Alternative vision
Jakhria is keen to emphasise how diversified the fund is, running it with a top-down perspective to get the best returns in the smoothest fashion.
“We look at thousands of different portfolios on a two-dimensional basis, examining both risk and return. We think about not only maximising return for a given level of risk but also minimising risk for a given level of return, and putting the two together.
“In turn, that has led has led to our long-standing philosophy of investing in some of the alternative assets – hedge funds, private equities and, more recently, quite a large amount in infrastructure.”
Within the alternative space, Jakhria determines the overall split between these types of assets, but also works specifically with a dedicated in-house team. Called Infracapital, it looks at projects across the globe, from mining companies in Asia to big hospital projects and renewable energy schemes, such as Tidal Lagoon Swansea Bay, in the UK.
Halfway through last year his team recommended a significant increase in alternative assets of about half a billion pounds. “We do not have an in-house team for any other asset class but we have one for alternatives because it demands a lot more subject matter knowledge than some of the standard asset classes.”
With hedge funds, a specialised in-house team makes direct allocations, for example, insurance-linked securities. Around 2.2% of the £76.7bn total is in hedge funds.
“Hedge funds aim to be less correlated to what happens in the traditional markets, and that gives us an additional diversified source of return. As for currency hedging, there is a detailed framework behind PPMG’s programme that takes into account different asset classes and geographies.”
One prime example is how PPMG fully hedged the Japanese yen dur-ing the past year, as the Japanese equity market has shot up and the yen has depreciated.
In recent times, the big picture outlook has been very positive in terms of real assets relative to nominal, Jakhria explains, citing how about three months ago his team felt that the historic lows of bond yields were unsustainable.
A significant allocation to Asian credit has also been made as part of a diversification play in the region.
“That move was based on the combination of a very good outlook, in terms of Asian credit relative to US or European credit, as well as a better yield from a market that is not necessarily well known to western investors. We believe some of that premium is to do with unfamiliarity.”
According to Jakhria, having specialist bond managers in Asia full-time, and having this exposure within the overall portfolio, puts PPMG at an advantage.
“Going forward, it is going to be one of the biggest regional bond markets, so having an in-house team looking at opportunities across Asia is really beneficial,” he says.
The road ahead
As to what keeps him awake at night, he says there are a number of scenarios that have been taken into account in PPMG’s asset allocations, such as Europe having a much bumpier ride than expected. “Though we think in the long term, it could easily have a much bumpier ride in the near term.
“The other question we think about is from a very, very long-term demographic perspective, as to what the long-term global growth is going to be like. In particular, what it means for global interest rates.
“So what is the long-term level of interest rates? Our view is that the long-term equilibrium level of rates is likely to settle at a level that is lower than we have been accustomed to in the past – fundamentally, because of demographics and a global change in central bank dynamics.”
Cautiously optimistic about global growth prospects, Jakhria says: “It is slowly turning a corner and we expect marginally higher global growth compared with last year.
“We are seeing a lot of positive signs in the US, Europe and Japan. That is not withstanding the fact that the road could be very bumpy – but at the fundamental grassroots levels we are seeing positive signs in a number of regions.”
Key investment themes
- Diversification– In addition to thinking about maximising returns, PPMG spends a lot of time looking at diversification. This is especially true for multi-asset portfolios where it has a larger universe of investable asset classes that are imperfectly correlated. PPMG was an early mover in diversifying its portfolio, both in terms of newer asset classes and geographical regions, allowing it to deliver consistently high risk-adjusted performance.
- Asian bonds – One example of an asset class where PPMG has been ahead of the curve is Asian bonds. Structural improvements, increased liquidity and investment opportunities, diversification benefits and attractive valuations have made a compelling investment hypothesis for Asian bonds. PPMG has increased its allocation to the sector during the past few years, and this has been a source of outperformance for its multi-asset portfolios, including PruFund.
- Property – Property fits well with PPMG’s long-term investment horizon as it provides favourable risk-adjusted returns to compensate for its low liquidity. The property portfolio is well diversified to capture the illiquidity premium in the sector and to implement PPMG’s view on the economic recovery in the US and UK. Property investments include high-street retail developments and out-of-town shopping centres.
- Alternatives – Alternatives remain a good diversifier for PPMG’s portfolios, and the asset class continues to meet return objectives despite recent crowding in the asset class as more investors search for yield. PPMG has a long-standing record of investing in alternative assets, with a variety of investments ranging from aircraft leasing to UK solar parks and the Swansea Bay tidal lagoon project.
- Scenario analysis – Any long-term portfolio must be robust enough to offer optimal risk-adjusted returns for a variety of economic scenarios. PPMG’s strategic asset allocation process incorporates a rigorous test of its portfolio against a series of scenarios based on its in-house outlook of possible economic conditions. This helps ensure the fund performs well not only in a base-case scenario but also under a range of ‘weather’ conditions.
