you see that in some of the actions by the European Union on tax and antitrust policy on US firms like Apple, Google, Amazon, et cetera. So as we get into this debate, there's an economic debate about how do we think about antitrust and what does it mean to limit innovation in a sector and then there are these deep underlying social things that are in play as well, populism, nationalism and so forth.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: You can also hear people say that sort of it's a bit of a sequence that many of the big technology companies might initially have built their position through a true technological advantage and innovation but then maintaining it to building those kill zones. And it certainly made the life of venture capital much harder. Because if you're in a place where dominant superstar has majority market share and are buying up smaller companies rather than letting them go through that IPO cycle to find the kind of one killer firm in a venture capital portfolio. It certainly made their life harder.]

  [DESCRIPTION: Nathan Sheets is now speaking.]

  [AUDIO: You know when they buy up those killer firms, they have strong incentives to integrate that technology. You know in some cases it may be just fundamentally incompatible. And those may be the ones they kill but some of the rest of them, they do have incentives to integrate it into their product mix and business models. But if these large firms and maybe this is a statement that shows I still have some naive belief in markets. If these large firms impede the development of technology too much, some way that better technology is going to manifest itself. Maybe by it's by small startup that gets bid quickly that they haven't seen. Maybe it's developments like some of those that Sara's talked about in the emerging markets. So I think that if they go too far in impeding the technology rather than integrating the technology and embracing it, their dominance will ultimately fail. And I think there is history of companies that haven't stayed up, like, you know, an example would be Kodak. Absolutely state of the art 50 or 60 years ago and, you know, has not fared well.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: But much debate on the Superstar Firm but I'd like to move to our third archetype and make sure we have a bit of time to chat about that which is a purposeful firm.]

  [DESCRIPTION: New screen, titled "Purposeful Firm: The Rise of Purpose Alongside Profit", featuring a pie chart demonstrating that shareholder proposals related to ESG in the U.S. have more than doubled in the past two decades, and currently account for nearly 40 percent of all shareholder proposals submitted to Russell 3000 companies.]

  [DESCRIPTION: Taimur Hyat continues speaking.]

  [AUDIO: And the underpinning logic here is that a lot of the debate in the media is around, you know, why firms are purposeful or whether they're purposeful. I think today whether it's enlightened owners or whether it's a much broader group of stakeholders banging on the door that are forcing companies to think about broader purpose. It is true that companies are at least making the motions around broader purpose rather than just quarterly earnings. Now, I'd like to jump straight into the investment implications of that trend. And Joshua, you've done a lot of interesting work on this with your colleagues but, maybe just to start with kind of, sort of the basics. How should investors think about doing good while doing well? How do they balance their fiduciary responsibilities with ESG driven motivations and is there a balance or are they congruent?]

  [DESCRIPTION: Joshua Livnat is now speaking.]

  [AUDIO: I think a good place to start is to review the literature, the academic literature on ESG.]

  [DESCRIPTION: New screen, titled "Purposeful Firm: The Rise of Purpose Alongside Profit", featuring bar charts titled "Purpose is Being Adopted by a Growing Number of Companies". Bar one represents the U.S., where 70 percent of companies focus primarily on shareholders and profit maximization, and 30 percent of companies consider a range of stakeholders and operate under profit with purpose. Bar two represents Germany, where 45 percent of companies focus primarily on shareholders and profit maximization, and 55 percent of companies consider a range of stakeholders and operate under profit with purpose. Bar three represents China, where 62 percent of companies focus primarily on shareholders and profit maximization, and 38 percent of companies consider a range of stakeholders and operate under profit with purpose.]

  [DESCRIPTION: Joshua Livnat continues speaking.]

  [AUDIO: And what is clear about this literature is that the firms that do good actually have higher valuations. Literature is pretty clear on it, they have enjoyed better cost of capital, both debt and equity which to invest those pose the question, if companies start from higher valuations, then more likely in the future they would have lower returns. And again, the literature is mixed on that, on the benefits of investing in better ESG companies. Well, some studies actually find that it's good to invest in such companies. Some find that it's bad, that you actually lose return. So, that place is not closed on whether ESG is a good place as a form of investment or better ESG companies. Having said that, I think from investors who are interested in improving company's ESG footprint, what you could do is always ask yourself if you have choices and we always have choices between companies with similar expected return, you could always tilt towards the better ESG companies without harming your returns. So, as long as you have a growth portfolio, as long as you have small active exposures to companies, you can always tilt and substitute potentially good investment company that is bad on ESG. With another good investment company, that is better with ESG and you do not tell you either.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: I know you and your colleagues have talked about something called the cost specialist strategy approach to ESG investing, is that kind of what you're hinting at here?]

  [DESCRIPTION: Joshua Livnat is now speaking.]

  [AUDIO: That's part of it.]

  [DESCRIPTION: New screen, titled "Portfolio Implications", with the following five bullet points: Integrate relevant ESG metrics into the investment process as it is imperative for both ESG champions and ESG skeptics; Re-evaluate the potential pitfalls of an exclusionary approach to ESG; Consider the next generation of more sophisticated "ESG 2.0" approaches; Consider a core/satellite approach to ESG investing; Continue to influence corporate reporting to drive higher-quality ESG data and outcomes.]

  [DESCRIPTION: Joshua Livnat continues speaking.]

  [AUDIO: Again, what -- I think people are thinking in general about how to invest from an asset owner point of view and what you see a lot of asset owners doing at least in the public equity market, they would hold the quote, position, which is essentially index. And then they would go for high impact or high return investments and that's the satellite. And some people can adopt a similar strategy in the ESG area. Well what you could do is if you -- if there are pressures on you, as an asset owner by the people who provide you the assets to be more ESG, you can of course, do select some active ESG companies but at the same time, you could improve on the core by tilting the core towards better ESG companies and that is something that can be done. Again, if you have broad portfolios with small exposures to many companies.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: What I've seen in our discussions, Joshua was a lot around just the shortcomings of kind of conventional check the box approaches to ESG. And I know QMA and PGIM has gone beyond that and thinking about it. Can you share kind of a couple of thoughts of how you might take into conscious the complexity of the fact that the link to ESG to risk returns and evaluation and then the link to whether that evaluation is priced [unclear] it's quite complicated? And how investors might think about that or what kind of makes the real difference?]

  [DESCRIPTION: Joshua Livnat is now speaking.]

  [AUDIO: So, I think we should start from the basic premise and the basic premise is that the ESG disclosure of voluntary and data on ESG is not plentiful. Scales and companies do not provide the metrics that you as an investor may be interested in. So there are few shortcomings when somebody wants to utilize and incorporate ESG in their portfolios. The first is data scarcity. Second is there is no agreement about what constitutes better ESG and what is inferior ESG. And just to give an example, one of the things that people talk about in the governance area about boards and you should have refreshment of the boards on a frequent measure. We actually looked at it and found out that companies that have stable boards, long term yield boards are actually better companies.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: Up to a point or forever?]

  [DESCRIPTION: Joshua Livnat is now speaking.]

  [AUDIO: Of course, it's up to a point. We all get always to a point where we diminish in livelihood, right. And same thing about corporations. So we are talking about the average then you have the board. And of course, you have some refreshment of individual board members. But stable boards are typically good up to about 10 years.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: I thought it was fascinating [unclear] kind of just overly simplistic conventional thinking around, you know, less experienced. The younger boards will be better and older boards and in fact it's a curved relationship and much more complex. I guess the other piece of your research which was I thought fascinating was around the fact that more is not always better when it comes to ESG factors and thinking about what is truly material matters. Can you -- So give a quick summary of kind of that sort of the takeaway there?]

  [DESCRIPTION: Joshua Livnat is now speaking.]

  [AUDIO: So again it goes back to the issue of ESG data voluntarily disclosed when companies choose what they want to disclose. And they may bombard you with information that is called ESG but it's not really relevant in that area of operations. And what we did was to utilize what is flagged by a voluntarily non-for-profit organization called FASB will they tell us in each sub industry what are the items that are most important for investors in terms of ESG. And once you hone in on these items, then you can come up with better ESG profile. And we show that, actually, if you just take all the data that are disclosed by firms, you're limiting yourself as compared to taking data that is specific to that industry, that is material to that industry.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: We could probably speak about kind of the next generation of ESG approaches for a while but I'm conscious of the time and then some of the questions that have come in, so maybe we can tackle those. I think one, Nathan for you as around the weightless firm and you'd mentioned that maybe the next wave Nathan of productivity increases and weightlessness would be AI and big data and so on. What's your vision of productivity in the future and how those might affect kind of labor productivity and total factor productivity?]

  [DESCRIPTION: Nathan Sheets is now speaking.]

  [AUDIO: Well, I -- I'm an optimist on this. My feeling is that we are surrounded by transformative kinds of technologies.] 

  [DESCRIPTION: New screen, titled Q and A - Please submit questions via the Q and A box on your screen.]

  [DESCRIPTION: Nathan Sheets continues speaking.]

  [AUDIO: And I think that over the next decade or two, it's likely to be a long run development. We're likely to see applications like AI and machine learning and alike make workers significantly more productive than they have in the past. Now, I'd say we haven't really seen that yet but my sense is that we're just kind of in an early phase of this transformation. Now, as I say that there is the opposite concern that it makes workers so productive, there aren't any jobs anymore. And in some sense, that's the challenge that manufacturing is faced in many countries where productivity has risen, output is still higher, continue to increase but employment is fallen. But in the past, we've seen, you know, new industries emerge. So I think that this technology will have two effects, make existing technologies and industries more efficient and create new industries and new applications and new kinds of employment. So right now as we sit here, would have a hard time guessing. But as I said, I'm a tech optimist.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: Another question in was what is the biggest challenge for private equity managers in a high valuation environment? I mean, I got a couple of thoughts on that. I think over the last years in the weightless world which the question addressed, private investors have been pretty eager to overlook profitability and focus on network size and scale and dominating a consumer base. And in effect that made a pretty bold bet that if you spend dramatically in really dominating a sector, and disrupting the sector, you will ultimately unprofitability and there certainly examples where that has worked. But I think the really interesting piece that we look at is, will the value that's placed on new firms in the private sector, will it match the valuation judgment of the public sector when the coming wave of IPOs materializes. And I think in many cases, it's not only about 19 percent all companies that went public last year were profitable. And I think whether it's the space or the time that the private sector gives or whether there's just too rich evaluations in the private sector driven by the amount of private capital is a very interesting issue that we will see play out. And I think it becomes even more important in the weightless context because, again, you're trying to build that network and that scale but how long do you give that? The other question we had on this was, Sara, to you was around obsolescence. So at the end of every week, less intangible technology driven firm are firms that are looking at what's possible obsolescence that may have not made that transition. Do you see that in the emerging markets world was as well and how do you sort of think about obsolescence risk in the portfolio?

  [DESCRIPTION: Sara Moreno is now speaking.]

  [AUDIO: Yeah, so given, and I think it can vary by industry and again, in where I see that industry is in the economy is in the continuum of emergence. So when you look at, at China that completely skipped you know, the traditional, the bench, financial system development, it is almost too late for you to be in a bank, a traditional bank as obsolescence there is pretty high. And then you have economies like Brazil that are that were sort of halfway as technology came through the market and were starting to be leveraged. So you still have something like the credit card royalty. So you still have some big dominant players like Visa, MasterCard, that, you know, are able to do well within that economy. So it really-- you have to really assess the scope of the opportunity where the level of emergence has been in that market. And then decide whether you sort within your portfolio play only the entirely, you know, tech opportunity in the that sort of superstar firm or you actually, you know, find can find interesting returns in the more sort of incumbent traditional sectors. Because just the opportunity is significant but by and large, it's really interesting to see that, you know, the obsolescence risk in some sectors has been much higher than in others. And that's the sort of work that bottoms up we do to assess how much of a factor it is in any given economy.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: One other question, Joshua, you might be best positioned for this one which is to be a Purposeful Firm, does management drive that, and what compensation do current investors want for diluting the profit maximum.]

  [DESCRIPTION: Joshua Livnat is now speaking.]

  [AUDIO: So, I think from the beginning of our discussion on ESG, a company that is good on ESG actually has higher valuations. So if you think about it as a manager, if you want to increase your valuations, one of the ways to do it is by broadcasting to the world "I'm good on ESG". And that could be done in two ways, that could be done by actually spending to get better on ESG or by providing more data that may be material or immaterial that you are good on ESG. So, we definitely have management should be interested in improving on ESG measures. Having said that, there is another class of investors that pressure asset managers to improve on ESG and these are people who are subject to all kinds of political pressure or younger investors. Well, there is more emphasis on ESG. And one of the fascinating things that we deliberated among ourselves was with all the index money on the larger proportion of money that is index, would that create more or less pressure on companies to improve ESG. And it turns out that even if you have money invested in an index portfolio, the asset owner actually may have, as I said, the political pressure to improve on ESG and they would be the ones to try to push the asset managers to improve on selection of better ESG companies.

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: For you Nathan, you spent a bit of time thinking about this issue, on the question that was asked is kind of the gig economy is a good example of the weightless trend. What's your take from a macro perspective on what this means for labor productivity side?]

  [DESCRIPTION: Nathan Sheets is now speaking.]

  [AUDIO: So I think the gig economy creates opportunities. But there's an important asterisk. So on the opportunities side, I think it's almost axiomatic that anything that makes the labor market more flexible, and increases the capacity of workers and those who are looking for services to be provided to them, be they firms or individuals, anything that increases the ability of the economy to match those folks in a flexible way is constructive. And as I say that, I think it's particularly constructive in an environment where we know we have an aging population, which is true in the United States. It's true in Europe, it's certainly true in Japan. It's true in China and Korea and many, many places in the world that older workers, the research shows, are very effective and productive. But that said, they are also looking for a different kind of employment contract than they had when they were in their twenties or thirties. And what they want is greater flexibility and greater control over when they're going to work, how much they're going to work and so forth. And I think the gig economy provides that to a very significant extent and may ultimately be a mechanism to allow many of those older workers to stay and contribute in the economy which is exactly what we're going to need in the decades ahead. Now, I said there was a caveat on my view here. And that is that I think it's also very important that this be done in a way where there are adequate safety nets and protections for workers. Do we have to think about well, if we move more toward a gig economy, what about the provision of health care? What kind of support and help are we going to provide? What kind of employment protections are we going to offer folks who are in these kinds of relationships? So may require us to think more broadly about the way labor is allocated in our economy and the legal and policy protections and supports that are provided to them. But in general, I think this is a very constructive trend.]

  [DESCRIPTION: Taimur Hyat is now speaking.]

  [AUDIO: Well, there are couple more questions that we'll answer directly by email. So I'd like to bring that session to the close. Let me start by first thanking our panelists once again for participating and covering these trends. We do quite deeply believe that the demographics of companies and how they are changing is as important as the demographics of human population. And with institutional investors holding both private and public corporate debt, holding corporate equities, the trends in real estate, we do think what happens to corporations and the fact that they're changing quite dramatically will have pretty major implications for the investment teams over the next few years. We do encourage everyone to look up PGIM's latest research on this, The Future Means Business by visiting our interactive website at pgim.com/futurefirm and we do hope you enjoy the rest of your day. Thank you very much for joining.]

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  [DESCRIPTION: Webinar ends.]