Manager Research

We have completed a review of Prudential’s funds and have updated several of the ratings across their fund range: 

We’ll discuss the ratings as applied to each of the different strategies in the sections below: 

Prudential Enhanced Income Fund 

This fund has delivered a more volatile return profile to investors in the past, primarily because of a higher duration exposure in the bonds and more property relative to peer funds. Prudential has elected to change the strategic asset allocation of the fund to result in a lower volatility profile for clients, but preserving the same expected return level. 

Given the recent changes to the fund risk profile and strategic asset allocation and we have resolved to downgrade the fund from Tier 1 to Tier 2. We remain comfortable with the income capabilities within the business, however we have chosen to take a more cautious view on the changes introduced and how these are managed over time, given that certain processes are new to the fund (for instance how offshore assets are managed) and the margin for error is small. As such we will be monitoring the fund over the coming months to assess how the changes are being implemented before we can reconsider the fund rating.

Prudential SA Equity (ex- Core Value), Equity and Dividend Maximiser funds 

We have historically had a high level of comfort in the depth and breadth across Prudential’s equity team. However, over the past year we have seen increasing turnover in senior staff in the equity team.  Craig Butters started a three-year sabbatical in March 2019. Rehana Khan, who was Head of Equity Research, a strong analyst and a mentor to the next generation of analysts, resigned from the business in September to take up a role at Investec. Additionally, in early 2020 we were informed that Prudential’s Head of Equity, Johny Lambridis, was relocating overseas.  He will remain a member of the investment team, working remotely for at least the next twelve months. They have offset these departures with new hires Damon Buss (ex-Electus, will focus on Retailers) and Aadil Omar (ex-Prudential) who returns as Head of Equity Research.  Ross Biggs takes over at Head of Equity.  Ross has 19 years’ experience with Prudential and is responsible for the Dividend Maximiser fund. 

With the departure of Rehana and Craig last year we took the view that despite being stretched, the team could cope with the research demands (including property where Johny was playing a covering role). However, we feel that with Johny’s departure the team will be stretched and the gaps wider than what we are comfortable with to justify a Tier 1 rating. As such we have elected to take a more cautious approach and have resolved to downgrade the SA Equity (Core Value), Equity and Dividend Maximiser funds to Tier 2. We would also like to monitor how investment leadership in this team develops over the coming period. This remains a positive rating, but with some concerns for investors to be aware of.

Prudential Inflation Plus and Balanced Funds 

Our rationale for downgrading both multi asset funds now is driven by the changes to the equity team, insofar this impacts the equity and property allocations in the funds. However, we have additional concerns unique to each fund which means our comfort levels in the funds were lower as a starting point. 

On the Balanced fund, we currently have a negative rating on the offshore component (communicated in 2019). We are still comfortable with their asset allocation capabilities. However, our growing concerns with the equity and property components, and our existing concerns with the offshore component, means we have reservations with many of the inputs going into the funds and this does not fulfil our criteria for a Tier 1 rating. We retain a positive rating, but the Tier 2 allocation is a better demonstration of our assessment. 

Our lingering concern with Inflation Plus is that it has a relatively high return target, but the exposure to growth assets like equities is capped due to ASISA sector constraints. Our concern is that the objectives become unattainable should their long-term expected returns on equities or property change, resulting in mandate/objective/sector changes in the fund going forward. While this is a low risk eventuality, in combination with the equity and property team changes, we are more comfortable allocating a Tier 2 rating.

Prudential Enhanced SA Property Tracker Fund 

The primary reasons for the downgrade are the changes to the broader team discussed above and changes to the underlying process. 

Firstly, there has been material turnover in the team responsible for this fund, first with Duncan moving to the fixed income team, then with Jean-Marie’s departure last year, and we would expect Yusuf to take over more responsibility of the fund with Johny moving to Australia. Yusuf is still relatively new to Prudential and has little portfolio management experience (we know he is being added as co-manager on the equity funds). This is in addition to the turnover in the broader equities team we discussed above. 

This fund has fallen outside of the regular Prudential processes in the past, being largely quantitatively driven with less fundamental research and a greater reliance on sell side. This made sense at a time when the listed property sector was more homogenous and the ability to add value over passive was difficult. The edge of the fund was in its lower fees and enhanced index process which typically delivered index returns after fees, which was a compelling proposition relative to the expensive active funds. Since then, the property market has diversified with greater ability for active managers to add value; passive fees have come down; and sell-side research has become thin or non-existent on smaller shares; light research processes were exposed when the listed property market crashed in the 2018-2019 period. 

This changing environment has coincided with several changes to the management of the fund to cover gaps in the process, including an active fundamental overlay that overrides the output from the quantitative model. We have a low level of confidence in how this fund will be managed in future. These concerns are consistent with a Tier 3 rating.