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Q2 WS Prudential Risk Managed Active and Risk Managed Passive Investment Update

15 min read 8 Sep 23

In this article

Summary

  • Inflation remains at near multi decade highs
  • The main central banks have continued to raise interest rates higher than previously forecast
  • Key changes have been implemented to both fund ranges as part of their annual strategic asset allocation review

Market overview

The past 12 months has seen a fairly monumental shift in market sentiment, particularly towards inflation and central bank monetary policy. The continued Russia-Ukraine conflict, combined with already creaking supply chains, has exacerbated global inflationary pressures, causing a sharp rise in central bank rates, which in turn accelerated a slowdown in global growth momentum. We believe that the turmoil has been symptomatic of a meaningful regime shift in monetary policy.

Central banks have recognised that the longer they wait to reduce inflation the harder it will be to bring it back down and the worse the policy trade-offs will be. This realisation has resulted in a remarkable shift in interest rate expectations over the year.

UK interest rates since December 2000

Source: Bank of England, as at 25 July 2023.

Portfolio performance overview

Equities were once again the best performing asset class, led by the US following the AI rally and ‘Magnificent 7’ contribution. Japan and India also performed well.

Information Technology and Consumer Discretionary were the lead sectors, with Energy, Materials and Utilities lagging behind.

Listed Alternatives suffered, driven by Real Assets and Diversifying Strategies whilst Private Equity surprised to the upside.

Property returns were also negative, driven by Real Estate Investment Trust (REIT) weakness and falls in Asian and European property. In the UK ‘physical’ property remained firm with positive contributions from L&G UK property fund and the M&G Property Portfolio.

Fixed income yields increased noticeably compared to a year ago, with UK Gilts seen as much more attractive compared to a year ago.

2023 Strategic Asset Allocation - Portfolio changes

In June the T&IO Long Term Investment Strategy team completed the strategic asset allocation review for both Active and Passive fund ranges with many of the proposed changes already implemented by the portfolio managers. Many of 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 Risk Managed Active and Passive funds.

RMA RMA1 RMA2 RMA3 RMA4 RMA5
Equity 13.8% 25.5% 38.2% 49.5% 61.1%
Property 5.0% 6.5% 7.5% 8.5% 10.0%
Alternatives 3.0% 3.5% 4.0% 5.0% 6.0%
Fixed Income 74.0% 61.3% 47.8% 35.3% 21.9%
Cash 4.3% 3.3% 2.5% 1.8% 1.0%
RMP RMP1 RMP2 RMP3 RMP4 RMP5
Equity 19.0% 29.7% 41.3% 52.8% 64.7%
Property 1.5% 2.2% 2.9% 3.4% 3.8%
Alternatives 1.0% 1.5% 2.0% 2.5% 3.0%
Fixed Income 74.3% 63.4% 51.3% 39.7% 27.5%
Cash 4.3% 3.3% 2.5% 1.8% 1.0%

Source: T&IO as at 01.06.2023

The key changes are:

  • A meaningful reduction in equity exposure, allocating more to ‘real assets’ and fixed income
  • The largest reduction was to UK equities, continuing the long term transition to more globalised portfolios
  • With much improved yields, UK Government Bonds have been introduced within fixed income as a separate allocation, providing additional diversification
  • Physical property exposure was added to the passive range via L&G UK property fund and the M&G European Property fund
  • Infrastructure was re-introduced to the Passives, with a meaningful allocation to the L&G Global Infrastructure Index Fund. Actives also benefitting from an increased allocation via this vehicle
  • The European Property (Institutional fund) added to the RMA, RMP funds

Portfolio Holdings (Risk Managed Active Range)

WS Prudential Risk Managed Active Range
 

% allocations of Risk Managed Active Range

Security Description Active 1 Active 2 Active 3 Active 4 Active 5
 UK Equity 4.49 8.28 12.51 16.05 19.78
FTSE 100 Index 0.23 0.42 0.63 0.82 1.00
M&G (ACS) BlackRock UK Equity Fund 1.27 2.37 3.57 4.60 5.68
M&G (ACS) BlackRock UK 200 Equity Fund 1.71 3.15 4.71 6.05 7.48
M&G (ACS) UK Listed Equity Fund 1.08 1.98 2.96 3.83 4.70
M&G (ACS) UK Listed Mid Cap Equity Fund * 0.21 0.36 0.64 0.76 0.93
 European excluding UK Equity 1.78 3.32 5.02 6.47 7.97
 Euro Stoxx 50 0.04 0.08 0.23 0.26 0.39
 European Small Cap Equity Fund* 0.18 0.34 0.51 0.65 0.80
 M&G (Lux) Pan-European Smaller Companies Fund* 1.09 2.03 2.97 3.88 4.71
 M&G (Lux) BlackRock Europe ex UK Equity Fund 0.48 0.87 1.31 1.68 2.07
 US Equity 2.55 4.30 6.28 8.00 9.66
 M&G (ACS) BlackRock US Equity Fund 1.57 2.51 4.27 5.76 7.25
 M&G (ACS) Earnest Partners US Small Cap Value* 0.10 0.21 0.26 0.35 0.42
 M&G (ACS) Granahan US Small Cap Growth Equity Fund* 0.13 0.19 0.24 0.32 0.38
 M&G North American Value Fund Sterling* 0.22 0.48 0.42 0.40 0.18
 E-Mini S&P 500 0.53 0.92 1.09 1.17 1.43
 China Equity  1.27 1.79 2.40 2.92 3.46
 FTSE China A50 0.43 0.44 0.37 0.51 0.52
 M&G (ACS) China Equity Fund* 0.40 0.69 1.07 1.28 1.57
 M&G (ACS) Value Partners China Equity Fund* 0.44 0.67 0.96 1.14 1.36
 India Equity 0.25 0.47 0.69 0.88 1.09
 iShares MSCI India UCITS ETF 0.25 0.47 0.69 0.88 1.09
 Asia excluding Japan Equity 2.49 4.40 6.28 8.06 9.92
 M&G Funds (1) Asia Pacific (ex Japan) Equity Fund* 2.49 4.40 6.28 8.06 9.92
 Global Emerging Markets (GEM) Equity 0.78 1.26 1.77 2.25 2.69
 M&G Funds (1) GSAM GEM Fund*  0.22 0.39 0.57 0.74 0.88
 M&G Funds (1) Invesco GEM Equity Fund* 0.10 0.14 0.21 0.24 0.28
 M&G Funds (1) Lazard GEM Equity Fund* 0.15 0.23 0.30 0.39 0.45
 M&G Funds (1) MFS GEM Equity Fund*  0.30 0.50 0.70 0.88 1.06
 Japan Equity 1.25 2.15 3.11 3.95 4.82
 M&G (ACS) Japan Smaller Companies Fund* 0.05 0.09 0.14 0.18 0.23
 M&G (ACS) Japan Equity Fund* 1.07 1.92 2.82 3.58 4.41
 TOPIX Index 0.12 0.14 0.15 0.19 0.18
 South Africa Equity 0.70 1.31 1.97 2.54 3.13
 FTSE/JSE TOP 40 0.03 0.07 0.10 0.13 0.15
 M&G South Africa Equity Fund* 0.67 1.24 1.87 2.41 2.98
 UK Property  2.80 3.73 4.22 4.81 5.59
 iShares UK Property Fund 0.62 0.77 0.84 0.95 1.14
 L&G UK Property Fund* 1.66 2.26 2.51 2.90 3.42
 M&G Property Portfolio* 0.52 0.70 0.86 0.96 1.02
 Europe Property 0.68 0.90 1.09 1.23 1.49
 iShares European Property Fund 0.48 0.63 0.75 0.86 1.07
 M&G European Property Fund* 0.19 0.28 0.34 0.37 0.42
 Asia Property 1.16 1.57 1.87 1.99 2.34
 iShares Asian Property Fund 1.16 1.57 1.87 1.99 2.34
 Private Equity* 0.27 0.41 0.56 0.59 0.66
 APAX Global Alpha Ltd 0.03 0.04 0.06 0.06 0.07
 Harbourvest Global Private Equity 0.15 0.23 0.31 0.33 0.37
 HgCapital Trust plc 0.06 0.10 0.13 0.14 0.16
 Princess Private Equity Holding 0.03 0.04 0.05 0.06 0.07
 Hedge Funds* 0.30 0.43 0.56 0.63 0.70
 BH Macro Limited 0.09 0.14 0.19 0.21 0.23
 BioPharma Credit plc 0.06 0.09 0.12 0.14 0.16
 Boussard & Gavaudan Holding 0.08 0.12 0.16 0.18 0.19
 Petershill Partners plc 0.03 0.04 0.05 0.06 0.06
 Round Hill Music Royalty Fund 0.03 0.04 0.05 0.05 0.05
 Infrastructure* 1.82 2.13 2.43 3.00 3.60
 BBGI Global Infrastructure 0.14 0.20 0.28 0.30 0.33
 DP Aircraft Limited 0.01 0.01 0.01 0.02 0.02
 Ecofin U.S. Renewables Infrastructure Trust plc 0.07 0.08 0.08 0.09 0.09
 L&G Global Infrastructure Index 1.21 1.27 1.27 1.75 2.22
 NextEnergy Solar Fund (NESF) Limited 0.10 0.15 0.21 0.22 0.24
 Pantheon Infrastructure plc 0.05 0.08 0.10 0.11 0.12
 SDCL Energy Efficiency Income Trust 0.14 0.20 0.27 0.30 0.33
 The Renewables Infrastructure Group 0.10 0.14 0.20 0.22 0.24
 US Treasuries 2.74 2.29 1.78 1.36 0.91
 US 10 Year Note  2.74 2.29 1.78 1.36 0.91
 US Investment Grade 14.84 11.30 8.07 5.77 2.91
 Eastspring US Corporate Bond Fund* 14.84 11.30 8.07 5.77 2.91
 UK Government 3.72 3.22 2.69 2.19 1.61
 Long Gilt  3.72 3.22 2.69 2.19 1.61
 Europe Investment Grade 4.52 3.21 1.95 0.88 0.21
 M&G European Credit Investment Fund* 4.52 3.21 1.95 0.88 0.21
 UK Investment Grade 25.00 19.32 13.66 8.94 5.08
 M&G Credit Income Investment Trust* 1.10 0.77 0.49 0.36 0.21
 M&G Fund Sterling IG Corporate Bond* 23.90 18.54 13.18 8.59 4.87
 Europe including UK Fixed Income 0.03 0.03 0.03 0.04 0.05
 NB Distressed Debt Investment Fund 0.03 0.03 0.03 0.04 0.05
 Asia Fixed Income 12.64 11.42 9.56 7.01 4.29
 M&G (Lux) Asian Corporate Bond Fund* 3.15 2.91 2.41 1.77 1.05
 M&G (Lux) Asian Local Bond Fund* 9.49 8.51 7.14 5.23 3.24
 Convertible Bonds 1.56 1.28 0.95 0.70 0.41
 M&G Global Convertibles* 1.56 1.28 0.95 0.70 0.41
 Emerging Market Debt 4.58 4.09 3.84 3.42 2.48
 M&G Emerging Market Bond Fund* 4.58 4.09 3.84 3.42 2.48
 Global High Yield 3.33 4.23 4.13 3.72 2.62
 M&G Global High Yield Bond Fund* 3.33 4.23 4.13 3.72 2.62
 Cash 4.44 3.17 2.62 2.57 2.52

*actively managed fund

Portfolio Holdings (Risk Managed Passive Range)

WS Prudential Risk Managed Passive Range
 

% allocations of Risk Managed Passive Range

Security Descriptions Passive 1 Passive 2 Passive 3 Passive 4 Passive 5
 UK Equity 6.14 9.62 13.44 17.10 20.81
 FTSE 100 Index 0.32 0.49 0.68 0.85 1.02
 iShares UK Equity Index  5.81 9.13 12.76 16.25 19.79
 European excluding UK Equity 2.65 4.18 5.83 7.49 9.08
 Euro STOXX 50 0.13 0.20 0.28 0.30 0.42
 M&G (Lux) Pan-European Smaller Companies Fund* 0.27 0.43 0.59 0.74 0.94
 L&G European Index 2.25 3.56 4.96 6.45 7.73
 US Equity 3.30 4.93 6.74 8.46 10.14
 iShares US Equity Index Fund 1.93 2.94 4.32 5.50 6.74
 M&G (ACS) BlackRock US Equity Fund 0.36 0.66 0.78 1.01 1.23
 Russell 2000 E-Mini  0.32 0.49 0.60 0.74 0.82
 E-Mini S&P 500 0.69 0.84 1.04 1.22 1.34
 China Equity  1.12 1.43 1.75 2.04 2.35
 FTSE China A50 0.51 0.45 0.51 0.49 0.56
 M&G (ACS) China Equity Fund* 0.31 0.49 0.62 0.84 0.97
 M&G (ACS) Value Partners China Equity Fund* 0.30 0.49 0.61 0.71 0.82
 India Equity  0.34 0.57 0.77 0.94 1.12
 iShares MSCI India UCITS ETF 0.34 0.57 0.77 0.94 1.12
 Asia excluding Japan Equity 3.42 5.13 7.04 9.03 10.94
 iShares Pacific excluding Japan Equity Index Fund 3.42 5.13 7.04 9.03 10.94
 Global Emerging Markets Equity 1.42 2.10 2.83 3.55 4.19
 iShares Emerging Market Equity Index 1.42 2.10 2.83 3.55 4.19
 Japan Equity  1.63 2.42 3.31 4.15 4.99
 iShares Japan Equity Index Fund 1.47 2.26 2.98 3.77 4.55
 M&G (ACS) Japan Smaller Company Fund* 0.07 0.11 0.15 0.20 0.24
 TOPIX Index 0.10 0.05 0.17 0.18 0.21
 South Africa Equity 0.61 0.94 1.30 1.67 2.01
 FTSE/JSE TOP 40 0.03 0.05 0.06 0.09 0.10
 M&G South Africa Equity Fund* 0.57 0.89 1.24 1.58 1.91
  UK Property  0.83 1.22 1.60 1.85 2.05
  iShares UK Property Fund 0.33 0.48 0.64 0.74 0.82
  L&G UK Property Fund* 0.50 0.73 0.96 1.12 1.23
  Europe Property  0.59 0.82 1.03 1.28 1.42
  iShares European Property Fund 0.59 0.82 1.03 1.28 1.42
  Remaining alternatives exposure 1.07 1.57 2.09 2.59 3.05
 US Treasuries 2.73 2.34 1.91 1.52 1.04
 US 10 Year Note  2.73 2.34 1.91 1.52 1.04
 US Investment Grade 17.07 14.27 11.22 8.38 5.45
 iShares US Corporate US Bond Index 17.07 14.27 11.22 8.38 5.45
 UK Government 3.72 3.31 2.82 2.34 1.85
 Long Gilt  3.72 3.31 2.82 2.34 1.85
 Europe Investment Grade 8.85 7.14 5.34 3.60 1.91
 iShares ESG European IG Corporate Bond Fund 8.85 7.14 5.34 3.60 1.91
 UK Investment Grade 30.01 24.95 19.67 14.42 9.35
 iShares UK Corporate Bond Index Fund 30.01 24.95 19.67 14.42 9.35
 Europe including UK Fixed Income 0.03 0.01 0.01 0.01 0.01
 NB Distressed Debt Investment Fund 0.03 0.01 0.01 0.01 0.01
 Asia Fixed Income 4.47 3.82 3.08 2.37 1.60
 M&G (Lux) Asian Corporate Bond Fund* 1.12 0.97 0.79 0.60 0.40
 M&G (Lux) Asian Local Bond Fund* 3.35 2.85 2.29 1.76 1.20
 Emerging Market Debt 3.68 3.47 3.17 2.91 2.36
 M&G Emerging Market Bond Fund* 3.68 3.47 3.17 2.91 2.36
 Global High Yield 2.56 2.93 2.96 2.74 2.17
 M&G Global High Yield Bond Fund* 2.56 2.93 2.96 2.74 2.17
 Cash 3.76 2.82 2.10 1.56 2.09

Outlook

Central bank’s attitudes towards taming inflation remain a core theme for investors. The general strength of developed market economies and the near-term path of inflation will be key to actions and attempts to cool prices without causing a recession. With data suggesting that inflation may have peaked, attention is now turning towards growth and whether economies can weather the storm in the face of rising interest rates.

We remain committed to utilising the funds size and scale to provide global opportunities for diversification. We maintain a consistent investment approach across all our multi-asset funds with a focus on competitive pricing and strong risk adjusted returns.

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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