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Alpha to return despite passive trend: PGIM

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David Hunt, who oversees more than $1 trillion as head of Prudential Financial’s PGIM asset manager, said his firm needs to focus on active investing and must not be seduced by the flood of money into passive strategies.

“We really looked at whether or not we should get into the passive business, and we came back clearly with the answer of no,” Hunt said Tuesday at a presentation by Newark, New Jersey-based Prudential. “It was a low-margin business that we didn’t see how we had anything special to offer to.”

Hunt is adjusting to the growing popularity of index investing. U.S. investors poured about $666 billion into passive mutual funds and ETFs in the 12 months through April while withdrawing a net $304 billion from actively managed funds, according to Morningstar.

Even billionaire Warren Buffett has said that most people are better off with a Vanguard stock index fund than trying to generate alpha.

While the growth of passive managers like Vanguard has forced retrenchment in the industry, with active managers Janus Capital and Henderson Group combining last week, Hunt has pursued a different approach. Prudential has recruited from Wall Street firms like Goldman Sachs and BlackRock to help attract business and has used smaller deals to expand in niches or geographic regions.

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The asset manager has had positive inflows every year for more than a decade among both institutional and retail investors. Hunt said one key is to look beyond stocks and focus on holdings like real estate and private debt, where it may be easier for an asset manager with scale and a long time horizon to spot unique opportunities.

“These areas really haven’t seen the same kind of fee pressure,” he said.

While PGIM has a substantial mutual fund operation, it also caters to institutional investors, serving 23 of the largest 25 U.S. corporate pension plans. More than 75 clients have invested at least $1 billion with Hunt’s unit, according to a company slide show Tuesday. Pretax adjusted operating income from asset management climbed to $787 million last year from $584 million in 2012.

Hunt said that many investors who allocate funds to passive strategies still want a diversity of holdings. PGIM also offers quantitative strategies, which rely on mathematical models to pick securities, and more than three-quarters of the company’s assets under management beat their benchmarks, according to the slide show.

“Fundamentally, we think that alpha will return to active-equity managers,” Hunt said. “We’ve seen this come in cycles before.”

Prudential, the second-largest U.S. life insurer, also highlighted its strength in the business of taking on retirement obligations for large employers. The company has won the largest deals in the pension-risk transfer market, including 2012 transactions with General Motors and Verizon Communications.

Phil Waldeck, president of the retirement operation, said he hasn’t found as many opportunities this year, partly because competitors including Athene Holding, Securian Financial and London-based Legal & General have been expanding in the U.S. market. He said Prudential’s preference is for “jumbo” transactions, when the economics are right.

“What we’ve walked away from are either industry or liability mixes that we find, on a relative basis, to be less attractive,” he said.

Bloomberg News