MONDAY JULY 14 2014 Face to face Prudential boss says investors should dig in for long term Prudential Investment Management Founded 1984 Headquarters Newark, NJ Interview David Hunt tells Chris Flood global solutions entail cutting across asset classes, regions and business lines In an earlier life, David Hunt might well have spent his days covered in coal dust. After emigrating from Scotland in the 19th century, his ancestors established several coal mines in Colorado that were owned by his family until recently. “I feel like I still have the mining heritage in my blood,” says Mr Hunt, who has dug out an entirely different career path. As the chief executive of Prudential Investment Management, the $891bn asset management arm of the US insurer Prudential, Mr Hunt oversees eight businesses that cover public and private fixed income, active, passive and quantitative equity strategies and a large real estate operation. The multi-manager model was developed in the late 1990s by John Strangfeld, now chairman and chief executive of the holding company Prudential Financial, to generate returns for the insurance business and outside investors. “Each feels like an investment partnership,” says Mr Hunt, adding “if you went to a meeting of Jennison Associates [fundamentally based active equity and fixed income] or PCG [private placements and mezzanine financing], you would feel part of a team run by the top ten people in a partnership”. He argues this model is a “powerful way to manage money” Assets under management $891bn Employees 1,260 investment professionals Owner Prudential Financial because the leaders of the eight businesses retain autonomy and accountability, helping to align the interests of employees and investors. Historically, Prudential Investment Management, which is also known as Pramerica in Europe, Asia and the Middle East, has preferred to let its businesses communicate individually. But Mr Hunt feels it is time for a change as clients are looking for global solutions that cut across asset classes, regions and Prudential’s business lines. “Increasingly we need to work across our units. That is leading us to talk more publicly about the capabilities of Prudential Investment Management, rather than leaving it to individual businesses,” says Mr Hunt. He clearly feels PIM’s success has been underplayed, pointing out it has enjoyed 26 consecutive quarters of positive inflows from thirdparty institutions. “People look at me slightly cross-eyed when I explain that Prudential is the tenth largest asset manager in the world,” he says. Although the Prudential insurance general account remains his biggest and most important client, the bulk of asset growth over the past 15 years has come from outside investors. “Around 22 per cent of our fees come from the general account and 78 per cent come from third party,” says the 53-year-old. He attributes this to the breadth of Prudential’s multi- manager capabilities and strong investment performance. “Look at the threeyear track records and more than 80 per cent of our fixed income and equity assets, net of fees, exceed their benchmark. That’s an extremely strong figure. We are active managers and we are good at it.” Erik Bass, an analyst at Citi, says these “very solid” asset management operations have helped the broader Prudential group achieve higher returns than other insurers. Prudential’s $418bn fixed income division is its largest and fastest growing in recent years. With more pension funds in the US and UK looking to de-risk their investment portfolios after strong gains for equities, Prudential is benefiting as these clients move more money into fixed income. Prudential recentlyagreed a £16bn longevity swap with the £39.6bn BT pension fund, the largest UK deal of its kind. It already had the largest US deals ‘People look at me cross-eyed when I explain Prudential is the tenth largest asset manager in the world’ to date, struck with General Motors in 2012 and Verizon in 2013. More of these “jumbo” pension risk transfers are anticipated by Mr Hunt. The $68bn Prudential Capital Group, which runs the largest US private placements business (a form of lending) along with mezzanine financing and infrastructure investing, has grown since the financial crisis as banks have pulled back from providing commercial mortgages and credit to companies. “In many cases, we were the only guy in the room willing to continue to lend money,” explains Mr Hunt. Activity has grown rapidly in the UK (where PCG is known as Pricoa Capital Group) © THE FINANCIAL TIMES LIMITED 2014 as bank lending has been even slower to recover than in the US. “There was not enough capital being lent out in the UK,” he says, adding that competition from other providers has increased. Regulators are looking more critically at asset managers’ role in shadow banking as they move into areas previously dominated by banks. Mr Hunt insists that to describe the PCG business as shadow banking is inaccurate, pointing out that banks separated their loan underwriting and origination functions. “We don’t believe in that model at all,” he says, adding that most of PCG’s lending is done directly to companies with which it has a long-term relationship, instead of via an agent. “That has meant that our credit experience has been terrific, even through the financial crisis. The accountability that we have is very clear and it does not have any of the principal agent problems of the banking model,” he emphasises. Prudential Financial, the holding company, has been designated a systemically important financial institution by US regulators. Capital rules affecting Sifis are still being written so the impact on Prudential’s asset management operations remains unclear. But Curriculum Vitae David Hunt Born 1961 Education 1984 BA, Engineering, Princeton University 1988 MBA in Finance and multinational management from the University of Pennsylvania Wharton School Career 1994 Elected partner at McKinsey & Company in London 2001-11 Senior partner and co-leader of North American asset management practice, McKinsey & Company 2011 to present President and chief executive of Prudential (Pramerica) Investment Management Other positions Board of directors of Lincoln Center for the Performing Arts. Life member of the Council on Foreign Relations Mr Hunt says clients view Sifi designation as a further protection for the soundness of their investments. He cautions that the increasing difficulties of meeting regulatory requirements will reshape asset management as smaller players struggle to meet rising legal and compliance costs. With Prudential’s real estate business managing about $42bn, the question of whether bubbles are developing in property markets worldwide naturally concerns Mr Hunt. “Our real estate team believes fundamentals are strong but there are signs of imbalances developing in major cities. And I detect worryingly little conviction that these imbalances will get better as long as interest rates are held down through government intervention,” says Mr Hunt. He concludes with a plea for institutions and individuals to take a long-term view of investment plans, noting that holding periods have declined due to the expansion of highfrequency trading, leveraged hedge funds and the exchange traded funds industry. “It is important for people to have long-term, multiyear plans for their assets. The more pressures there are to adjust, day to day or week to week, the more likely people are to make poor decisions.” Sentiments that his Scots mining predecessors would surely applaud.
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