David Hunt (pictured below), president and chief executive of PGIM, tells Romil Patel about leading a top-ten global asset manager through a remarkable era of change.
What do you see as the three biggest investment themes over the coming decade and why do you identify those as key drivers?
One of the things that’s exciting about the industry at the moment is that the range of possible asset classes to invest in is growing larger and we believe that that will continue. In particular, I would point you to the large and growing alternatives area that makes up things like private equity, private credit, real estate, infrastructure, agriculture and a whole range of assets that have unique characteristics that provide benefits not only from a return point of view, but also add real diversification to a portfolio.
Think back 20 years ago. Most people invested in stocks and bonds and nowadays, even reasonably large institutions – let alone one of the very largest – are in a very full range of asset classes, and that’s a very exciting trend. Most of our clients are increasing their allocations to alternatives.
The second-biggest trend that we see is the almost maniacal search for yield. We’ve been in this low-rate environment for quite a while and I would argue that this year is the most punitive it’s ever been to be sitting in cash. Our clients are looking everywhere they can to find something that’s going to pay above that. That search for yield is a major theme and we don’t see that going away any time soon.
The third theme that I would highlight is the incredible focus that investors have on ESG. More broadly, extending that into impact investing and sustainability. This has been something obviously that I think the major European institutions have led the way on, but we’re now seeing this take hold right around the world. Certainly, in the US in the last year, I would say that the level of discussion and interest in ESG has gone up dramatically, and we’re seeing it in Asia as well. So, while Europe has been clearly the leader, it is now truly a global phenomenon.
Where does Asia fit into your business strategy and expansion plan and just how great is that opportunity set?
We don’t think of Asia as a monolithic bloc in any way – we have a very important and fast-growing business in Japan, which is very Japanese in nature and geared towards the way that Japanese investors like to invest – and the way that they like to be served from a client service and reporting perspective as well. That could not be more different than the way Chinese sovereign wealth funds want to be dealt with. We believe increasingly there is a real opportunity in Greater China, which we would include important onshore as well as offshore products in. We see growth in many of the ASEAN countries which we base out of Singapore, and that’s been an important area for us to continue to develop.
Australia and New Zealand, with their very successful approach to building out pension systems and superannuation funds, means that they’re quite different in how they are looking to invest, but they’re important markets and we see good growth there. We don’t love those together, we don’t think there’s an Asia, but we do think there are important regional opportunities which are different.
In an interview last year, you said you strive to have non-consensus views at the firm. You noted that sometimes people can be wrong for two years before being considered to be right and that from heated debates come views that aren’t necessarily in the newspaper. The last year has acted as a catalyst for many conversations that have been necessary for a long time but lacked momentum in order to gather critical mass. What type of ESG risks and gaps are you debating internally that aren’t always in the mainstream news and how are you integrating cognitive diversity across the organisation and into the investment process to generate alpha?
The question of culture is, in many ways, the secret sauce to a really good active management firm. Very much unlike a company, which is based on many discussions that reach a consensus, investing doesn’t work that way. In fact, almost by definition, if you have the same view as the market, you will not be generating any excess return. So, we actually need a culture that generates rigorous debate, that actually comes up with views that are not already priced into the market, and then – and this is the critical point – is willing to support individuals and teams, sometimes for quite long periods of time, until those ideas play out. That requires a level of dedication to a meritocracy, to a willingness to not just tolerate but encourage very active, rigorous debate. There can be no hierarchy, there can be no sense of ‘I’ve been here for longer, so my view must be worth more than yours’, and a willingness to stick by your people through good and bad.
Your leadership philosophy advocates for letting people who are knowledgeable and close to the assets make decisions rather than moving it up the hierarchy where there is less information. The Covid-19 pandemic has highlighted social issues and gaps in social infrastructure which have always been there but often ignored. As a fiduciary, how are you engaging with people and communities who are more closely linked to social – and by extension often environmental – problems in your investment decisions to achieve better outcomes?
I believe in a leadership philosophy that tries to keep investment decisions as close as possible to the assets that they are responsible for. As you move up any kind of hierarchy and get further away from the people who know the most about that office building or know the most about the credit underlying a bond, the generally worse decisions get made. Empowering and encouraging the kind of investment decisions as close to the assets as possible gets you the most power.
An important corollary to that is obviously you need to have a risk management system that sits over and above any individual asset selection process that actually makes sure that you’re staying within the risk parameters that you’ve agreed. I’m not simply saying that we need 1,000 flowers to bloom – I do want 1,000 flowers to bloom, but I’m pretty clear about exactly where in the garden they need to bloom. So, having that risk-control framework and having it very rigorously managed is as important as the autonomy I’m trying to create as well – they both go together.
To answer your second question about the responsibility in communities for investment products, we think this is going to be something that more and more investors are taking stock of. We see this mostly in our real estate business, so we know that we can transform communities by the way in which we approach our real estate investment. We’ve seen that in senior living, we’ve seen that in affordable housing, we’ve seen that in the development that we’ve done for student housing, for example. We do look not just at the financial return of these strategies, but also at the impact that they have in their communities.
We think investors increasingly will want a more holistic view of their investments’ true impacts on the community and will want to see more measures.
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