PGIM CEO David Hunt on Constructing Resilient Portfolios in 2025PGIMCEODavidHuntonConstructingResilientPortfoliosin2025

Read the transcript

• –

  [ Music ]

  >> One of the challenges with summarizing a year like 2024 is just how many remarkable things actually occurred. And so choosing the right couple to focus on and then talking through the implications for what it means for investors and for portfolios in 2025 is a real challenge. But let me give it a try. So I think I would pick out three major themes for the year. The first one was a remarkable shift of capital allocation. I really don't remember in my career seeing such a rapid change in geographic allocation of resources. There's really no more money going into Europe. People are not confident about the growth in the major countries of the UK, of Germany, of France, and they're not allocating more capital there. And yet, when you go to Asia, you find that there's actually quite a lot of capital going into Japan, which has been one of the big beneficiaries of all of the conflict with China. You see money going into ASEAN because of the changes in a lot of the trade patterns. In China, you see investors for the most part taking really a wait-and-see mode. They're not confident yet and they aren't putting any more money into China. And then you arrive in the United States and you find that the market is actually very strong. The actual underlying real economy is stronger than most people predicted. The labor market remains strong. And so most CIOs that I talk to are actually significantly overweight, they're nervous about it, but are overweight the US. The second theme I would really highlight for you is geopolitical uncertainty. As I travel the world and talk to CIOs, I see that they are really more focused on geopolitical risks, on idiosyncratic risk, and much less on the traditional kind of business cycle risks or whether interest rates are kind of going up or down. And so the way that they're dealing with that is through a really increased use of scenario analysis and geopolitical analysis that I haven't seen. And the third risk I would talk to really comes from our great summer of the democracy. Many, many countries around the world actually did go ahead and vote this year. It's been a popular wisdom that there was a big movement away from kind of all incumbencies. But the biggest loser from almost all of these elections was actually the balance sheet of the country themselves. What was remarkably absent from almost all of these elections was a serious discussion about fiscal conservatism. And whether that was in the UK, whether that was in the US, whether it was what we've seen in France, we really do feel that many of these countries are on a path of greater government debt. And that certainly causes us to pause and to think very carefully about the level and value of government debt in an overall portfolio. So if I take those three themes and I look forward and we kind of project into '25, what does that mean for a CIO who's building a resilient portfolio? I would really point to a couple of different things. First of all, we think the role of liquidity is ever more important. If we see the same kinds of volatility due to geopolitical risk that we have in the past but also real opportunities to take advantage of price inefficiencies. But, to do that, you've got to have liquidity. And so many more funds are spending time to ensure that they don't get caught in the private alternatives trap too much and that they actually have room to move when prices are right. The second thing we're seeing is a real movement to redefining geographic diversification. And given all the supply-chain channels, given some of the political risks, are portfolios resilient to various different outcomes vis-a-vis the political climate? And the third piece that we're really seeing is a careful look at how broadly diversified across asset classes portfolios are. The good news is that the range of different kinds of asset classes is only growing that's available to institutional investors. So whether or not it's places like ABF or the coming together of public and private fixed income, we see that more and more types of asset classes are available and that diversification of those are providing real benefit in a world that is more uncertain. So 2025 will without a doubt be an exciting year. It will be an absolutely fascinating time to build resiliencies into portfolios in the face of some of these headwinds but it will also be where really sound portfolio construction never has mattered so much.

  [ Music ]