Prudential on the hunt for sustainable PE, real estate
British life insurer Prudential will continue to diversify into the private markets in 2023, with a focus on ESG-themed assets like private equity impact funds, green real estate, and blended financing investments.
“An alternative portfolio can provide meaningful diversification and enhance our returns in a market challenged by continued market volatility, inflationary pressures, and rising interest rates,” said Don Guo, CIO at Prudential.
The company will aim to build a diversified alternative portfolio in private credit, private equity, real estate, and infrastructure, in order to deliver long-term returns.
“In 2023, we continue to see opportunities across various alternative asset classes,” Guo told AsianInvestor in an exclusive interview.
As part of Prudential’s alternative asset expansion in 2023, its private equity impact fund investments will focus on global healthcare and environmental issues. Meanwhile, the insurer sees “significant opportunities” in blended financing investments in emerging markets in Asia and Africa.
“We integrate our responsible investment principles into the entire investment process, from asset and liability management (ALM) to risk management and portfolio management. We also apply ESG considerations in our alternative investments,” said Guo.
Prudential operates life insurance businesses in Asia and Africa. Its investment has a large exposure to emerging markets, while its liabilities are often denominated in local currency.
As of the end of June 2022, Prudential has $166.9 billion of assets under management.
In 2021, Prudential pledged that its portfolio of assets would reach net zero by 2050. Actions include a 25% reduction in the carbon emissions of all shareholder and policyholder assets by 2025, and an accelerated transition to a low-carbon economy by engaging with companies responsible for 65% of the emissions in the portfolio.
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Sustainable investment aligned to the United Nations’ sustainable development goals is part of Prudential’s long-term investment strategy.
In 2023, such strategy is in play for Prudential’s equity investments as the firm stays committed to investing in companies linked to climate mitigation and resilience.
CHINA ADVANTAGE
Guo expects global equity volatility to remain relatively high, and developed markets in particular will pose more downside risk.
“We believe central banks will continue to raise interest rates to fight inflation, leading to a potential recession in the Eurozone and US, making it a challenging environment for equities to perform, especially in the first half of the year,” he said.
Given the situation, Prudential remains defensive on global equity in general.
Nevertheless, it does see “increased opportunities” in Chinese equities, given that the country emerged from its zero-Covid policy “much faster than expected” and increased its focus on growth via more supportive monetary and fiscal policies.
“We expect that both onshore and offshore Chinese consumer-orientated stocks to benefit from the recent changes in government policy and the build-up of savings in the last few years,” Guo said.
FIXED INCOME FIRST
In terms of overall asset allocation, Prudential is currently overweighting fixed income over equity.
“We see a strong case for investing in fixed income, especially high-grade bonds, after yields reset higher in 2022,” Guo said.
“With an economic downturn looking likely in 2023, we consider that high-grade fixed income offers attractive total return potential when compared to other investment opportunities.”
In particular, it is overweighting investment-grade bonds — especially US investment-grade bonds that are offering "some of the most attractive" hard currency yields.
US AAA corporate bonds are yielding around 4.5% recently, higher than the 2.7% at around the same time in 2022, or the long-term average of 4%. Meanwhile, the US 10-year high-quality market corporate bond is yielding around 5%, posing a good investment case for long-term investors such as life insurance companies.
“The credit fundamentals [of US investment-grade bonds] remain solid and should provide protection and reduce downside equity risk in a slowing economic environment,” Guo said.
For some life insurance companies, in order to ride on the recent yield surge, the repositioning of their fixed income portfolios could result in the realisation of losses of existing bond investments from last year’s market downturn.
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For Prudential, given the regular investment flows from its life businesses, it is taking advantage of higher yield opportunities with both portfolio reinvestments and new premium investments, Guo said.