PGIM keeps faith with its ‘village of boutiques’ model

Stuart Parker, the neatly-coiffured CEO and president of PGIM Investments, has a smile on his face and not surprisingly. Under his stewardship, the retail distribution arm of US investment giant PGIM, based in Newark, New Jersey, crossed the $100bn barrier in 2018. He now oversees $124bn in assets.

His plans to make inroads into Europe’s tightly-controlled distribution networks have involved relocating international investments boss Kimberly LaPointe to London and hiring a new European team for her. 

Whereas many top investment houses – and PGIM is right up there with the best, controlling $1.3tn for clients – have long ditched the “village of boutiques” marketing message so popular at the turn of the Millennium, Mr Parker is keeping the faith.

He credits this message, giving investors the choice of a handful of independently-run brands, with the success of his distribution story.

Beyond bonds

Although seen by many as a fixed income shop, with bonds accounting for some $838bn in assets, Mr Parker likes to divert attention to the other “affiliates” in his portfolio. These include active equity unit Jennison Associates and quant equity and multi-management specialists QMA, as well as alternatives managers PGIM Private Capital and PGIM Real Estate.

“They are all completely independently run, based on the relevant asset class, whether it’s private credit, real estate or quant,” says Mr Parker, who himself previously headed up retail at Jennison Associates, before taking the helm of the distribution effort for PGIM, the investment arm of US insurance giant Prudential.

“All the offices have a completely different feel and culture,” which helps maintain and encourage alpha-generating expertise, rather than become swallowed up in the corporate quagmire, he claims.

Although PGIM began as in-house asset manager for Prudential’s internal account, the structure soon evolved. “Our chairman believed the highest quality money managers are third party managers, not just those running the internal account,” he says.

The Prudential figures appear to back this line. Just $400bn of PGIM’s assets are invested on behalf of the insurance company, generating 19 per cent of group fees, the balance coming from third-parties.

While other investment houses have succumbed to the “centralising tendencies” dominating asset management and led to smaller franchises being subsumed by master-brands, Mr Parker believes the struggle to keep the boutiques independent is one worth fighting.

“High quality investment talent doesn’t necessarily want to work for a Fortune 500 company,” he suggests, often preferring the challenge of running a smaller boutique, “with similar business culture to their own.”

This, he believes, has resulted in a direct spike in performance numbers listed in Prudential Financial’s earning statements. he believes. “Over the last five years, 90 per cent of [our] assets have outperformed. No other firm can make that kind of claim.”

Part of the reason for this is the sheer scale of the firm, admits Mr Stuart, with little likelihood that small can be beautiful in today’s fund management landscape, where the passive behemoths of BlackRock and State Street bestride a harsh world for boutiques.

Indeed, the “boutiques” Mr Parker so fondly refers to are generally nothing of the sort as they all manage close to or more than $100bn each. “We don’t need to merge teams to gain scale,” he says. “We already have scale and that is one of the major differences of this model to that of other asset managers.”

Keep growing

This is the fourth fastest growing US fund house in the industry, according to Simfund. Now he plans to seek further growth in Europe, where a $1bn Ucits platform was launched in London in 2015, today accounting for $4.6bn.

“We need to build out this platform and our distribution strength across Europe,” says Mr Parker, in the full knowledge that he faces a plethora of much stronger regional brands, which will seek to defend their territory against US insurgents.

His two-fold strategy involves building both the institutional book of business, and perhaps closer to his heart, tackling the professional buyers, whose tentacles extend deep into Europe’s fund landscape. The houses he has in his sights include Credit Suisse, UBS, Citi, HSBC, Goldman Sachs and ABN Amro.

These distributors “increasingly want to face off with managers who can approach them from a global perspective, servicing them in the US, Europe and Asia,” adds Mr Parker.

Complete menu

Among the stories and trends he plans to market through these channels, fixed income remains by far the most important. “In this low rate environment, people will want all types of yields and flavours of fixed income,” he says. 

But this is not enough, he admits, with many distributors seeking “enhancement” strategies to boost returns and shield losses. 

“They want participation on the upside, protection on the downside,” says Mr Parker, believing the “ability to protect assets in difficult times” will prove central to the appeal of the best asset managers.

He expects these “professional buyers” to further increase resources for research into “individual sleeves” of asset groups, before deciding “whether to create the puzzle or just the pieces: sometimes they will try to build the whole model and at other times they will expect us to do this”. This demand for customised solutions extends to target-date funds and tailored asset allocations.

“Liquid alternatives” – will also play an important part of the mix, with market-neutral and long-short strategies currently in demand. “This is where asset managers like us can be important,” he hints, once again stressing the value of both protection and riding market surges. 

The latter can also be achieved through ETFs, which “have their role in making access to the index very easy”, says Mr Parker, who has long observed the influence of passives on the US mutual funds market. He spent 14 years in the asset management business of Citigroup, prior to its sale to Legg Mason in 2005, when he joined PGIM.

“The importance of performance has never been higher than today, with the advent of passive,” he says. “Investors no longer just want the cheapest products they can find, but performance at a price” and a transparent one at that.

This role of a visible management fee will play out well in Europe, he believes, to benefit the sub-advisory business. “More and more professional buyers want to create their own fund and be sub-advised into that,” he says. A sub-advisory relationship cost-wise comes in very close to bulk institutional price levels, while it can be tailored to environmental, social and governance criteria.

“With the advent of ESG, you can ask an asset manager much more easily to customise your own fund for you, rather than being beholden to the owner of the fund,” he claims. 

But he cautions those predicting the continuing of another major trend, that of allocations to private equity, not to get carried away with their own hype, as happened when the booming hedge funds industry reached its nadir, at the time of the global financial crisis of 2008.

“Hedge funds have taken a back seat because they have not delivered on their performance after fees,” says Mr Parker. Private equity on the other hand is characterised by the $1.7tn of dry powder currently chasing deals, a paucity of publicly-listed securities in which to invest and a belief that investors should be rewarded by a special “illiquidity premium.

“We need to be careful, based on the number of dollars chasing these opportunities,” warns Mr Parker.

Rather than over-weighting any asset, the conservative-thinking Mr Parker recommends splitting portfolios across a continuing diversification between equities, bonds and alternatives, which encompass private credit and mortgage securities.

A successful group, he maintains, needs three things: scale, product range and performance. “I can’t speak for every business model, but if you’re in active management, performance has to be the number one criteria of why you exist.”