The Man from the Pru....

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Ian@Holborn
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The Man from the Pru....

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Post by Ian@Holborn »

The final quarter of 2018 was a turbulent one for global markets, and meant the majority of major indices finished the year showing negative growth. While the start of 2019 has done much to eradicate short-term negative sentiment, increasing volatility levels during recent years still has many investors feeling concerned as questions about how, when and where to invest persist, and the answers become more complicated. As more and more clients come to me seeking advice on how best to protect their hard earned capital while still seeking at least moderate gains, I find myself turning to a gimmick from U.K. television commercials during the 1980’s and saying “Trust the man from the Pru”.

Prudential International have been a household name for UK investors for generations. Founded in 1848 to provide loans to business professionals, the company has developed and grown significantly over the last 170 years and has become one of the most trusted names in the UK for assurance, investment and savings products. Since the 1980’s Prudential have also become an institution of choice for cosmopolitan investors, providing investment ‘bonds’ to the international market.

Bond ‘wrappers’ for tax purposes are available to the international investor from a number of well-known financial institutions, so the Pru bond is by no means unique in itself. The range of “mirror funds” offered within their bond are not (in my professional opinion) the most cost effective investment strategy on the market due to increased and avoidable fund charges. However the option to invest in Prudential’s own ‘in-house’ funds provides access to a tried and tested investment approach that has been delivering strong and consistent returns since around the middle of last century.

Prudential funds use what is known as a “smoothing process” to achieve less volatile and more stable returns, and help protect clients against some of the ups and downs of the market. Their investment team, made up of a mixture of analysts, economists, mathematicians, and even other ‘financially unrelated’ fields such as the sciences, work relentlessly to give them a unique level of insight into where the next suitable investment opportunities lie.
Through a complex mathematical process, the Prudential investment team analyse market risk across a number of different sectors (credit, property, equity, government and inflation) and use this information to calculate an “expected growth rate” (EGR) for each of their funds over the next quarterly period. At the end of each quarter the investment team can adjust the EGR up or down based on market expectations or leave things unchanged.

The unit price of each fund is monitored on a daily basis taking into account both the “smoothed price” which would normally increase daily in line with the EGR, and the “unsmoothed price” which is the value of the fund divided by the number of individual units. The “smoothing process” checks the gap between the two prices levels (using a 5-working-day rolling average for the unsmoothed price), and if the gap is over a certain level in either direction they will automatically adjust the price of the fund, reducing the gap and ‘smoothing’ the investment returns.

The unit price adjustments can be implemented either mid-quarter or on each quarterly review date, and will vary depending on the whether the funds are “growth” or “cautious”. The principle goal and outcome of this smoothing process is that the effects of market volatility are minimalised, therefore reducing exposure and risk to investors. Historical figures show that while the Pru funds lag behind during times of strong market growth, they consistently outperform many of their peers during times of volatility, and investor capital is far more protected.

The Pru funds are exceptionally well diversified, usually holding over 30,000 underlying investment instruments. As well as the more typical holdings in equity, bonds and fixed interest markets, Prudential invests heavily in areas such as Private Equity, Corporate Loans, Infrastructure, Utilities and Hedge Funds. It is this level of diversification that enables such strong performance during market downturns and ensures that the unit prices continue to perform. While the FTSE 100% dropped an alarming -11.17% over the last year or so (Jan 26th 2018 – Jan 25th 2019) the Pru ‘Cautious’ fund provided a positive return over an almost identical period, growing 2.3%, while their ‘Growth’ fund returned an impressive 5.5%, and this can be attributed to the investment processes and strategic factors mentioned above.

Prudential’s bond and in-house investment funds may appear too conservative for some investors, and certainly in times of strong and persistent market growth there will be more appealing options available. However with Brexit on the horizon, the US-China trade war far from over, and increasing volatility / diminishing returns in traditional safe havens, Prudential provides a truly exceptional alternative to safeguard your capital. The charging structure used for the bond is taken over a 5 year period only (0.3% per quarter), meaning over the medium to longer-term it is a more cost effective solution than many of the other bond providers in the market. Additionally the minimum capital requirement for the bond starts at only £20,000 GBP / €25,000 euros, making it more accessible to investors.

If anyone would like to learn more about the investment solutions available with Prudential, and how it could help protect their capital, please send me a private message on here or email me at [email protected]. I will be happy to provide you with further literature or arrange a call at a convenient time to discuss things in more detail.

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