Good governance of multi-asset portfolios is increasingly important. However, the complexity of the process is increasing. Ciaran Mulligan, Head of Investment Manager Oversight at M&GPrudential Treasury and Investment Office, shares his views on how quantitative and qualitative approaches could complement each other. One of the key aspect he discusses is, not to overlook the overall economic factors at play and how they may have helped or impacted performance of a manager.
Defining mandates
Taking a disciplined approach to investment is paramount to generating sustainable and increasingly superior returns in the long run, amidst challenging markets and regulatory environments. The Investment Manager Oversight team, part of the M&G Prudential Treasury and Investment Office, focus on ensuring a disciplined approach is applied by the investment managers who manage money on behalf of Prudential UK. The Manager Oversight team is responsible for the oversight of £135bn AUM within the With-Profits book and over 400 retail and corporate Unit-Linked funds.
Many of these managers are running segregated mandates rather than funds. This is a feature that Ciaran, believes is at the heart of PruFund's success. Running these well-defined segregated mandates allows an element of control; through the team's rigorous manager selection programme, they are able to identify the key skillsets of managers and subsequently design mandates and tailor benchmarks that will allow alpha to come through in a specific way.
Know your manager
"Certain managers might be adapt at picking stocks within a sector; they will differentiate between companies like Amazon and Apple, between Apple and Google relatively successfully. Other managers might shy away from that approach, but have a good understanding of what's driving the macro economy, and understanding that they need to do to tilt their portfolio accordingly i.e. toward tech stocks or financial stocks, given the context of the environment that we're in." In understanding these characteristics, the team can allocate risk budgets to more skilful managers or actually tilt portfolios to benefit from these individual manager skills.
There is a continuous circle of understanding the manager, selecting the manager and then ensuring that they're performing in line with expectations. As part of this, understanding the balance between quantitative and qualitative research is a powerful tool that can be used both to understand performance and unlock constructive predictive insight.
Governance Framework:
Blend of quantitative & qualitative
"We spend a lot of time looking at quantitative output, making sure that managers results are within our tolerances and expectations, both from a risk and a performance perspective. It's key that when something is awry our qualitative research kicks in to understand if managers have deviated away from a pre-set process."
This helps understand the performance in the context of the environment that they have performed in and, aided by scenario testing different managers in a range of environments, allows predictions of performance streams in the future.
If a fund manager performs poorly, the team will use this context to understand what has generated that underperformance. As Mulligan acknowledges, "we've just come out of a long, protected period of value managers being unrewarded for their approach to investing". That's not to say that all of these managers are poor managers but again we must ensure managers don't hide behind this excuse. Whilst the team will never try to redefine a manager's investment philosophy, they will work with managers to help improve their portfolio construction skillset or attitudes towards risk in order to maximise the potential for positive performance to manifest itself.
A differentiator between the Manager Oversight team's process from other multi-asset providers in the market is their attitude towards biases. The process of picking and assessing managers is inevitably subject to some bias, whether it be conscious or subconscious. However, rather than suppressing those biases, Mulligan notes that there is value in being cognisant of them:
"What we try to do is not to ignore those biases, but to accept that they're there and to understand that the decisions we make are influenced by those biases and to adjust accordingly in terms of our daily process".
Evolution continues
With rapid globalisation and digitalisation in today's age, being able to adapt to change is more important than ever. Prudential has benefited from these new ideas over the years of running multi-asset portfolios; however, as more esoteric asset classes emerge it is imperative that manager's skill sets are well understood. This involves continual improvement of quantitative analysis (through alternative metrics, systems and quantitative techniques) alongside redefining and reassessing qualitative approaches to draw rational conclusions. As Mulligan concludes "changing our attitudes and our methods going forward is a key evolution of a manager research process" and is vital for the successful expansion into new areas.
Find out more about M&GPrudential T&IO, how they manage money and the processes and controls in place to help meet fund objectives.
