Monitoring your managers and the importance of mandates
The PPMG Manager Oversight team has created a rigorous set of procedures to underpin the ongoing monitoring and management of the various underlying investments within the PruFund proposition. Adrian Gaspar explores.
The primary role of the team is to ensure the continued suitability of underlying managers. They also assess whether the mandates and funds held in Prudential's multi-asset portfolios are performing in line with expectations. Discovering a manager is outperforming in what may be unfavourable market conditions would trigger as many questions as periods of underperformance.
As you know, performance is not guaranteed and the value of an investment can go down as well as up. Your clients could get back less than they have paid in.
The due diligence process combines quantitative factors, including measures of performance and holdings analysis, with qualitative analysis focused on the business, people, process, philosophy and infrastructure.
PPMG formally reviews each underlying managers' key exposures and holdings on a monthly basis.
The team are able to generate detailed performance and attribution analysis. It provides a clear breakdown of the drivers and detractors of performance within the underlying segregated mandates and funds. The analysis will also highlight areas like key risks and single stock, sector and country exposures.
Such granular data can also inform the team of recent purchases and sales of the underlying securities and is important MI for portfolio managers. It can also help inform investment ideas from the PPMG Portfolio Management and Research teams.
Quarterly strategy and performance review
The team has meetings with the managers, either in person for those based in London or by video conference for those located overseas. Each manager submits a Data Request Book prior to the quarterly meeting. This provides the manager's own performance data, risk metrics, market outlook and attribution for the quarter. This complements the work carried out by PPMG.
The Data Request Book forms the basis of the meeting, enabling PPMG to pinpoint areas that require further discussion.
Annual investment due diligence
The Manager Oversight team will conduct on-site meetings with all underlying fund managers at least once a year.
These meetings will not only cover key investment activity and performance. It provides an opportunity for PPMG to review first-hand the structure of each business and how fund managers interact with analysts and other members of the investment teams.
They can also interview other relevant individuals in key functions like risk and operations. This is really important because fund managers are often running very large portfolios and this requires significant operational infrastructure to ensure important activities like trades are executed efficiently and risks can be monitored and reported quickly and effectively.
Ultimately, the team want to be assured that:
- the business is in good health
- the investment philosophy and process remain strong
- portfolios are generating the expected risks and returns
- the mandate objectives are still appropriate
- the fund manager is working in an environment that will allow him to generate good performance.
Outside of the formal review process any important corporate actions or changes to fund manager or team will be reviewed as and when they occur.
The scale of Prudential's assets enables the team to work with fund managers on the creation of bespoke mandates. These can be designed to best suit the objectives of PruFunds and can also evolve over time to ensure each mandate reflects an ever changing investment landscape.
The Investment Management Agreement (IMA) is the document that defines the objectives, the shape of the portfolio, the benchmark and the requisite stock, sector and country limits. Fund manager IMAs are reviewed as part of the annual investment due diligence to ensure the mandate and guidelines remain fit for purpose.
A large proportion of the assets underlying PruFunds are run as segregated mandates and this has several advantages;
Prudential and their clients are sole investors
Fund managers focus solely on working for the benefit of Prudential policyholders
Managers are unlikely to be forced sellers of assets
The long-term nature of insurance contracts means that unless a huge number of Prudential policyholders decide to surrender or transfer out of policies over a very short period of time a manager is unlikely to need to sell any assets below market value to meet redemptions
Close and collaborative working relationships are formed with fund managers
Provides market insights
A valuable source of new investment ideas
Work with managers to set guidelines and objectives
The ability to create appropriate benchmarks can help avoid a structural overweight to certain markets
Mandates can be adjusted as markets change and new ones evolve
Designed to match manager skillset
A mandate can be reshaped to allow a fund manager more flexibility to invest in areas where they or the team have particular expertise
Fee negotiations with underlying managers
The team will seek to ensure that ongoing fund management costs are competitive
The Manager Oversight team act as a key conduit between PPMG and Prudential Group fund managers.
The due diligence process and ongoing work gives the team great market insights and investment ideas from Prudential Group fund managers, like M&G and Eastspring, across the globe. These are shared across PPMG and can be used to inform various processes.
The scale of Prudential's assets also gives the Manager Oversight team the ability to not only source new investment ideas but also to recommend the provision of seed capital. This can help fund managers launch new funds and also provides suitable vehicles through which the portfolio management team can allocate to new and niche asset classes.
In summary, Prudential's experienced in-house team, with access to Prudential Group fund managers worldwide, will continue to monitor the suitability of all underlying fund managers through a robust process of formal reviews.
The scale of Prudential's assets enables the team to work with managers on creating bespoke mandates - these can be designed to suit the objectives of PruFunds and can also evolve over time.
Our analysis of key risks within each mandate - single stock, sector and country exposures - help us understand drivers and detractors of performance at any given time. PPMG provides a key source of market intelligence and investment ideas.
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