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

4 min read 1 Aug 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 service 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.

The decision by the central banks to raise interest rates has led to rising bond yields, a stronger US dollar and falling equity markets. The ESG sector has faced a further challenge as the war in Ukraine has increased the demand for defence, aerospace, defence and fossil fuel related stocks and bonds. As a result, ESG has underperformed the broader market.

In addition, the fund’s focus on solutions means that it tends to be biased toward growth type stocks. In a rising interest rate environment the longer term cash flows of such companies tend to be discounted more than their more established counterparts leading to underperformance.

Although the portfolio’s fixed income allocation also detracted from returns, the tilt of underlying bond funds toward government related bonds meant that returns were somewhat sheltered from the impact of widening credit spreads.

It was a relatively quiet quarter in terms of investment activity across the portfolios with no significant changes to the underlying funds.

The following comments refer to the broad asset class groups. Each asset class weight will vary across the range depending on its risk profile and objective.

Equity exposure is broadly split into two groups. 40% is allocated to active thematic and impact funds. The largest of these is the M&G Positive Impact Fund, which seeks to invest in companies that have a positive influence on society by addressing social and/or environmental challenges. Complementing this allocation are five more funds with specific ESG targets such as better health, gender equality and climate change. The remainder of the allocation is held in a global bespoke ESG mandate that ensures the portfolio’s overall positioning is in line with the strategic asset allocation.

The fixed income allocation is diversified across regions, sector and credit quality. Given the focus on achieving impactful change, many of the investments within the underlying fund are held in government and government related bonds. These might be focused on areas such as affordable housing, financial inclusion and health.

The portfolios hold diversifying strategies in property, infrastructure and alternative investments. Given the illiquidity of some of these assets and the time frame of investing, exposure is currently achieved through a mixture of direct investment liquid investment vehicles that enable the portfolio to achieve the Strategic Asset Allocation. 

The first half of 2022 has been a difficult period for financial markets and in particular ESG related investments. Unfortunately, as we begin the second half of the year, the economic backdrop remains extremely challenging and although demand for fossil fuels has fallen in recent weeks as concerns about recession have increased, restricted supply means that prices remain elevated.

In regards to the macro-economic picture, central banks remain the key driver of returns. Confronted with decade high levels of inflation they 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.

That said, we are confident in the longer-term rationale for ESG. We believe that not only is ESG the right thing to do, but sustainable investing will help to deliver better outcomes for future generations and should not be detrimental to longer-term returns. Innovators and companies with strong governance should reap rewards over time and many that fail to transition will ultimately pay a heavy price.

In the current environment the broad diversification of the portfolios should continue to help shelter investors from some of the negativity. In addition, the uncertainty could well provide the opportunity to add exposure at more attractive levels both at an asset class and security level.

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 expressed should not be taken as a recommendation, advice or forecast. 

Underlying Fund Underlying holdings as at 30.06.2022
  PruFund Planet 1 PruFund Planet 2 PruFund Planet 3 PruFund Planet 4 PruFund Planet 5
M&G (ACS) BlackRock UK Equity Fund 6.82% 10.68% 14.26% 18.36% 22.65%
M&G (ACS) BlackRock Europe ex UK Equity Fund 0.21% 0.35% 0.47% 0.65% 0.68%
M&G (ACS) BlackRock Japan Equity Fund 0.83% 1.37% 1.80% 2.36% 2.96%
M&G (ACS) BlackRock Asia ex Japan Equity Fund 3.30% 5.18% 6.91% 8.90% 10.92%
M&G (ACS) BlackRock Global Emerging Market Equity Fund 0.77% 1.17% 1.73% 2.33% 2.95%
M&G Better Health Solutions Fund 0.78% 1.26% 1.63% 2.20% 2.82%
M&G Positive Impact Fund 4.02% 6.29% 8.39% 10.80% 13.31%
Pictet Global Environmental Opportunities Fund 0.77% 1.24% 1.66% 2.12% 2.70%
RobecoSAM Gender Equality Impact Fund  0.76% 1.24% 1.66% 2.13% 2.77%
RobecoSAM Sustainable Water Fund 0.76% 1.26% 1.67% 2.19% 2.75%
Wellington Climate Strategies Fund 0.75% 1.24% 1.65% 2.15% 2.74%
Prudential Real Estate Limited Partnership (PRELP) 4.56% 5.62% 7.17% 5.67% 4.16%
M&G Residential Property Fund 0.05% 0.02% 0.02% 0.04% 0.09%
iShares UK Property 2.90% 4.33% 4.79% 7.01% 9.19%
iShares European Property 0.61% 0.70% 0.91% 0.99% 0.93%
M&G European Property Fund 0.67% 0.66% 0.88% 0.60% 0.81%
iShares Asia Property 0.70% 0.90% 1.07% 1.14% 1.20%
M&G Asian Property Fund 0.07% 0.05% 0.05% 0.06% 0.14%
EcoFin US Renewables Infrastructure Trust PLC 1.00% 1.23% 1.52% 1.74% 2.32%
Private Equity Impact Fund 0.91% 0.97% 1.22% 1.25% 1.78%
Catalyst 0.92% 0.84% 0.70% 0.50% 0.21%
M&G Sustainable TAA 1.59% 1.81% 2.05% 2.31% 2.61%
Wellington Impact Bond Fund 45.04% 33.33% 22.64% 13.36% 4.32%
M&G Sustainable Global High Yield 4.39% 4.02% 3.34% 2.36% 0.95%
M&G Sustainable Loan Fund 1.40% 1.23% 1.03% 0.75% 0.43%
Eastspring Sustainable Asia Bonds Fund 2.35% 1.76% 1.19% 0.67% 0.21%
M&G Sustainable Emerging Markets Credit Fund 3.53% 3.22% 2.71% 2.02% 0.87%
M&G Impact Financing 0.00% 0.00% 0.00% 0.00% 0.00%
M&G Impact Financing 3.38% 3.08% 2.69% 2.10% 1.19%
Cash 6.15% 4.96% 4.17% 3.25% 1.35%