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Q4 LF Prudential Risk Managed Active and Passive Investment Update

10 min read 6 Feb 22

  • Global equities generate positive returns driven by good corporate earnings, decent economic growth, and buoyant sentiment
  • Some uncertainty caused by fears around COVID-19 and the winding down of monetary stimulus
  • Central banks debate the stickiness of inflation, with the Bank of England the first in developed market to increase rates

The emergence of the Omicron COVID-19 variant in late November dented economic growth in many countries during the fourth quarter, as a surge in global virus cases dampened economic activity and forced many governments to reintroduce restrictions. Persistent high inflation also cast a shadow over the world economy, prompting some of the major central banks to turn more aggressive in their policy responses as strong post-lockdown demand and supply chain issues continued to contribute to pricing pressures.

The Bank of England raised its key interest rate for the first time in three years, while the US Federal Reserve indicated that US interest rate hikes were likely in 2022, and that its asset purchase programme would be ending in March.

Despite the persistence of the COVID-19 pandemic into the final quarter of the year, many equity markets enjoyed a buoyant end to 2021. US shares (S&P 500: +11% in the fourth quarter) registered their strongest quarterly performance of the year, while shares in Europe also ended higher.

Returns from some stockmarkets in Asia and many emerging market countries lagged, as a stronger US dollar, pandemic-related difficulties and concerns over the financial health of the Chinese property market continued to weigh on investor appetite.

Bond markets were mostly lower in the quarter, capping a disappointing year for fixed income assets in general, as sustained global inflationary pressure dampened investor appetite for the asset class. 

UK commercial property enjoyed another quarter of solid performance, with total returns from all sectors providing a positive contribution in the final quarter of 2021. Whilst the arrival of the Omicron variant is unwelcome, so far at least it has not impacted the performance of property assets as investors appear prepared to look through the near-term impact of the new virus strain into 2022.

Despite the mixed quarter all ten portfolios produced positive returns barring Risk Managed Passive 1 which was negative 0.1%

Equities drove most of the performance in Q4. The strong returns delivered by UK, European and US equities offsetting negative contributions from Asian, Japanese and Emerging Markets. Property and alternatives were positive contributors and fixed income was fairly flat, with yields and spreads not changing much in Q4.

After a strong first part of 2021 for the active equity managers in portfolios, passive equity again outperformed in Q4. The M&G ACS BlackRock US Equity Optimised (+9.9%), M&G ACS UK All Share (+4.2%) were particularly strong although the actively managed M&G ACS China Value Partners (flat) also had a good quarter, operating in tricky market conditions.

The alternatives (+6.7%) and UK property (+7.5%) sleeves outperformed in the period with the iShares UK REITs (+10.1%), L&G UK Property (+6.7%) and M&G Property portfolio (+2.7%) all positive contributors, very much reversing the trend of 2020.

In fixed income, investment grade spreads widened with parts of the high yield market following suit on the back of Omicron concerns. Asian bonds also had a challenging quarter which would have been a headwind particularly for the lower risk active funds.

The M&G Strategic Corporate Bond Fund (-0.4%) gave back Q3 gains to the iShares Corporate Bond Index (+0.2%) driven by credit spread widening. The M&G Credit Income Investment Trust outperformed (+3.4%).

The M&G Emerging Market Debt (-0.8%) and M&G Global High Yield (-0.4%) funds outperformed their respective benchmarks but held back total performance.

In local currency (LCY) terms, the M&G European Credit Investment Fund (-0.1%) and Eastspring Investments US Corporate Bond Fund (+0.1%), were ahead of their passive equivalents. Sterling was an additional headwind (circa -2.6%), curtailing performance of iShares European Investment Grade (-2.6%), M&G European Corporate Bond (-2.9%), and iShares US Corporate Bond Fund (-2.5%).

The drivers of full year performance were very similar to Q4. Equity holding generated the bulk of the gains with China the only region that produced a negative return. Property and alternatives delivered good returns and fixed income detracted slightly. European (inc.UK) and Asian bonds were the largest detractors.

 

3m

1yr

LF Prudential Risk Managed Active 1 P Acc in GB

0.21

2.37

LF Prudential Risk Managed Passive 1 P Acc in GB

-0.01

0.35

LF Prudential Risk Managed Active 2 P Acc in GB

0.44

4.30

LF Prudential Risk Managed Passive 2 P Acc in GB

0.52

2.06

LF Prudential Risk Managed Active 3 P Acc in GB

1.32

6.24

LF Prudential Risk Managed Passive 3 P Acc in GB

1.12

4.22

LF Prudential Risk Managed Active 4 P Acc in GB

1.47

8.51

LF Prudential Risk Managed Passive 4 P Acc in GB

1.46

6.18

LF Prudential Risk Managed Active 5 P Acc in GB

2.25

11.61

LF Prudential Risk Managed Passive 5 P Acc in GB

2.44

8.95

The table shows the annualised performance of each fund in the LF Prudential Risk Managed Active and Passive range over 3 months and 1 year to 31 December 2021. Outperformance relative to the comparator benchmark for each fund is indicated by the green boxes.

Source and date – FE, total return bid-bid month end (31 December 2021) performance table from UK Investment Association universe.

Changes following the SAA review

Following the recent strategic asset allocation review, full details below, most of the key changes have now been implemented

LF Prudential Risk Managed Active & Passive Strategic Asset Allocation Review 2021

The following new exposures have been added to the Risk Managed Active range;

iShares MSCI India UCITS ETF

iShares European Property Fund

iShares Asian Property Fund

The Indian ETF has also been added to the Risk Managed Passive range and the portfolio management team have also started allocating to;

Eastspring Asia Dollar Bond Fund

Eastspring Asia Local Bond Fund – full allocation expected in Q1

 

Other changes

As part of the ongoing development of portfolios;

The Risk Managed Active range has now transitioned out of the Royal London Corporate Bond Fund and into the M&G Sterling Investment Grade Corporate Bond Fund, another internal vehicle that replicates the core corporate bond mandate in PruFunds.

Both the M&G (Invesco) Global Emerging Markets and M&G (Lazard) Global Emerging Markets funds were added as emerging market equity managers in Q4, so the range now has the same line up as PruFunds, albeit portfolios are not yet fully disinvested from Eastspring.

In Asian equity the transition to the M&G Asia Pacific team was completed. Again, aligning with PruFunds.

Finally, the portfolio managers have added a small position in US small caps through a Russell 2000 future with the aim to onboard active managers soon.

 

Tactical positions

A small diversifying overweight to alternatives has been maintained.

In December the portfolio manager added an overweight to US equities based on the strong outlook for both economic and earnings growth. In early January, smaller overweights to UK and European equities were added to complement the US position.

The overall equity overweight is moderate, around 1%, after these changes, and the portfolio managers have aimed blend more cyclical areas with the growth driven US market. The incremental step also reflects our growing conviction that the Omicron variant may be less damaging to the global economy than prior strains.

The economic recovery which began in 2020 is likely to persist into 2022 as the supply chain bottlenecks that characterised the early stages of the recovery, ease while growth in the services sector accelerates as the reopening continues.

GDP growth forecasts for 2022 have been revised down in recent months as economists acknowledged that the Omicron variant of COVID-19 is likely to prevent a full return to pre-pandemic levels of activity, but there is general optimism that Omicron’s lower perceived health risk compared to earlier variants presents a potential improvement in the outlook.

Principal risks to the outlook include unanticipated headwinds from the Omicron (and subsequent) COVID-19 variants, stubbornly high inflation which forces central banks to tighten monetary policy more quickly than anticipated, and the potential that emergency stimulus packages designed to restart economies after the COVID-induced shutdowns are withdrawn prematurely before escape velocity has been reached.

The shift to a more hawkish policy setting by developed market central banks leaves rate markets in these regions vulnerable to further price downside and increased volatility.

 
LF Prudential Risk Managed Active

Security Description

Active 1

Active 2

Active 3

Active 4

Active 5

UK Equity

7.78

11.91

16.23

20.87

25.77

FTSE 100 Index

0.45

0.66

0.87

1.04

0.51

M&G (ACS) UK 200 Index Fund

2.60

3.98

5.42

6.99

8.90

M&G (ACS) UK All Share Index Fund

2.61

3.99

5.38

6.95

8.86

M&G (ACS) UK Listed Equity Fund*

1.34

2.10

2.88

3.76

4.83

M&G (ACS) UK Listed Mid Cap Equity Fund *

0.35

0.53

0.73

0.93

1.21

M&G Recovery Fund*

0.44

0.66

0.95

1.20

1.46

European excluding UK Equity

2.75

4.20

5.73

7.40

9.17

Euro Stoxx 50

0.33

0.40

0.49

0.30

0.45

M&G (Lux) European Active Fund*

1.77

2.78

3.90

5.25

6.38

M&G (Lux) European Passive Fund

0.65

1.02

1.35

1.85

2.34

US Equity

3.22

4.59

5.92

7.43

9.02

M&G (ACS) BlackRock US Equity Fund

1.09

1.56

2.35

3.44

5.49

M&G North American Val*

1.09

1.56

2.35

3.44

5.49

Russell 2000 E-mini

0.25

0.37

0.51

0.69

0.80

E-Mini S&P 500

0.80

1.00

0.96

0.93

0.00

China Equity 

0.74

1.09

1.45

1.93

2.39

FTSE China A50

0.02

0.02

0.04

0.05

0.00

M&G (ACS) China Equity Fund*

0.35

0.53

0.70

0.94

1.21

M&G (ACS) Value Partners China Equity Fund*

0.37

0.54

0.71

0.94

1.18

India Equity

0.19

0.28

0.38

0.50

0.63

iShares MSCI India UCITS ETF

0.19

0.28

0.38

0.50

0.63

Asia excluding Japan Equity

2.84

4.43

6.11

7.90

9.84

M&G Fund Asia Pacific excluding Japan Equity Fund*

2.84

4.43

6.11

7.90

9.84

Global Emerging Markets Equity

0.77

4.43

6.11

7.90

9.84

Eastspring Global Emerging Markets Fund*

0.14

0.19

0.24

0.32

0.43

M&G (GSAM) Global Emerging Markets Fund*

0.24

0.38

0.52

0.60

0.78

M&G (GSAM) Global Emerging Markets Fund*

0.04

0.06

0.08

0.10

0.14

M&G (Lazard) Global Emerging Markets Fund*

0.05

0.06

0.08

0.10

0.14

M&G (MFS) Global Emerging Markets Fund*

0.30

0.50

0.69

1.01

1.13

Japan Equity 

1.39

2.10

2.77

3.66

4.58

M&G (ACS) Japan Equity Fund*

1.00

1.75

2.49

3.38

4.58

TOPIX Index

0.39

0.35

0.28

0.28

0.00

South Africa Equity

0.97

1.44

1.90

2.53

2.97

FTSE/JSE TOP 40

0.97

1.44

1.90

2.53

2.97

UK Property 

3.35

4.23

5.02

5.45

5.94

iShares UK Property Fund

0.67

0.86

1.09

1.11

1.18

L&G UK Property Fund*

2.08

2.61

3.05

3.37

3.69

M&G Property Portfolio*

0.60

0.76

0.88

0.98

1.07

Europe Property

0.52

0.65

0.77

0.85

1.07

iShares European Property Fund

0.52

0.65

0.77

0.85

0.93

Asia Property

0.81

1.00

1.18

1.31

1.44

iShares Asian Property Fund

0.81

1.00

1.18

1.31

1.44

Private Equity*

0.72

0.87

0.97

1.08

1.17

Harbourvest Global Private Equity

0.44

0.54

0.59

0.67

0.71

HgCapital Trust plc

0.17

0.22

0.25

0.25

0.28

NB Distressed Debt Investment

0.04

0.04

0.04

0.07

0.08

Princess Private Equity Holding

0.06

0.07

0.08

0.09

0.10

Hedge Funds*

0.53

0.62

0.70

0.78

0.86

BH Macro Limited

0.18

0.20

0.23

0.25

0.28

BioPharma Credit plc

0.08

0.10

0.11

0.12

0.13

Blue Capital Alternative Income Fund

0.00

0.00

0.00

0.00

0.00

Boussard & Gavaudan Holding

0.18

0.20

0.23

0.26

0.28

Round Hill Music Royalty Fund

0.10

0.12

0.12

0.15

0.16

Infrastructure*

0.70

0.85

0.98

1.08

1.17

BBGI Global Infrastructure

0.17

0.20

0.23

0.25

0.27

DP Aircraft Limited

0.00

0.00

0.00

0.00

0.00

Ecofin U.S. Renewables Infrastructure Trust plc

0.13

0.15

0.18

0.19

0.21

NextEnergy Solar Fund (NESF) Limited

0.13

0.16

0.18

0.20

0.22

Renewables Infrastructure Group

0.11

0.14

0.16

0.18

0.19

SDCL Energy Efficiency Income Trust

0.16

0.20

0.23

0.25

0.28

US Treasuries

2.49

2.06

1.77

1.04

0.07

US 10 Year Note 

2.49

2.06

1.77

1.04

0.07

US Investment Grade

14.14

11.40

8.58

6.04

3.48

Eastspring US Corporate Bond Fund*

14.14

11.40

8.58

6.04

3.48

Europe Investment Grade

9.15

7.41

5.56

3.95

2.37

M&G European Credit Investment Fund*

9.15

7.41

5.56

3.95

2.37

UK Investment Grade

27.85

22.36

17.10

12.09

7.08

M&G Credit Income Investment Trust*

0.93

0.70

0.50

0.37

0.23

M&G Fund Sterling IG Corporate Bond*

13.38

11.18

8.80

6.14

3.62

M&G Strategic Corporate Bond Fund*

13.53

10.49

7.81

5.58

3.23

Asia Fixed Income

8.51

7.03

5.63

4.20

2.65

Eastspring Asia Dollar Bond Fund*

2.13

1.82

1.47

1.02

0.69

Eastspring Asia Local Currency Bond Fund*

6.38

5.21

4.17

3.18

1.97

Convertible Bonds

1.79

1.40

1.03

0.75

0.54

M&G Global Convertibles*

1.79

1.40

1.03

0.75

0.54

Emerging Market Debt

3.60

3.28

3.12

2.97

2.32

M&G Emerging Market Bond Fund*

3.60

3.28

3.12

2.97

2.32

Global High Yield

3.30

4.14

4.08

3.67

2.72

M&G Global High Yield Bond Fund*

3.30

4.14

4.08

3.67

2.72

Cash

1.89

1.49

1.40

0.39

0.27

           

Total:

100.00

100.00

100.00

100.00

100.00

 

*actively managed fund

LF Prudential Risk Managed Passive

Security Descriptions

Passive 1

Passive 2

Passive 3

Passive 4

Passive 5

UK Equity

9.69

13.47

17.70

22.50

26.82

UK Equity

9.69

13.47

17.70

22.50

26.82

FTSE 100 Index

0.60

0.70

0.80

1.41

1.37

iShares UK Equity Index 

7.07

11.53

12.61

17.75

19.49

L&G UK Index

2.03

1.23

4.30

3.34

5.96

European excluding UK Equity

3.82

5.26

6.90

8.74

10.41

Euro STOXX 50

0.54

0.83

0.93

1.13

1.34

L&G European Index

3.28

4.43

5.97

7.61

9.07

US Equity

3.96

5.12

6.56

8.06

9.60

iShares US Equity Index Fund

2.75

3.52

4.71

5.53

6.68

M&G (ACS) BlackRock US Equity Fund

0.00

0.27

0.31

0.76

0.90

Russell 2000 E-Mini 

0.32

0.43

0.57

0.73

0.87

E-Mini S&P 500

0.89

0.90

0.97

1.04

1.14

China Equity 

0.47

0.70

0.91

1.19

1.33

FTSE China A50

0.02

0.04

0.04

0.07

0.08

M&G (ACS) China Equity Fund*

0.20

0.33

0.43

0.55

0.63

M&G (ACS) Value Partners China Equity Fund*

0.25

0.33

0.43

0.56

0.62

India Equity 

0.24

0.33

0.43

0.54

0.66

iShares MSCI India UCITS ETF

0.24

0.33

0.43

0.54

0.66

Asia excluding Japan Equity

4.26

5.82

7.69

9.77

11.77

iShares Pacific excluding Japan Equity Index Fund

4.26

5.82

7.69

9.77

11.77

Global Emerging Markets Equity

1.53

2.12

2.80

3.59

4.27

iShares Emerging Market Equity Index

1.53

2.12

2.80

3.59

4.27

Japan Equity 

1.90

2.54

3.36

4.24

5.28

iShares Japan Equity Index Fund

1.65

2.10

2.71

3.80

4.86

TOPIX Index

0.25

0.44

0.64

0.44

0.41

South Africa Equity

0.45

0.65

0.87

1.17

1.43

FTSE/JSE TOP 40

0.45

0.65

0.87

1.17

1.43

Private Equity*

0.45

0.53

0.59

0.63

0.66

Harbourvest Global Private Equity

0.27

0.34

0.37

0.41

0.41

HgCapital Trust plc

0.11

0.13

0.15

0.16

0.17

NB Distressed Debt Investment

0.03

0.01

0.02

0.01

0.02

Princess Private Equity Holding

0.04

0.05

0.05

0.05

0.06

Hedge Funds*

0.32

0.37

0.42

0.44

0.48

BH Macro Limited

0.11

0.12

0.14

0.14

0.15

BioPharma Credit plc

0.05

0.06

0.07

0.07

0.08

Blue Capital Alternative Income Fund

0.00

0.00

0.00

0.00

0.00

Boussard & Gavaudan Holding

0.11

0.12

0.14

0.15

0.16

Round Hill Music Royalty Fund

0.06

0.07

0.08

0.08

0.09

Infrastructure*

0.45

0.53

0.60

0.63

0.67

BBGI Global Infrastructure

0.11

0.12

0.14

0.15

0.16

DP Aircraft Limited

0.00

0.00

0.00

0.00

0.00

Ecofin U.S. Renewables Infrastructure Trust plc

0.08

0.10

0.11

0.11

0.12

NextEnergy Solar Fund (NESF) Limited

0.08

0.10

0.11

0.12

0.12

Renewables Infrastructure Group

0.07

0.09

0.10

0.10

0.11

SDCL Energy Efficiency Income Trust

0.11

0.12

0.14

0.15

0.16

US Treasuries

2.68

2.40

2.00

1.56

1.11

iShares $ Treasury Bond Fund

2.68

2.40

2.00

1.56

1.11

US Investment Grade

16.65

14.10

11.24

8.49

5.57

iShares US Corporate US Bond Index

16.65

14.10

11.24

8.49

5.57

Europe Investment Grade

10.33

8.73

6.97

5.19

2.76

iShares European Investment Grade Corporate Bond

8.21

6.93

5.61

4.11

2.15

M&G European Corporate Bond*

2.12

1.81

1.36

1.08

0.62

UK Investment Grade

31.79

26.94

21.59

16.39

10.86

iShares UK Corporate Bond Index Fund

25.50

21.39

17.10

13.07

8.67

M&G Fund Sterling IG Corporate Bond*

0.00

0.00

0.00

0.00

0.00

M&G Strategic Corporate Bond Fund*

6.29

5.55

4.49

3.31

2.19

Asia Fixed Income

2.13

1.81

1.50

1.15

0.79

Eastspring Asia Dollar Bond Fund*

0.54

0.45

0.39

0.30

0.21

Eastspring Asia Local Bond Fund*

1.58

1.36

1.12

0.85

0.58

Emerging Market Debt

3.23

3.01

2.83

2.72

2.24

M&G Emerging Market Bond Fund*

3.23

3.01

2.83

2.72

2.24

Global High Yield

2.18

2.57

2.69

2.52

2.08

M&G Global High Yield Bond Fund*

2.18

2.57

2.69

2.52

2.08

Cash

3.45

3.00

2.33

0.49

1.22

           

Total:

100.00

100.00

100.00

100.00

100.00

 

*actively managed fund