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Q2 Prudential Risk Managed Active & Passive Investment Update

4 min read 12 Dec 22

Fears of an imminent recession in the US and Europe, brought on by months of rising inflationary pressure, which dented consumer and business confidence, gathered steam during the quarter. Business surveys for the month of June pointed to a sharp deceleration in the health of the global economy, as manufacturing and services sector activity slowed among the world's leading economies. Economic damage from the war in Ukraine has been a significant factor in the slowdown in global growth in 2022 and has greatly exacerbated the global inflation problem. Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest. The worsening inflationary picture necessitated a more aggressive pace of interest rate hikes from many of the world's central banks.

Against this backdrop, bond yields rose sharply, the US dollar rallied and equity markets fell. The increases in oil and gas prices added to investor concerns over global growth as the war in Ukraine rumbled on. However, fears of a global recession knocked industrial metals prices, with many registering their first quarterly fall since the onset of the pandemic in Q1 2020.

It has been another tough quarter, for all multi asset teams. Both bond and equity markets have come under pressure from rising interest rates, leaving little hiding place for investors.

Total returns for equities have been negative in most markets over the quarter. The one exception was the allocation to China. An easing of Covid restrictions, accommodative policy and signs that the US may ease some trade sanctions helped to buoy sentiment in the region.

It was another particularly difficult quarter for fixed income portfolios, which came under pressure from central banks raising interest rates. All holdings were in negative territory with active managers having mixed fortunes relative to their passive peers. Although still delivering a negative return, emerging market holdings outperformed their developed market counterparts.

During the quarter, and as part of the continual evolution of portfolios the M&G Strategic Bond exposure was switched to M&G Sterling Investment Grade.

Small-cap exposure was added to the Japanese equity market. Given the lack of options for passive mandates in this space, exposure for both the active and passive ranges has been achieved through actively managed mandates.

In the passive range the iShares Euro and US Corporate bond exposures have previously been via unhedged and euro hedged share classes respectively. We have worked with Blackrock to move these exposures to sterling hedged share classes, whilst also transitioning to an ESG screened universe. (note: the US allocation won’t be screened until later in 2022.)

Along with these changes to fund allocations, the portfolio management team made some positioning adjustments over the quarter. Following Russia’s invasion of Ukraine, the overweight position in equities was reduced. In May exposure was added to China following an easing of Covid restrictions and improving economic situation in the country. Diversifying positions held in property and alternatives were increased in April and retained for the quarter.

Full holdings are shown at the end of this note.

The first half of 2022 been a difficult period for financial markets. Unfortunately, as we begin the second half of year the economic backdrop remains extremely challenging.

Central Banks confronted with decade high levels of inflation have started to accelerate the speed at which they tighten policy. It is now becoming clear that with high inflation eroding real spending power and financial conditions tightening, an economic slowdown is underway.

On a more positive note, the uncertainty could well provide the opportunity to add exposure at more attractive levels both at an asset class and security level.

Q2 Prudential Risk Managed Active

*Actively Managed Fund

Q2 Prudential Risk Managed Passive

*Actively Managed Fund

The value of an investment can go down as well as up and your clients may get back less than they’ve paid in. Past performance is not a reliable indicator of future performance.

The views and opinions expressed in this should not be taken as a recommendation, advice or forecast.

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