Prudential Corporation Asia’s asset allocation team – which manages the life insurance general account in the region – is looking at buying European and US property assets for the first time with a view to creating a truly global real estate exposure.
Meanwhile, the portfolio is well below its 5% target allocation to alternatives (it doesn’t put property in this category) and is tentatively looking for investment ideas in this area, says Kelvin Blacklock*, Singapore-based chief investment officer of asset allocation for the UK insurance group.
The $28 billion in global multi-assets account for more than a third of the company’s $80 billion of investments managed in Asia. The two largest funds are global balanced portfolios, with around 65% in bonds, 25% in equities, 5% in property and 5% in alternative assets.
“We have inhouse capability in property, but we’re seeking external managers for US and European property funds to provide us with broad market exposure,” says Blacklock. “We’re trying to take advantage of the dislocation we’ve seen in property markets by building up a truly global exposure.”
The team started doing this some three or four years ago in Asia, he notes, but two or three years ago it did not have any exposure in Europe or the US. That has proved beneficial, he says, but developed-market real estate valuations now look relatively attractive.
“So we’re now starting to tentatively scale up into those assets,” says Blacklock. “We’ll probably end up with a fairly even mix between Europe, the US and Asia, building up to the 5% mark.”
To do that, Prudential has engaged its inhouse property team – one of the biggest real estate investors in Europe, and which has people on the ground in Asia – to find property managers with suitable funds of funds. Blacklock says the team is seeking “diverse, relatively high-quality bricks and mortar, typically core assets”.
He explains the move towards greater diversification. “Historically some of the people in the life business would have been happy to buy a building in Singapore or Taiwan or wherever,” he says. “But if you wouldn’t buy a single property equity, why would you buy a single building? That gives you huge concentration risk.”
Blacklock points out that 5% of $28 billion is not enough to build a diversified portfolio of direct property assets. “We’d much rather put say $200 million into a $2 billion or $5 billion fund,” he says, “and then we’ve got a broad and diverse exposure to a range of different assets."
As for the firm’s alternatives investments, Blacklock’s team typically aims to spread the exposure so that, of the target 5%, it might have 1% in private equity, 1% in hedge funds, 1% in infrastructure, and so on.
But it is well below its target alternatives allocation of 5% and is looking for ideas to invest in. Finding them is easier said than done, however, and caution is still the name of the game – Blacklock is in no rush to pour money into alternatives.
“We’ve been quite conservative in our approach to this whole area, and that has served us well,” he says. “We haven’t suffered from illiquidity in hedge funds or massive exposure to CDOs [collateralised debt obligations] or structured notes and the like, all of which we’d categorise as alternative assets.”
Still, he is happy to take on the illiquidity risk of certain assets, such as infrastructure, which suits Prudential’s life liabilities well, being long-dated in nature and relatively simple assets.
But Blacklock is more cautious about hedge funds. “We’re not really sure how you measure [hedge funds]; they’re a bit ‘black-boxy’ and reluctant to disclose exactly what they do – and they often change strategy over time,” he says. “A lot of our reticence to get too much into things like that is that we’re not always sure what it adds to our portfolios.
“If we can add equities at the bottom end of the cycle when everyone’s running scared, that can add a lot of value, as we can measure a tangible expectation of how the P/E should normalise,” adds Blacklock. “But it’s incredibly difficult to do that with hedge funds.”
What’s more, hedge funds are “very fixated on not losing money over a short period of time”, he notes. “That’s not a huge concern of ours, as we deliberately structure funds to withstand volatility.”
“For us a lot of the risks [taken on by hedge funds] are some derivatives of global equities or global bonds,” adds Blacklock, “so they’re not really adding that much.”
* An extended interview with Kelvin Blacklock will appear in the upcoming February issue of AsianInvestor magazine.