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PGIM India’s parent company Prudential Financial is the tenth largest AMC in the world with legacy of over 140 years in fund management. What learnings have you imbibed from the parent company to make investing experience superior with PGIM India MF?
The long legacy of Prudential along with its culture of excellence has been very beneficial to us at PGIM India. The last couple of years have been challenging for us all. But it is precisely in such challenging environments that the culture of a firm and that of its teams are tested. At the end of calendar year 2021, our parent PGIM's long-term investment performance remained outstanding as 95%/97%/96% of PGIM benchmarked assets outperformed their respective indices over 3-, 5- and 10-year periods, compared to 90%/93%/95% at the end of 2020 (source PGIM website). At the heart of this has been an unwavering focus on our clients and on our people. An approach of controlling the controllable, a consistent focus on the rigour of our internal processes and bringing together the views from senior leadership from our unique multi manager model have all contributed to our learnings here in India. By extension, this has richly informed our own approach, decision making and process design in all those aspects that contribute to a superior investment experience.
Why do you think investment process is more important that performance of individual fund managers?
The investment process brings about a thought process and philosophy for the fund house, which percolates down to every member of the team. That leads to development of a culture and continuity in the thought process, which is important. From a stand point of the organisation to grow, it is no longer dependent on individual people, as the culture, thought process and philosophy matches across all the members.
PGIM India follows GARP model. Please take us through this model.
GARP is growth at a reasonable price. By this model, what our team tries to do is look for good growth-oriented businesses but where the valuations justify the future earnings growth. This is subjective in nature. In case of the midcap, flexicap and small cap, we tried to make it more objective in nature. We define the GARP model based on PEG ratio, which is the PE of a stock divided by the earnings growth of the company. The ratio is a good way to make valuations look objective in relation to the earnings growth and helps decide on future actions.
Why does GARP model have the potential to provide superior risk adjusted return?
GARP brings a very objective criteria to evaluate businesses from a valuation perspective and the PEG ratio clearly throws out a single number which helps the investment team to decide whether the stock is inexpensive, reasonably valued or expensive and one can then act more objectively. It helps cut down on very expensive stocks, irrespective of how good the business is, if earnings don’t justify the valuations.
How does PGIM India MF go about constructing investment portfolio (both – equity and fixed income)?
Equity: The investment team has a very diligent process which helps in creating the universe. The process focusses on the historical Operating Cash Flows (OCF) generation of the business, the cleanliness of the balance sheet and the corporate governance history of the business to determine whether the business forms a part of the universe. The OCF and balance sheet ratios are objective in nature and hence there is no subjectivity in stocks which form part of the universe. The process is aimed at eliminating businesses and reducing the inherent risk in the portfolio.
Fixed Income: We follow both a top down as well as bottom up approach for Fixed Income investments. The security selection follows a bottom up approach where we have a propriety internal credit rating model with predominant weightage to objective parameters depending on issuer / industry. We consider lower of our internal ratings and external ratings to arrive at the effective rating for investment purpose. The asset allocation and our duration stance are driven by the outlook on key macro-economic variables. Thus, the portfolio construction process is a combination of bottom up as well as top down approach.
What is the value proposition that PGIM India brings to the table?
The investment process outlined above has helped us build portfolios that are distinctly positioned for higher diversification. This is demonstrable across our equity strategies which have a low overlap within each category that we are present in. The quality of our fixed income portfolios too has been tried and tested in difficult times. The approach of our sales team from the advisors perspective have been to complement the good and consistent performance primarily through adding value in aspects of client engagement and growing the business. Therefore, a strong and investment platform at the core with three strong satellite areas that complement viz Diversified International strategies, a strong and deep focus on the area of Retirement and Financial wellness value adds that are designed for business support and growth contribute to the distinct value proposition that we bring to the table.
What are the risk mitigation strategies that the fund house has deployed to offer better risk adjusted return?
We believe in taking calculated risks and mitigate some of it through diversification but we concede that inherently equities are the riskier of the asset classes where in one can do only as much risk mitigation. Our processes filter out high risk companies and bring to fore companies with strong cash flow generation which are at lower risk. During adverse times, leveraged companies are more impacted hence we avoid companies with high leverage and hence avoid balance sheet risk. Internally, we also have sectoral level limits so as not to be highly concentrated in one sector. We believe, higher risk in equities is often rewarded by higher returns in the medium to long term and healthy risk adjusted returns showcase the strength and skills of a professional fund manager.
How should MFDs/RIAs review investment process of different fund houses?
With successful financial outcomes for clients in mind, we believe that for an MFD or RIA, it is the diagnostic function of a client’s context and financial needs that is far more important than the investment function. Emotional intelligence is more important for better outcomes. Having said that from an advisor’s perspective it is imperative that they look at clarity and purpose in the investment process for e.g. in fixed income, taking long term ratings into account even for buying short term papers ensures extra layer of credit security and similarly in equities looking at operating cash flows + leverage ratio ensures that you are buying stronger balance sheets with the higher ROE and in turn better shareholder value. So, in simple terms what is the investment process solving for over and above the basic hygiene requirements. Best would be to use a combination of funds with complimentary investment process which may potentially help build portfolios with lower overlap. At the end of the day that is an important outcome to have for a healthier portfolio at the clients end. Transparency, especially in model driven strategies and seeking evidence demonstrating the core aspects of the process are also very important.
