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Q1 2022 PruFund Investment Update from the M&G Treasury & Investment Office (T&IO)

5 min read 5 Apr 22

  • Markets and sentiment dominated by events in Ukraine
  • More concern and uncertainty in an already inflationary environment
  • T&IO have been monitoring markets very closely
  • Diversification helping with most major asset classes producing negative returns

Global inflationary fears and Russia’s invasion of Ukraine were the two themes that dominated global financial markets during the quarter. 

Rising inflation expectations weighed heavily on both bonds and shares in most major markets, as investors fretted over the impact of higher prices on consumers and businesses and anticipated a much faster pace of interest rate rises from the world’s major central banks.

The conflict between Russia and Ukraine acted as another catalyst for commodity price rises. The added geopolitical uncertainty weighed heavily on many emerging markets, particularly those closest to the conflict zone. However, some markets further afield, such as in Latin America, and notable oil- producing nations performed well. Assets that are traditionally seen as safer bets, such as the US dollar and gold also benefitted. 

The yields on government bonds in the UK, US and Europe rose sharply throughout the quarter (prompting notable losses for many bond investors).

The key drivers of returns for the underlying PruFund Growth portfolios in the first part of 2022* were property, alternatives, African equities and private credit as shown in the bar chart below.

Year to date returns per asset class as at 28th February 2022

1. Middle East & Africa Equity

2. Africa Bonds

3. Asia Property

4. Infrastructure

5. UK Property

6. TAA Mandate

7. Private High Yield

8. European Property

9. Hedge Fund

10. Private Equity

11. Private Credit

12. Asia ex Japan Equity

13. Cash

14. North America Property

15. Japan Equity

16. Asia Bonds

17. US Bonds

18. Europe incl. UK Bonds

19. India Equity

20. Global High Yield

21. UK Equity

22. Global Emerging Equity

23. EM Debt

24. China Equity

25. Europe ex. UK Equity

26. Convertible Bonds

27. North America Equity

Asset allocations are regularly reviewed and may vary from time to time, but will always be consistent with the fund objective.

*Performance data source – M&G Performance Reporting team. Data to end Feb because of lags with real estate and private asset numbers

Our key diversifying assets have remained sturdy so far in what has been a tough year for most major equity and bond markets. As at the time of writing March was certainly better for equities with the FTSE 100 tipping into positive territory for 2022.

Clearly, 2022 has also been challenging for PruFund Cautious portfolios that hold more fixed income and less property and alternatives than Growth.

Equities

Within the equity portfolios we decided to reduce some risk. Given that funds performed well in 2021 and we see further uncertainty around the direction of the war and what the outcomes may be, a small reduction in equities to re-balance the portfolios has been applied.

This will also provide additional liquidity. We may also take additional steps to reduce or reapply risk depending on how the situation evolves.

Property

Another busy period for teams across M&G Real Estate has seen the team who run the M&G Asian Property Fund substantially increase its exposure to Japan’s residential for rent sector through the recent purchase of 30 multi-family housing assets in the gateway cities of Tokyo, Osaka and Nagoya. M&G was an early investor in this market in 2014 and this has been rewarded with consistent returns from an asset class that remained resilient throughout the pandemic, underpinned by continued urbanisation.

The development in Haymarket, Edinburgh, which has been highlighted previously will create a new destination for workers and the local community, with a focus delivering high quality real estate that meets modern occupier needs. Pleasingly, the 390,000 sq. ft of Grade A office space is now fully pre-let.

Finally, the team announced that the Manchester Arndale Centre will become home to the UK’s first Urban Playground attraction, offering visitors a chance to beat ITV game show The Cube as part of a dynamic new leisure venue. We believe this is a good example of active asset management, showing how the use of a retail asset can evolve. 

Note - both Haymarket and the Arndale Centre are effectively in PruFund Growth.

M&G Catalyst

The team acquired a majority stake in sustainable housebuilder Greencore Construction (Greencore). The investment will help Greencore to significantly expand its capacity and increase its impact across the UK. 

M&G also plans to invest up to half a billion pounds over the next three to five years in sustainable new developments of private and affordable housing, in partnership with Greencore. The co-development will be led by M&G’s real estate investment team, on behalf of investors in its residential property and shared ownership strategies.

Greencore has developed an innovative modern method of construction which uses a closed panel timber frame, manufactured off-site and insulated with natural materials such as hemp, lime and wood-fibre. This allows it to build high quality, energy efficient homes which lock up more carbon than is emitted both during construction and also over the lifetime of the home. 

Summary

It would be nice to be able to paint a picture of a more positive outlook for 2022 but the likelihood is that the conflict in Ukraine will rumble on for some time and whilst equity markets have recovered in recent weeks any signs of escalation could well see fragile sentiment shaken again. 

Central banks have been keen to provide clear forward guidance, in order to navigate a path out of the uncertainty facing markets, while governments face a challenging balancing act of reducing huge budget deficits in the wake of the pandemic support packages, while providing support to those most in need from the increasing cost of living. 

The market continues to grapple with the additional pain the Russia-Ukraine conflict will have on inflation and supply chains, and whether it is enough to slow economic growth sufficiently to further impact financial asset valuations.

To finish on a more positive note, we do believe that the extremely broad diversification of PruFund portfolios should continue to help shelter investors from some of the negativity and current markets may also prove to be fertile ground for active managers, across all asset classes, with the potential to invest at attractive valuations in many cases. 

PruFund Growth - Main Mandates/Funds

PruFund Cautious - Main Mandates/Funds

Source of underlying holdings data: M&G Treasury and Investment Office as at 1 January 2022.

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