Q2 LF Prudential Risk Managed Active and Risk Managed Passive Investment Update

Author Image Adrian Gaspar Investment Director, T&IO
8 minutes read
Last updated on 29th Jul 2021

Summary

  • A good quarter for all portfolios after a challenging start to 2021 
  • Vaccine rollouts the key driver 
  • Uncertainty over direction of inflation still a nagging concern
  • Strong returns across most equity allocations
  • Positive returns for all fixed income holdings
  • Commercial property continues to recover 
  • Tactical overweight positions removed bar alternatives

Overview

The majority of world stockmarkets registered solid gains in the quarter, buoyed by the widespread rollout of vaccination programmes which aided the reopening of economies. Investment returns among European shares were particularly strong as vaccination take-up in the region accelerated following a slow start. Global commodity markets continued to reflect rebounding demand for raw materials – the price of oil advanced by more than 20% during the quarter, for example. 

Fixed income markets were also higher in Q2 as central banks dampened speculation they would be withdrawing stimulus measures soon, and many investors seemed to shrug off global inflation fears. Within credit, US and UK corporate bonds fared better compared to European corporate bonds, although all ended the period in positive territory. Emerging markets bonds – both corporate and government – had a decent quarter. Meanwhile, bond investors continue to gauge what impact a better outlook for the global economy will have on fixed income assets in the coming months, given rising uncertainty on inflation and the direction of interest rates.

UK commercial property returns continued to increase in the second quarter of 2021, with all sectors providing a positive contribution. Industrials remained the standout performer, achieving both rental growth and further yield tightening. In the retail sector, whilst capital declines continued to impact shopping centres and high street shops, supermarkets and retail warehouses are proving more resilient. With shops reopening and consumers eager to spend accumulated savings, we believe the sector is set for recovery. 

There was little overall movement in currency markets.

Quarterly Performance Overview

After a challenging first quarter, the three months to the end of June saw strong positive returns across all portfolios.

As in Q1, equities led the way with all regions except South Africa positive. A late quarter value fade meant passive equity nudged ahead in Europe, US and Asia.

The good start to 2021 for UK commercial property continued to be supported by the UK economy opening up more. Q2 returns were positive across UK REITs, L&G UK Property and the M&G Property Portfolio.

In fixed income, there were positive returns from all the underlying funds which was in stark contrast to Q1 when only the M&G Global High Yield fund was in the black.

 

3m 1yr

 LF Prudential Risk Managed Active 1 P Acc in GB

2.49 8.71

 LF Prudential Risk Managed Passive 1 P Acc in GB

3.06 6.21

 LF Prudential Risk Managed Active 2 P Acc in GB

2.93 11.63

 LF Prudential Risk Managed Passive 2 P Acc in GB

3.09 8.39

 LF Prudential Risk Managed Active 3 P Acc in GB

3.27 14.47

 LF Prudential Risk Managed Passive 3 P Acc in GB

3.77 11.66

 LF Prudential Risk Managed Active 4 P Acc in GB

3.66 17.66

 LF Prudential Risk Managed Passive 4 P Acc in GB

3.88 14.20

 LF Prudential Risk Managed Active 5 P Acc in GB

2.96 19.68
 LF Prudential Risk Managed Passive 5 P Acc in GB 4.05 17.11

The chart shows the annualised performance of each fund in the LF Prudential Risk Managed Active and Passive range over 3 months and 1 year to 30 June 2021. Outperformance relative to the comparator benchmark for each fund is indicated by the green boxes.
Source and date – FE, total return bid-bid month end (30 June 2021) performance table from UK Investment Association universe.

The underlying active corporate bond managers in the Risk Managed Active funds generally produced stronger returns than the equivalent iShares vehicles in the Risk Managed Passive range.

Activity within portfolios  

As always a busy quarter for the portfolio management team as they continue the process of embedding the new internal building blocks created for Prudential multi asset portfolios.

Added in Q2;

M&G (Lux) European ex UK Equity Fund – Risk Managed Active range and same internal vehicle as PruFunds

M&G (Lux) European ex UK Index – Risk Managed Active range and same internal vehicle as PruFund

M&G (ACS) M&G China Equity Fund – both ranges and same internal vehicle as PruFund to sit alongside the M&G (ACS) Value Partners China Equity Fund 

M&G Credit Income Investment Trust – Risk Managed Active only

The portfolio manager also continued to assess markets and reposition portfolios as the teams’ shorter term ‘tactical’ views evolved.

In May the global equity overweight position was halved. This had been equally split across US, UK, European, Japanese, Asian, and Chinese equities. The overweight positions in Asia and China were removed completely to moderate but not remove the cyclical bias. 

The team retained a small overweight to Emerging Market Debt, offering superior yield relative to US Investment Grade, where they had moved underweight. 

In early July, with equities having performed well and with a bit more uncertainty on the outlook for inflation and interest rates, the tactical positions across equities and fixed income were all removed. A diversifying overweight to alternatives has been maintained. 

This decision also coincides with the summer trading months, which tend to see much lower volumes traded as markets pause for a holiday break. 

The portfolio manager feels the funds are now well positioned to deploy capital where and when opportunities present themselves. 

Outlook

Portfolio positioning had remained largely unchanged for most of 2021 until the changes in May and early July. A focus on the increased volatility in, and level of government bond yields remains. The potential for them to increase in an environment of higher growth and accommodative central banks is being monitored closely.

On balance, while the risk of higher inflation and an increase in COVID-19 cases owing to new variants is greater than last quarter, central banks remain alive to their duty to accommodate the recovery rather than cut if off, and politicians are pressing for as much of a return to normality as their health services can support.

In the very near term the high rates of economic growth achieved in the earliest stage of reopening are likely to slow, and we watch keenly to ascertain the extent of the deceleration. We continue to see pockets of good value on a long-term basis in places like Emerging Markets and the UK but acknowledge that the realisation of many of these investment cases is predicated on a continued emergence from COVID19-inflicted restrictions.

Portfolio holdings as at end June 2021

LF Prudential Risk Managed Active - portfolio holdings

 

Active 1

Active 2

Active 3

Active 4

Active 5

 UK Equity

7.17

11.07

15.10

19.68

24.46

 FTSE 100 Index

0.46

0.44

0.49

0.61

0.81

 M&G (ACS) UK 200 Index Fund

2.05

3.27

4.39

5.77

7.16

 M&G (ACS) UK All Share Index Fund

2.05

3.30

4.41

5.80

7.18

 M&G (ACS) UK Listed Equity Fund

1.12

1.73

2.35

3.11

3.85

 M&G (ACS) UK Listed Mid Cap Equity Fund

0.28

0.46

0.57

0.83

1.02

 M&G Recovery Fund

1.20

1.88

2.88

3.56

4.44

 European excluding UK Equity

2.97

4.46

6.02

7.74

9.53

 Euro Stoxx 50

0.64

0.58

0.58

0.56

0.58

 M&G (Lux) European ex UK Equity Fund

0.88

1.28

1.94

2.35

3.25

 M&G (Lux) European ex UK Index

0.60

1.01

1.41

1.88

2.21

 M&G European Select

0.86

1.58

2.08

2.95

3.49

 US Equity

2.84

4.26

5.71

7.36

9.13

 LF Prudential UT N American QIS

1.29

1.83

2.50

3.12

4.52

 M&G North American Val

1.32

1.79

2.57

3.45

4.27

 E-Mini S&P 500

0.23

0.64

0.64

0.79

0.34

 China Equity

0.38

0.59

0.81

1.07

1.35

 FTSE China A50

0.02

0.02

0.05

0.06

0.06

 M&G (ACS) M&G China Equity Fund

0.18

0.28

0.38

0.51

0.65

 M&G (ACS) Value Partners China Equity Fund

0.18

0.28

0.38

0.50

0.64

 Asia excluding Japan Equity

3.09

4.79

6.59

8.61

10.88

 Eastspring DM & EM Asia Fund

3.09

4.79

6.59

8.61

10.88

 Global Emerging Markets Equity

1.18

1.81

2.48

3.27

4.12

 Eastspring Global Emerging Market Fund

1.18

1.81

2.48

3.27

4.12

 Japan Equity

1.79

2.53

3.38

4.27

5.17

 M&G (ACS) Japan Equity Fund

1.05

1.81

2.58

3.59

4.43

 TOPIX Index

0.74

0.72

0.80

0.68

0.74

 South Africa Equity

0.36

0.54

0.79

0.99

1.24

 FTSE/JSE TOP 40

0.36

0.54

0.79

0.99

1.24

 US Treasuries 1.90 1.57 1.12 0.77


0.28

 US 10 Year Note

1.90

1.57

1.12

0.77

0.28

 US Investment Grade

14.04

11.24

8.53

5.74

3.22

 Eastspring US Corporate Bond Fund

14.04

11.24

8.53

5.74

3.22

 Europe Investment Grade

8.88

7.12

5.43

3.20

1.12

 M&G European Credit Investment Fund

8.88

7.12

5.43

3.20

1.12

 UK Investment Grade

27.33

21.92

16.58

10.87

5.57

 M&G Credit Income Investment Trust

0.89

0.72

0.55

0.39

0.23

 M&G Strategic Corporate Bond Fund

13.27

10.61

7.97

5.22

2.68

 Royal London Corporate Bond Fund

13.17

10.60

8.06

5.27

2.66

 Asia Fixed Income

6.82

5.71

4.50

3.32

2.14

 Eastspring Asia Dollar Bond Fund

1.68

1.43

1.11

0.83

0.54

 Eastspring Asia Local Currency Bond Fund

5.13

4.27

3.40

2.49

1.61

 Convertible Bonds

1.73

1.47

1.10

0.81

0.50

 M&G Global Convertibles

1.73

1.47

1.10

0.81

0.50

 Emerging Market Debt

2.56

2.53

2.41

2.37

2.04

 M&G Emerging Market Bond Fund

2.56

2.53

2.41

2.37

2.04

 Global High Yield

4.48

5.12

5.10

4.53

3.43

 M&G Global High Yield Bond Fund

4.48

5.12

5.10

4.53

3.43

 Cash

5.79

4.59

4.06

4.00

3.12

 UK Property

3.30

4.43

5.33

5.90

6.58

 iShares UK Property Fund

0.85

1.46

1.53

1.36

1.19

 L&G UK Property Fund

1.98

2.03

2.75

3.61

4.24

 M&G Property Portfolio

0.47

0.94

1.04

0.94

1.14

 Private Equity

1.17

1.44

1.66

1.88

2.11

 Harbourvest Global Private Equity

0.71

0.88

1.00

1.15

1.28

 HgCapital Trust plc

0.30

0.37

0.45

0.47

0.54

 NB Distressed Debt Investment

0.04

0.04

0.05

0.07

0.08

 Princess Private Equity Holding

0.12

0.15

0.17

0.19

0.21

 Hedge Funds

1.12

1.40

1.65

1.78

1.98

 BH Global Limited

0.19

0.24

0.28

0.33

0.37

 BH Macro Limited

0.10

0.12

0.14

0.11

0.13

 BioPharma Credit plc

0.38

0.47

0.56

0.61

0.68

 Blue Capital Alternative Income Fund

0.00

0.00

0.00

0.01

0.01

 Boussard & Gavaudan Holding

0.31

0.41

0.48

0.52

0.55

 Round Hill Music Royalty Fund

0.13

0.16

0.18

0.21

0.23

 Infrastructure

1.12

1.40

1.65

1.82

2.04

 BBGI Global Infrastructure

0.26

0.33

0.40

0.42

0.47

 DP Aircraft Limited

0.01

0.01

0.01

0.01

0.01

 Ecofin U.S. Renewables Infracture Trust plc

0.19

0.23

0.26

0.30

0.34

 NextEnergy Solar Fund (NESF) Limited

0.22

0.27

0.32

0.35

0.39

 Renewables Infrastructure Group

0.19

0.23

0.28

0.30

0.34

 SDCL Energy Efficiency Income Trust

0.27

0.33

0.39

0.43

0.48

LF Prudential Risk Managed Passive - portfolio holdings

 

Passive 1

Passive 2

Passive 3

Passive 4

Passive 5

 UK Equity

9.06

12.57

16.73

21.21

26.02

 FTSE 100 Index

0.24

0.37

0.60

1.30

1.78

 iShares UK Equity Index

5.87

10.70

11.17

15.89

17.34

 L&G UK Index

2.96

1.50

4.95

4.02

6.91

 European excluding UK Equity

3.77

5.06

6.69

8.34

10.22

 Euro STOXX 50

0.67

0.89

1.02

1.15

1.41

 L&G European Index

3.10

4.17

5.68

7.20

8.81

 US Equity

3.61

4.87

6.41

8.00

9.78

 iShares US Equity Index Fund

3.17

4.18

5.38

6.75

8.17

 E-Mini S&P 500

0.44

0.70

1.03

1.25

1.61

 China Equity

0.48

0.64

0.86

1.16

1.41

 FTSE China A50

0.02

0.05

0.06

0.10

0.09

 M&G (ACS) M&G China Equity Fund

0.23

0.30

0.40

0.53

0.66

 M&G (ACS) Value Partners China Equity Fund

0.23

0.29

0.40

0.53

0.65

 Asia excluding Japan Equity

3.92

5.54

7.42

9.36

11.46

 iShares Pacific ex Japan Equity Index Fund

3.92

5.54

7.42

9.36

11.46

 Global Emerging Markets Equity

1.46

2.09

2.79

3.52

4.31

 iShares Emerging Market Equity Index

1.46

2.09

2.79

3.52

4.31

 Japan Equity

2.18

2.85

3.69

4.59

5.53

 iShares Japan Equity Index Fund

1.74

2.28

2.94

3.56

4.46

 TOPIX Index

0.43

0.57

0.74

1.02

1.07

 South Africa Equity

0.45

0.68

0.89

1.09

1.37

 FTSE/JSE TOP 40

0.45

0.68

0.89

1.09

1.37

 US Treasuries

1.88

1.51

1.20

0.81

0.36

 iShares $ Treasury Bond Fund

1.88

1.51

1.20

0.81

0.36

 US Investment Grade

16.90

14.38

11.42

8.38

5.42

 iShares US Corporate US Bond Index

16.90

14.38

11.42

8.38

5.42

 Europe Investment Grade

10.77

9.13

6.99

4.66

2.39

 iShares European Investment Grade Corporate Bond

8.65

7.32

5.60

3.68

1.91

 M&G European Corporate Bond

2.12

1.81

1.39

0.97

0.48

 UK Investment Grade

32.34

27.40

21.72

15.64

9.55

 iShares UK Corporate Bond Index Fund

25.36

21.91

17.36

12.54

7.57

 M&G Strategic Corporate Bond Fund

6.97

5.50

4.36

3.10

1.98

 Emerging Market Debt

2.56

2.48

2.49

2.45

2.20

 M&G Emerging Market Bond Fund

2.56

2.48

2.49

2.45

2.20

 Global High Yield

3.08

3.30

3.28

2.96

2.36

 M&G Global High Yield Bond Fund

3.08

3.30

3.28

2.96

2.36

 Cash

5.13

4.59

4.04

4.23

3.68

 Private Equity

0.83

0.99

1.17

1.21

1.30

 Harbourvest Global Private Equity

0.51

0.64

0.73

0.76

0.82

 HgCapital Trust plc

0.21

0.26

0.31

0.33

0.35

 NB Distressed Debt Investment

0.03

0.01

0.02

0.02

0.02

 Princess Private Equity Holding

0.08

0.09

0.11

0.10

0.11

 Hedge Funds

0.79

0.96

1.12

1.19

1.31

 BH Global Limited

0.15

0.14

0.18

0.17

0.19

 BH Macro Limited

0.05

0.12

0.12

0.15

0.16

 BioPharma Credit plc

0.27

0.33

0.39

0.41

0.46

 Blue Capital Alternative Income Fund

0.00

0.00

0.00

0.00

0.00

 Boussard & Gavaudan Holding

0.22

0.29

0.32

0.37

0.40

 Round Hill Music Royalty Fund

0.10

0.08

0.10

0.09

0.11

 Infrastructure

0.80

0.95

1.11

1.19

1.31

 BBGI Global Infrastructure

0.19

0.24

0.27

0.31

0.33

 DP Aircraft Limited

0.00

0.00

0.00

0.00

0.00

 Ecofin U.S. Renewables Infracture Trust plc

0.14

0.12

0.16

0.14

0.17

 NextEnergy Solar Fund (NESF) Limited

0.15

0.20

0.23

0.25

0.27

 Renewables Infrastructure Group

0.13

0.16

0.19

0.21

0.23

 SDCL Energy Efficiency Income Trust

0.19

0.23

0.26

0.28

0.31

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company. The Prudential Assurance Company and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.