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Q2 2023 PruFund Planet update from the M&G Treasury & Investment Office (T&IO)

5 min read 18 Oct 23

In this article

Summary

  • Inflation remained in focus with headline inflation rates reducing between April to June
  • The main central banks continued to raise interest rates higher than previously forecast at start of the year
  • Downwards Unit Price Adjustments (UPAs) for Planet in 2023 but relative performance still strong vs. peers
  • Long term positioning of underlying portfolios reviewed over the summer with several adjustments made
  • New funds added to some of the underlying portfolios

Market overview

The impact of inflation and higher interest rates on economic activity remained in focus in the second quarter of 2023. During the period, headline inflation rates continued to come down, helped by lower energy prices and slower increases in food prices. In June 2023, annual inflation in the US slowed to 3% and in the Eurozone it fell to 5.5% with UK inflation falling to 7.9%. Despite the significant tightening of monetary policy over the past year, economies, by and large, appear to be holding up. Labour markets remain healthy, with unemployment rates near record lows (US, Europe, UK), which supported consumer spending.

Financial markets were mixed in the second quarter of 2023, with equity markets, broadly, benefiting from improving risk appetite, whereas sovereign bonds struggled as major central banks continued to raise interest rates to curb high inflation. Concerns that the aggressive monetary tightening that has taken place in the past 12 months might lead to an economic recession persisted during the period. The collapse of another US financial group, First Republic Bank, in April 2023 added fears about the banking system, while the US ‘debt ceiling’ negotiations also caused some anxiety. However, as the banking crisis did not escalate and a deal was reached to avoid the US defaulting on its debt, investor confidence strengthened and equity market volatility levels dropped.

Portfolio performance overview

Within equity markets further headwinds have been seen in recent months with the recent large cap technology rally and outperformance of the “magnificent seven” stocks. Whilst the US does make up a large portion of the opportunity set for Planet equity strategies, it should be noted that this small number of stocks are not broadly held within PruFund Planet. This is due to their primary focus on investing in solution providers and sustainability leaders and are structurally underweight both the Tech sector and Large/Mega cap names.

The passive allocations continue to be successful allocations within the fund range, both in terms of the better relative ESG outcomes and the financial returns generated. The passive BlackRock building blocks have added diversification and resilience to the relative performance of the overall equity solution.

Fixed income has continued to do well on a relative basis with several enhancements to exposures over the past year with the additions of the Columbia Threadneedle UK Social Bond Fund and the Manulife Asia Sustainable Bond allocation.

There have also been new additions within the private asset exposure with allocation to two sustainable food strategies in Asia and Latin America run by responsAbility, developing and funding sustainable and fair agriculture practices. The lagged nature of private markets has meant softening valuations seen in recent months has negatively impacted performance.

We should note that over the long-term we have conviction these assets will be positive contributors to performance and that the allocation to physical assets will be differentiating relative to peers and provide some hedge against inflation.

2023 Strategic Asset Allocation - Portfolio changes

The T&IO Long Term Investment Strategy team completed the strategic asset allocation review in Q2 and many of the proposed changes have been implemented by the portfolio managers. The changes follow the same pattern as the main PruFund range as you would expect.

The table below provides the high-level benchmarks for each of the five PruFund Planet funds

%

Planet 1

Planet 2

Planet 3

Planet 4

Planet 5

Equity

13.2%

23.9%

34.8%

46.3%

59.6%

Property

9.3%

11.0%

12.5%

13.3%

14.3%

Alternatives

10.5%

11.0%

11.5%

12.0%

12.3%

TAA Mandate

1.8%

2.0%

2.3%

2.8%

3.0%

Fixed Income

61.1%

48.9%

36.5%

24.0%

10.0%

Cash

4.3%

3.3%

2.5%

1.8%

1.0%

The key changes are:

  • Equity exposure remains tilted to UK, US and Asia ex Japan equities
  • Continued diversification of property with a higher allocation to Asia
  • Alternative allocations remain similar to last year
  • Fixed income allocations have increased with UK Gilts added due to much improved yields, whilst Global High Yield allocations have been slightly reduced due to higher risk

Summary

Whilst we are mindful that PruFund Planet has been launched into a challenging market, the performance of the fund remains robust compared to peers since inception. The PruFund Planet range provides us with niche opportunities with additional diversification benefits. We shouldn’t forget that many of the underlying funds within PruFund Planet are not only looking to invest in companies that can help solve some of the worlds environmental and societal challenges but also those companies that we believe will become tomorrow’s winners.  

It is important that we, and policyholders, continue to take a long-term view. Current markets remain uncertain and we should always remember that conditions like this will often create attractive long-term investment opportunities for globally diversified funds such as the PruFund Planet range.

This content has been prepared by M&G Treasury and Investment Office (T&IO) and is prepared for information purposes only and does not contain or constitute investment advice. Information provided herein has been obtained from sources that T&IO believes to be reliable and accurate at the time of issue but no representation or warranty is made as to its fairness, accuracy or completeness. The views expressed herein are subject to change without notice. Neither T&IO, nor any of its associates, nor any director, or employee accepts any liability for any loss arising directly or indirectly from any use of this document. The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back less than the original amount invested and past performance information is not a guide to future performance.

‘M&G Treasury & Investment Office (T&IO)’ includes the team formerly known as Prudential Portfolio Management Group (PPMG), Prudential Portfolio Management Group Limited, is registered in England and Wales, registered number 2448335.

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