Why considering MPS and PruFund can make sense

This is for information only. It is not advice.

You have asked our Business Development team if it’s sensible to have both the M&G Wealth Model Portfolio Service (MPS) and PruFund as part of your Central Investment Proposition, given that they share the same investment process and core views.  We believe MPS and PruFund are complementary. In this article, we explain why the outcomes can differ and why it can make sense to hold both.

MPS and PruFund – the same investment engine

The MPS and PruFund range of funds are backed by the investment expertise of the Treasury & Investment Office. This means both have a common set of investment principles:

• A well-diversified asset allocation, with (1) exposure to global equity markets, (2) a granular approach to fixed income across government, corporate, and emerging market bonds and (3) an allocation to real assets.
• Both multi-asset solutions allocate based on how we see economies and markets evolving over the next 10 years. 
• The ranges take a dynamic approach to asset allocation considering economic cycles, demographics and technological change, and taking action when opportunities arise. 
• Both use a broad universe of underlying asset managers.

The views reflected in the asset allocation are therefore very similar as is the underlying manager selection process. But, as the table below demonstrates the client outcome can be very different depending on market circumstances.

Model portfolios and PruFund calendar year performance

Periods run from 1^st January to 31^st December for each year

Source: M&G Wealth Investments, FE fundinfo, 16^th January 2024. We can’t predict the future. Past performance isn’t a guide to future performance. The figures shown are intended only to demonstrate performance history of the fund over the period shown. The PruFund funds include a representative fund charge of 0.65% pa and any further costs. They take no account of product or advice charges. The application of charges and any further costs will impact the overall performance. Please also note that our charges and any further costs may vary in the future and may be higher than they are now.

The value of your investment can go down as well as up so you might get back less than you put in. For the PruFund range of funds, what you receive will depend on the value of the underlying investments, the Expected Growth Rates as set by the Prudential Directors, our charges and the smoothing process.

For the model portfolio service, the performance figures are calculated in FE fundinfo based on a standard model and may not reflect the performance of individual customer portfolios. The calculation includes all underlying fund charges and investment management fees. The platform, wrapper and advice fees are excluded.

While the total return over the last 5 years is comparable depending on the risk level, the returns in each year can vary significantly.

For example, 2022 was a tough year for multi-asset investing where stocks and bonds both fell. PruFund Growth delivered a positive return over this period compared to the MPS which fell between -9% and -7%. In contrast, markets bounced back strongly in 2023. This was captured in the MPS which rose between +7% and +8% but returns for PruFund were lower.

There are two key reasons for the differences in annual returns: the smoothing process used by PruFund and the exposure to private assets.

A smoother journey

A diversified asset allocation goes a long way to dampening the ups and downs of direct stock market movements however the PruFund range has an additional tool: the long established smoothing process. Due to the formulaic nature of the smoothing mechanism, PruFund provides an element of downside protection but will tend to lag the wider market during periods of strong performance.

In the MPS there is no smoothing process, so it follows the ups and downs in the market. This explains why the model portfolios benefit more when the stock market rises (like 2023 and 2019) but also fall more during the down periods.

Private Assets Exposure

A key difference in the asset allocation used by the MPS and PruFund is the exposure to private assets. PruFund has around a third of its investments in less liquid private assets, such as office buildings, private equity, and infrastructure.  In contrast, the MPS only holds investments in asset classes that can be bought and sold on a daily basis.

Less liquid investments can offer the opportunity for higher returns in exchange for more limited access to your funds. They offer access to high quality assets with different sources of cash flow generation to public markets and consequently lower correlations to a public market portfolio. For instance, private assets like real estate and infrastructure tend to do well when inflation is rising. These types of direct investments require careful selection of managers and naturally come with higher costs.

The values of private assets tend to lag the broader market and do not move as quickly as the value of a share or bond traded daily on an exchange. For example, during 2022 global equities had weak performance because markets reacted quickly to higher inflation and interest rates rising. However, the values of private assets did not fall sharply in 2022. Partly, this reflected the strong linkages such assets are expected to have with inflation over time. But also, valuations are often assessed based on transactions and there were fewer transactions happening that could be used to assess values. In 2023 equities recovered with some markets reaching new all-time highs. In private markets, by contrast, 2023 was a weaker year as it has taken time for valuations to adjust to the new higher yield environment as the impact on demand becomes clearer.

When combining MPS and PruFund makes sense

In periods of market volatility, the smoothing mechanism will outweigh the diversification that can be achieved purely from investing in different asset classes and this has shown particularly in recent years when stocks and bonds have often moved up and down together.

PruFund has, over many years, demonstrated its use for clients with a lower tolerance for the daily ups and downs of markets. It provides the benefit of access to the full investment universe across public and private markets available to patient investors, for those that can tolerate the higher cost that comes with direct investments. Other clients may want greater look-through to their investments and can tolerate the volatility of daily pricing, or may be more focused on cost. A useful strategy could be to combine the MPS and PruFund approaches to varying degrees as a client moves through their savings and retirement journey.  

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