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Strategic Asset Allocation Review Q4 2023 Update

5 min read 27 Nov 23

An update from the M&G Treasury and Investment Office detailing recent Strategic Asset Allocation (SAA) changes that have been implemented across the PruFund range of funds, Risk Managed Collectives and Model Portfolio Service in November 2023.

In this article

2023: Another momentous year for markets

Soaring interest rates, global inflation and bond yields are all evidence of a reversal from the years of low interest rates, benign inflation and quantitative easing. With the significant geopolitical uncertainties in the Middle East as well, we have made some adjustments to the SAA within portfolios.

So, what specifically has changed this year?

  • Developed market yields have reached levels not seen since 2007, with US 10-year treasuries reaching 5% in October
  • Interest rates have spiked over the past 12 months to 22-year highs for the US, and Europe and 15-year highs in the UK
  • Core inflation remains sticky across developed markets, despite signs it is now on a downward trajectory.
  • A resurgence in energy prices created by recent geopolitical events could further delay returns to target inflation levels

What are we changing and why now?

Markets are evolving and we need to be able to react to this which may lead us to review our portfolio positions more regularly, ensuring underlying holdings are best placed to capitalise on valuation opportunities while managing risk levels to ensure the right outcomes for clients.

Summarised below are key changes applied to the asset mix across our range of funds.

Fixed Income – further increased allocation

As bond yields have risen further over the course of 2023, they are now even more attractive, and this is particularly so in inflation-linked markets where real yields have risen to 14-year highs. As such we have increased the allocation to Index Linked Gilts, UK Gilts, US Treasuries and UK and US Investment Grade Bonds. There has been a small relative reduction to the Global High Yield allocation.

Equities – pro-rata reductions

A broad pro-rata reduction across developed markets with smaller reductions to India (medium to longer term demographic prospects and access to globalization of services) and China (reversing a negative view over the last couple of years stemming from the zero-covid policy).

The changes do not reflect a negative view on equities but more the opportunities in fixed income.

Property, Alternatives and Infrastructure – maintained

In recent years, we have done a lot of work to build diversified exposure to real assets, like global property, infrastructure and private credit, a good proportion of which provide linkages to inflation. We remain keen to maintain this exposure that is conducive to the current environment despite recent pressure on valuations.

The chart below outlines the upwards curve seen in bond yields in recent years and our increased fixed income allocation within portfolios.

Impact on portfolios (% change):

The tables below outline the key SAA changes applied to asset classes, the key moves have been within Equity and Fixed Income allocations (4% and 2.5% respectively for PruFund Growth and PruFund Cautious), and a slight increase in alternatives.

Expand the headings below to see the changes in details.

Asset

PruFund
Growth

PruFund
Cautious

UK Equity   

-1.46%

-0.88%

European Equity

-0.51%

-0.32%

North American Equity

-0.71%

-0.41%

Japanese Equity

-0.33%

-0.20%

Asia ex. Japan Equity

-0.61%

-0.37%

China Equity

-0.02%

-0.03%

India Equity

-0.02%

-0.02%

Global Emerging Markets Equity

-0.22%

-0.13%

Middle East and Africa Equity

-0.19%

-0.11%

Total Equity

-4.07%

-2.47%

Asset

PruFund
Growth

PruFund
Cautious

UK Property

+0.08%

-0.04%

Europe ex. UK Property

+0.06%

-0.05%

North America Property

-0.01%

+0.04%

Asia Property

-0.19%

+0.03%

Total Property

-0.06%

-0.02%

Asset

PruFund
Growth

PruFund
Cautious

TAA Mandate

+0.03%

-0.02%

Asset

PruFund
Growth

PruFund
Cautious

Private Equity

+0.08%

-0.02%

Diversifying Strategies

+0.04%

+0.40%

Infrastructure

0.00%

-0.13%

Private High Yield

+0.07%

+0.18%

Total Alternatives

+0.19%

+0.43%

Asset

PruFund
Growth

PruFund
Cautious

Europe including UK

+0.65%

-0.22%

UK Government Bonds

+0.81%

+1.69%

US Corporate Bonds

+1.08%

+0.40%

US Treasuries

+0.23%

+0.08%

Asia

+0.67%

+0.27%

Convertibles

+0.12%

+0.11%

Private Credit

+0.05%

+0.03%

Global High Yield

0.00%

-0.12%

South Africa

+0.14%

-0.01%

Global Emerging Markets

+0.27%

-0.02%

Total Fixed Income

+4.02%

+2.21%

Asset

PruFund
Growth

PruFund
Cautious

Cash

-0.09%

-0.07%

Outlook

We expect the world to continue moving at a fast pace and will review any additional changes accordingly. The team continue to monitor closely what is happening in economies and global markets ensuring portfolios are well placed in delivering returns that support clients’ objectives. We continue to see value in ensuring portfolios are well diversified across different asset classes and regions with positive exposure to factors such as inflation risk. As the world changes we are open to adding new asset classes and evolving our portfolios.

We want to emphasise that scenario work is very much ingrained in the analysis that we do and this continues to help shape the recommendations in this SAA, which considers the best estimate outcome as well as the results of a range of potential future scenarios.

This content has been prepared by M&G Treasury and Investment Office (T&IO) for information purposes only and does not contain or constitute investment advice. Information provided herein has been obtained from sources that T&IO believes to be reliable and accurate at the time of issue but no representation or warranty is made as to its fairness, accuracy, or completeness. The views expressed herein are subject to change without notice. Neither T&IO, nor any of its associates, nor any director, or employee accepts any liability for any loss arising directly or indirectly from any use of this document. The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back less than the original amount invested and past performance information is not a guide to future performance.

‘M&G Treasury & Investment Office (T&IO)’ includes the team formerly known as Prudential Portfolio Management Group (PPMG), Prudential Portfolio Management Group Limited, is registered in England and Wales, registered number 2448335.

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