The transcript from this week’s MIB: David Hunt, PGIM CEO is below.
You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast, and Stitcher. Our earlier podcasts can all be found at iTunes, Stitcher, Overcast, and Bloomberg.
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This Is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST MASTERS IN BUSINESS: This week on Masters in Business, I have an extra special guest. His name is David Hunt and he is President and CEO of PGIM, which could be the largest asset manager that you are unfamiliar with they manage $1.2 trillion and they are the 10th largest asset manager in the world. PGIM has a really fascinating business model, they are a variety of different groups that have a very, very long history in the world of asset-management.
They been around over 100 years, their quantitative group dates back to 1975, it could be the oldest quant group that’s out there. PGIM is somewhat unique not just in their institutional focus, but they are a very interesting mix of fixed income, real estate, and real estate financing that makes for a really, really fascinating combination of asset classes.
They — David is as knowledgeable as anybody on these various subjects. If you’re at all interested in private credit, real estate investing, fixed income investing, as well as traditional public markets, you are going to find this to be absolutely fascinating. So with no further ado, my conversation with PGIM’s David Hunt.
I’m Barry Ritholtz, you are listening to Masters in Business on Bloomberg Radio. My extra special guest this week is David Hunt he is president and CEO of PGIM, this is the investment arm of Prudential, the insurance and asset management giant. You might not be familiar with PGIM, but they manage $1.2 trillion in assets, they may be one of the largest top 10 asset managers you might not have heard of.
David comes to us with the bachelors degree in engineering and he spent about 22 years at McKinsey, that’s a really unusual background to go into the asset management business. Tell us a little bit about how you found your way to PGIM?
DAHID HUNT, PRESIDENT CEO, PGIM: Well, to be honest, it’s not that unusual. Actually the asset-management world has quite a few people who have you know, management consulting background and part of it, I think is that we are fundamentally wired to be client oriented and I think one of the aspects of a great asset manager is the fiduciary part of that culture, and I think you get that in spades when you’re working in a firm like McKinsey and I really appreciated that set of values from the very beginning.
RITHOLTZ: So you mentioned being client oriented. Who are the clients of PGIM?
HUNT: So PGIM as you were nice enough to point out, is the 10th largest asset manager in the world, we serve most of the world’s largest pension plans and other large sovereign wealth fund, central banks, so we are predominately an institutional manager. We do I have a retail business here in the United States which has been growing quite the quite rapidly but we’re better known in the institutional market. We serve I would say the world’s most sophisticated client base with a broad range of products.
So we offer obviously public equities and public fixed income but maybe less known is that we’re the third largest real estate manager in the world and we do a lot of other alternatives including things like private credit which have obviously been very hot in that in recent years.
So we have both a public and a private business.
RITHOLTZ: And when I was working my way through the various websites of PGIM, not only are you one of the largest real estate managers, but you’re also a fairly substantial real estate financier. Did I read that correctly?
HUNT: No, you’re absolutely right. I mean for many, many years and this really does go back to the history as an insurance company, obviously we financed a lot of office buildings, Prudential, at one point, was the largest direct owner of real estate in the United States.
RITHOLTZ: Really?
HUNT: But we also have been lending into the real estate business for many, many years, so those are old insurance businesses and what we’ve done is we have taken them and essentially make them available to third-party investors.
So at this point, PGIM, although it started out with an insurance heritage, only about 20 percent of my fees come from Prudential, 80 percent of it actually comes from my third-party clients.
RITHOLTZ: So when you’re dealing with sovereign wealth funds in central banks and pension funds, how is that different than the traditional base of insurance clients?
HUNT: It is quite different. I mean insurers need their money managed in very specific ways.
RITHOLTZ: They have real specific liabilities at set future dates based on actuarial tables…
HUNT: And in general they want to manage their money so that they effectively match those liabilities with the cash flow of their assets. And so done well, there’s actually not that much investment risk that is inherent in those books.
Third parties tend to want a more active approach, they have less specific liabilities that they are matching and they will often want a more active and a higher active share style of management than an insurance company will.
RITHOLTZ: That’s quite fascinating. So you spent 22 years at McKinsey, how did that prepare you for running what is now the 10th largest investment manager in the world?
HUNT: Well, I think maybe in two ways. One is that I ran the asset-management practice at McKinsey so the people actually served asset managers, so I’ve spent a lot of the last years working with the leading CEOs in the asset-management stream, and so I think my pattern recognition of what worked and what hasn’t is reasonably good over that period of time.
And the second one is that I do think that the managing and leading in a professional services context is a lot has a lot of parallels with the investment world. Investors are people with strong convictions, they don’t need a lot of management, they might need a little inspiration and leadership, they are people have who have deep convictions which are only good if they are contrarian, there is no point in having the same view as the rest of the market.
And so by nature, they are very independent thinkers, and I would say the same thing as is true of good consultants.
And so having a style where you’re able to inspire and lead but not manage is a style that works very well in the investment world.
RITHOLTZ: What about the engineering background undergrad? You went to Princeton, did you plan on going into finance or was the engineering background something more…
HUNT: So I think the engineering is a little bit of a misnomer in the sense that effectively the econometrics program at Princeton is in the engineering school and so I actually — I actually really majored in econometrics and I my senior thesis was on the emerging markets debt crisis of the of the early 80s, you may remember, that Citi and many others got themselves in an enormous amount of trouble and I built a model of how that worked out in order to help predict some of the future trouble spots.
But — so it was effectively an econometric which led me obviously very easily into finance.
RITHOLTZ: Quite fascinating. You were at McKinsey prior to joining PGIM, what was your first job at PGIM like? What was your role when you first joined the company?
HUNT: So I joined in the same role that I that I have now. I came in as the president and CEO and I think that in many ways, it was a very — a very natural fit with my background. I probably spend about half of my time leading but not managing the investment units, I spend about a third of my time externally with clients at conferences really trying to keep my ear to the market and then I spend some time on my kind of corporate duties for Prudential more broadly and with our board.
RITHOLTZ: So what’s it like leading but not managing the various asset units? That sounds kind of interesting.
HUNT: It is absolutely a delicate — a delicate balance and I do like to say that the right style of leadership for a role like this is much more as a servant leader, so I come into the office in the morning and what’s in my mind is what do I need to do to help the people who are running our businesses be successful? I do not come in the morning and think these guys somehow report to me in a classic corporate style.
I think that’s an extremely important mindset in the investment world. Investors don’t want to work for a large corporate hierarchy, they want to work in a place where they have autonomy and freedom to express their often contrarian points of view and you need to create an environment where that’s not just acceptable but actually encouraged.
RITHOLTZ: So what happens if one of these contrarians suddenly go off the rails and there’s talking about hey this XYS is terrible and we need to move to Golden Bottled Water and we are going to hide in a cave somewhere. How do you deal with the occasional overreactions of managers because all of us have a tendency to allow our emotions to get the best of us.
HUNT: Without a doubt and I think one of the things that that we do well is we have a very disciplined team based investing process. So one is that we have very few individuals who were making those decisions, we have a clearly defined process which lays out how we believe in the investment thesis should work and we stick with high conviction trades that stay within that philosophy and oftentimes will be wrong for some period of time. And that’s okay.
But we make a very clear distinction between high conviction within a process versus somebody who would make a move outside of what we’ve told clients that we’re actually investing behind. And in that case, we ran it back very quickly and very abruptly.
RITHOLTZ: What was the environment like during the financial crisis? Was everybody on point in thinking think hey this is something…
HUNT: I wasn’t in this role during the…
(Crosstalk)
RITHOLTZ: You missed it.
(Crosstalk)
HUNT: So timing is important in all of this.
(Crosstalk)
RITHOLTZ: Yes, to say the least. So when did you join?
HUNT: I moved over in 2011.
RITHOLTZ: Okay, so you’ve been there for seven years, that’s a decent — so your whole experience at PGIM has been during what pretty much looks like a riproaring bull market certainly domestically, if we are talking emerging markets, perhaps not so much.
How do you think your role might change when the wheel turns?
HUNT: Well, I think it’s a great — a great question, there is no doubt that in the years since I’ve been in this seat, we’ve had pretty friendly markets, and for our mix of business, I would say that’s been particularly true because not only do you have you know the equity markets which have been moving up, but you also had relatively low rates around the world and pretty stable, and then you had a pretty attractive real estate business coupled with our private businesses which really have thrived as banks have pulled back from lending.
So we lend money into the middle market, we lend money to the real estate business and banks really pulled out of that or substantially out of it. As a result, those businesses grew very rapidly for us as well. So I think the macro environment for us has been extremely strong, we all know that will turn, nobody can predict exactly when, but it will, and part of the art of all of these managerial roles are being willing to stay a bit ahead of that and begin to prepare portfolios for a downturn.
RITHOLTZ: So you guys have about — you guys, PGIM has $1.2 trillion in assets, about if I’m doing this from memory so pardon me if I’m off a little bit, a little less than two thirds is fixed income is that — is that about right? 700 plus?
HUNT: Yes, that’s right. We tend to look at it a little bit more in terms of fees rather than assets because that tends to give you a better picture, and from that, about 40 percent of our fees are public fixed income, about a third of it is public fixed income and the rest of it is alternatives including real estate.
RITHOLTZ: Quite interesting. So given that we’ve just had a 30 plus year bull market in fixed income and last year was the first year we really saw that sort of coming to an end, what does this make your group think in terms of how are you going to manage duration, risk, et cetera?
Are there big changes coming or is it hey we have a 30 year time horizon we don’t care about last quarter?
HUNT: No, I think absolutely, we spend a lot of time thinking about the effect of rates on our portfolios. If you go back in time, we were one of the first people after the financial crisis that said that we believe that rates would stay low for very long time and actually, that was an out of consensus call. Most people thought, oh, it would be like the last time, it’ll snap back quickly and we really didn’t think so. And the reasons behind that I had less to do with the fed and more to do with the fundamental problems we have in our economy which are low productivity and really low growth.
And we felt that until either of those got fixed, rates were going to stay really low around the world and you couple that with very accommodative central-bank policies and obviously that turned out to be true. I would say as we went into the 13 and 14, more and more people piled into our point of view and I would say lower for longer, kind of became the consensus view.
RITHOLTZ: Right.
HUNT: Now you see many more people are beginning again to say finally growth is beginning to pick up, we actually do believe now that rates are going to rise.
We would agree to an extent but probably to a much less extent than most other people. We’d still have lower numbers on our yield curve than most other people.
We just see this lack of productivity, lack of growth, and importantly, the demographics around the world as keeping rates much lower than they have been historically and for a very long time.
RITHOLTZ: So let me ask a wonky question given your econometric background, how much of the so-called weakness and productivity growth is a measurement issue?
I know in my firm or even here in Bloomberg, technology software algorithms allow us to do so much more per individual employee than was even imaginable 10 or 20 years ago, so I’m always shocked when I hear others know productivity gains, I see massive productivity gains or is that my narrow biased technology-oriented service sector perspective?
HUNT: So I think there are two different ideas in your question. One of them is whether or not there’s a measurement problem with productivity and the answer to that is absolutely yes, but the more relevant question is, is there any worse productivity problem measuring than there was in the past? And that we would actually say there’s no real evidence of that, it’s always been badly measured, and we don’t see that that’s necessarily any worse than it has been.
So we don’t think you can attribute the productivity problem to measurement at this point.
The second point you made though is — is your lens on the world just unique and different? And I would, to that, I would say yes. One of the interesting thing is about productivity when you break it down industry by industry is it is just massively different. So communications and media and some — I have seen enormous growth in productivity, telecommunications, very large portions of the economy in terms of healthcare, in terms of retail, have not seen that.
And so the productivity story is not a kind of flat average, it’s very much a tale of two cities but much of the economy is not seeing the productivity lifts that you described.
RITHOLTZ: Quite fascinating. Let’s talk about where we are today in the markets, we see the yield curve flattening, everybody seems to be jumping up and down and saying this (fortends) a recession in the in the near future, what is PGIM’s view on this?
HUNT: So we believe that the yield curve will continue to flatten. We do believe that the fed quite properly will continue to raise rates at the short end, I mean the economy is doing very well, we think that’s entirely an appropriate policy response.
On the other hand, as we spoke about a moment ago, we do believe that there is an enormous amount of money that’s coming from the ageing population, so in the retirement systems and pension funds which will continue to weigh down on the long end of the curve.
So we think that flattening…
RITHOLTZ: Meaning that they are big long term investors and they stay with long-duration systems.
HUNT: They are because remember, they are matching liabilities for that as opposed to looking for the absolute return. So we think that will continue to weigh on that which will just flatten that curve even further.
Now at some point, does it become inverted? Quite possibly. But remember inverted yield curve doesn’t cause anything it’s more a symbol of what may happen because what the market is telling you when that happens is that people think long-term growth is actually below what short-term rates are and that’s actually the symbol but the signal that being sent out by an inverted yield curve.
But we’ve also had inverted yield curves which have not led ultimately to recessions and there’s certainly a lag that goes with that. So you’re still looking at kind of 18 to 24 months before that signal even really kicks in.
RITHOLTZ: Right. Thank you so much for saying that it’s a symbol and not a cause, I can’t tell you how many people seem to get that wrong and it’s absolutely infuriating. We’re also starting from such low rates and as the fed normalizes, shouldn’t the yield curve flatten anyway during that process?
HUNT: It should, and remember, it kind of low all depends on your perspective. So if you’re in Japan, rates over here look positively luxurious, and it’s even true in large parts of continental Europe. So while we, if you have a view on our rates, many others around the world see us as an attractive rate play and certainly as a business, we see quite significant flows from outside the United States coming back into credit products for that very reason.
This is a yield pickup for them. But that of course in turn, keeps our rates lower.
RITHOLTZ: Sure, it makes a lot of sense. So you have a substantial exposure in the private equity worlds and that side of the market? How do you look at that? Some people have been calling it frothy, what’s the PGIM view on private markets and private equity these days?
HUNT: So I would say that our view on alternatives is broadly defined which I would include private equity, I would include real estate in particular in that, and our private credit businesses, is very positive, we actually think that the private forms of investment will continue to grow pretty rapidly, we’re seeing a lot of demand from our big institutional clients for that, many of them have actually been taking money out of public equities and moving it into alternatives.
One of the important things to remember about private markets is that in many ways, they can weather a downturn a bit better, right? Because…
RITHOLTZ: Not daily priced.
HUNT: There is no daily prices, and so if you think we’re 24 months away or whatever your particular timeframe is, you may decide that a better way to play this market is through the private businesses. So we have a very attractive view of that and much of the dry powder that’s been raised in private equity and we are not in the large buyout business ourselves, but much of the dry powder in there we think will actually probably sit on the sidelines until pricing gets a little bit more reasonable.
RITHOLTZ: I was going to ask about valuations, a lot of people seem to think stocks and bonds are pricey, we can — we can debate that, it is certainly not historically cheap on the equity side, but that said, when we look at venture capital, when we look at some of the private equity firms, it seems to be a little frothy, seems like a lot of money has flowed into those spaces, do you see the same valuation issue in private equity or is it a — hey, we don’t get daily prices so we can ride out a downturn a little more comfortably in that space?
HUNT: So this is where I think having an institutional perspective as maybe very different than what you hear in the retail world. So our view is the biggest risk the markets present today is high prices, not volatility.
Actually most of our clients would be quite happy if we had a bit of a correction in the market because their biggest problem is today’s vintage of money that they’re putting out, what kind of return over 10 years will they be able to earn on that given the high prices that are on it, almost any asset class that you got?
So actually a bit more volatility would be better and probably lower risk for most institutions from where we stand today and I think that’s with the focus on what is the level of the market, it completely misses the point that that volatility is not risk and actually a bit more volatility would give people an opportunity to get in the markets that they’ve been priced out of.
RITHOLTZ: High valuations mean forward-looking expected returns are lower and lower valuations are the opposite, I mean…
(Crosstalk)
HUNT: Exactly, right.
RITHOLTZ: Quite interesting.
Let’s talk a little bit about the industry because you’ve gotten to see how it’s evolved from multiple perspectives over the past, almost 3 decades, what do you see as the evolution of the industry, what’s the most significant thing from your sort of institutional perch?
HUNT: So I think the most important trend that we see right now in the industry is very much the fact that the two worlds of alternatives and long only asset managers are coming together. So the entire universe was broken into these two, I mean there were the Blackstones and Carlisles and KKRs on the one hand and they did — they started in private equity but expanded out broadly from that, and then there was the broad variety of people who largely did long only public securities.
And these were covered by different analysts, they were talked about by different persons, even the press had very different people who covered those two groups.
That really is now — were seeing a fundamental merging of those. So more and more, you’ll see firms like PGIM where we are very much a blend of those, we have a big alternative business, we have a big long only business as well, and you’re seeing many more of the historically alternatives guys getting in the long only, all of a sudden, they think core real estate is just great, and you see a lot of other long only managers deciding that they’d like to really launch private credit and infrastructure funds.
So you’re really seeing this merger and that is driving a need for scale, so the other I would say secondary trend you’re seeing is that the large global firms are winning and they are taking share away from the individual country specific firms who largely grown up in an individual asset class.
RITHOLTZ: So on the retail side, the biggest change over the past decade has to be the rise of low-cost passive indexing, how are you seeing the reverberations of that on the institutional side, what you guys do very much is not passive by design, you’re looking for active share, you looking for non-correlated assets, it’s a completely different…
HUNT: No, it’s a very different game, in fact, we’ve designed our approach to the equity markets to work with passive, we believe that passive will continue to grow, we think that it has an important role in many investors portfolios, but what you need to with that is than other high active share strategies, which will allow you to drive alpha over longer periods of time, and most of the money that we manage is done in either that style or we have a pretty big quantitative business where we actually use computer algorithms which capture very consistent alpha over long periods of time at pricing that’s just slightly above what you would find in an index fund.
So those two strategies are designed to work with, not against, passive strategies and we’ve actually seen that approach be far more effective than what many others are doing which is to effectively try to fight passive particularly in the retail side which has not been a winning strategy.
RITHOLTZ: So my assumption is that your clients are have a big slug of passive exposure and they come to you for the active side?
HUNT: That’s correct.
RITHOLTZ: And you mentioned the quantitative group, pardon me if I get the dates wrong, you had one of the first quantitative groups on Wall Street, does that date back to like 1975?
(Crosstalk)
HUNT: You have a very good memory.
RITHOLTZ: Okay.
HUNT: It absolutely does.
RITHOLTZ: That’s not from the notes, I remember being a little startled and saying 1975 quantitative, that’s amazing….
(Crosstalk)
HUNT: We were absolutely one of the very first people in to pioneer the use of computer algorithms for that, the business goes under the brand QMA, a PGIM business and it’s been remarkably successful in both the US and in global markets, they also do a lot of our multi-asset class investing which again has had very attractive returns through a cycle.
And clearly that’s a business that’s highly scalable once you’ve got your got your algorithms thoroughly tested.
RITHOLTZ: So we’re talking about active versus passive and quantitative versus traditional. One of the things that keeps coming up in those discussions is the declining number of companies that are publicly available to trade especially here in the United States. Any thoughts on that — what how do — how does PGIM view that in terms of your public market exposure?
HUNT: So we are quite troubled by the health of the public equity markets in the US. While they hit all-time highs, we think that that actually masks what’s going on underneath, and that is that our public markets in this country have ceased to be the home of choice for fast-growing midsized or smaller companies.
So if you go back to 1996, there were almost 8,000 publicly traded companies, there are now 3,700, so almost more than half have fallen in terms of numbers. As worrying or maybe even more worrying is that is the IPO trend. So again if you go back to the 90s, we were looking at 500 to 600 companies year that were coming in, I mean if you were a tech and the entrepreneur then, your holy grail was to become public.
RITHOLTZ: Right.
HUNT: Now, your holy grail is to take another dollop of private capital and stay private for as long as you can and so what we’re seeing is that basically private equity is becoming the owner of choice for these companies. And at one level you can say will maybe that doesn’t matter, at least we’re funding it and the capitalist system is working, but what’s hidden and that is that used to be the returns from these fast-growing companies were available to retail investors and they now aren’t, they’re actually captured by institutions through private equity.
And I think that’s a bit of a shame, I think that the democratization of our capital markets has always been an important part of the American story and that’s becoming less true. But the public markets are going to have to raise their game because private equity has been very successful, they’re getting better and better at what they do, they have proven to be good owners of businesses and the public markets are going to have to raise their game if they’re going to really turn this around.
RITHOLTZ: I don’t necessarily disagree with you but here’s the pushback here on the subject. When you control for the number of teeny tiny pink sheet companies that were a dry cleaner trading at $3 million valuation, when you remove all that, the big decrease from 8,000 to 4,000 most of that goes away says some analyst and then you take the Jobs Act under the Bush administration which really opens up the ability for more people to make investments and then private companies plus the ton of venture capital cash floating around, I mean there is a tsunami of cash out there. Is it a shock that we’re not seeing as many companies trading publicly as we did 10 and 20 years ago?
HUNT: I won’t necessarily say it was a — it’s a shock but I do think that our public markets are very much under threat by this. And almost all of the sources of capital that you described whether it’s private equity or venture, those are institutional pools of money for the most part. So, yes, as an institutional money manager, I will be able to capture a deal of that.
But it won’t be available the way it was in the 1990s to people through their 401(k) plans, and I think that is a bit of a shame and it’s certainly a big change in our capital markets. I don’t know if we ever made the decision that we wanted to have private equity be a dominant funder of midsize companies , but I think hats off to them, they’ve done a really good job at it.
RITHOLTZ: So what’s the prescription for the various NASDAQ NYSE various forces around the world to repair that…
(Crosstalk)
HUNT: So the popular whipping boy for this has been regulation, that regulation has gotten so onerous on public markets that many people don’t want to kind of bear the scrutiny of that, and indeed last year in 2017, we had more companies go from public to private than we’ve ever had.
I personally think that that is true a bit but it’s actually far from the full story. The reality is over the last 10 years, effectively the banks in the sell side have withdrawn their support of small stocks, there’s no analysts covering these anymore, they’re not putting out capital in order to trade these, they’re not supporting them, and so we would actually need to go back and rewire a good deal of the ecosystem that supports public trading in small companies in order to fix this problem.
And of course, it is exacerbated by the huge flow into index funds that you described earlier because there’s a big difference between being in the S&P 500 and not being, most of these companies would come in, they wouldn’t be in that and so they’re not drawing the kind of capital that they would have pre-indexing.
RITHOLTZ: Post financial crisis, we’ve seen a huge consolidation amongst the big banks, amongst the big investment banks as well how much does that top-heavy much fewer banks managing the top half of assets affect what you’re describing as the lack of enthusiasm for small and mid-cap companies and for IPOs?
HUNT: I think it’s had a very significant impact, we have not only the consolidation that you refer to but we’ve also had a massive retrenchment, right? So the continental European banks have gone back to continental Europe, the Brits have gone back to their island for the most part and where as you used to have a whole series of large global banks who stake their ambitions on doing that, you now really don’t and so we see that even in our own trading businesses where we have less options for counterparties than we did 10 years ago.
We also get a lot less of our analyst work done by the sell side and as a result we have many more of our own researchers and analyst than we would’ve had a decade ago for sure.
RITHOLTZ: Quite fascinating, can you stick around a bit? I have a ton more question for you.
HUNT: Sure.
RITHOLTZ: We have been speaking with David Hunt, CEO of PGIM Asset Management. If you enjoyed this conversation be sure and come back for the podcast extras where we keep the tape rolling and continue discussing all things asset management, we love your comments, feedback and suggestions, write to us at MIBPodcast@Bloomberg.net, you can check out my daily columns at Bloomberg.com follow me on Twitter@Rithotlz.
I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
Welcome to the podcast. David, thank you so much for doing this. I have been looking forward to this. I’m fascinated by PGIM and you hinted at something I have to bring up. How do you get to be the 10th largest asset manager with 100 year track record and not only does the average retail investor not know who you are, half the people from the industry I spoke to, I said “Oh, I’m interviewing the CEO of PGIM” and they are like “Who?” It’s $1 trillion fund an I’m guilty of it also, how have you guys managed to stay so under the radar and grow as rapidly as you have?
HUNT: So the grow as rapidly as you have part is the easy question to answer and that is because we believe that we have some of the best investment performance in the industry. At the end of the day, that’s how we measure our success as to whether or not our clients are doing well.
We actually don’t care about how much AUM we have, we don’t have a goal around that, we don’t have financial goals, but we have a lot of goals around creating excess returns for clients and if you do that well, the rest of the things take care of themselves, you’ll have more clients, you’ll have more money for existing clients…
RITHOLTZ: Sure.
HUNT: And your growth will happen.
So let us come onto your other question which is about what about the — what about the brand? So PGIM is only 2 1/2 years old as a brand. Prior to that, all of our different affiliates had their own brand names…
RITHOLTZ: And they always have their own independent websites right under the parent company’s jurisprudence.
HUNT: And while this business was largely a US business, in some ways, I don’t know if that mattered very much. But as you may know, we can’t use the Prudential name outside really of the US and Japan and a few other exceptions.
RITHOLTZ: Is that is that due to contract or is it just…
HUNT: Because of the Prudential PLC which is based in the UK in which is not in any way affiliated with us, but they own the rights to the name Prudential.
RITHOLTZ: Okay.
HUNT: So as I came into this role, it was clear if I wanted to expand the business to be truly a global leader in the investment world, we needed a single name that we could use around the world, and so we looked around, we obviously did a lot of test marketing as you can imagine we came up with PGIM which is a name that we can use everywhere, but that is only 2 1/2 years old and I like with any brand…
RITHOLTZ: Sure.
HUNT: It takes time for that to really sink in and be associate and it’s a new brand, we didn’t have really a name that we used externally for the entire investment business. So it’s not surprising to me at all that you found that but I do think that’s in the process of changing and my hope is that when we sit down three years from now and you’ve talked to your colleagues that they will say, “Oh, yes, I have heard of them a bit.”
RITHOLTZ: And there are a handful of acronym-based asset managers from S&P…
HUNT: Everywhere.
RITHOLTZ: S&P, MSCI, DFA, there are a bunch of them around…
HUNT: GSAM, MSAM, GAM, I mean pick your favorite.
RITHOLTZ: Although GSAM and those you know, you — they are really under Goldman Sachs so you really think — I don’t think of them as an acronym business the way do an MSCI or a DFA…
(Crosstalk)
HUNT: You’re even probably old enough to know what PIMCO stands for.
RITHOLTZ: Yes, Pacific Insurance Management Co.
HUNT: Right.
RITHOLTZ: And not only that, I’m old enough to remember and it helps to having had Bill Gross hear the story of how PIMCO is launched out of the Pacific Life Insurance Company…
HUNT: Right, absolutely right.
RITHOLTZ: It began us, hey, why don’t you let us manage your fixed income and maybe we’ll find some of the clients…
HUNT: Good people too.
RITHOLTZ: Yes, so it’s one of those things and am I guess you forget I forget PIMCO is an acronym this because I’m just so used to it as PIMCO…
(Crosstalk)
HUNT: And that happens over overtime…
RITHOLTZ: Well, 35 years later, sure.
So let’s revisit this in…
(Crosstalk)
HUNT: You and I will do this again…
(Crosstalk)
RITHOLTZ: 2052 and we’ll see how broadly PGIM has been accepted.
So there’s a bunch of other questions I wanted to get to that we kind of skipped. We talked about market valuation, we talked about your role at PGIM, let’s a little bit about consultants, because I think the consultants these days have gotten a bad rap some of which is not deserved, but some of which is, how do you — how does your office work with the various consultants to different large buy side customers like pension funds, insurers and sovereign wealth funds.
HUNT: Well, the pension consultants are obviously extremely important partners of ours and in the whole ecosystem of money management, they are the people who the trustees look to for advice and guidance, they are also the people to do a lot of the asset and liability studies that underpin the strategic asset allocation.
RITHOLTZ: So here’s my question about that and this is really off the top of my head, why does the investment committee at a big pension fund need an outside consultant, isn’t what the consultant does really their job? I think that’s a fairly common perspective from people. Why is that view wrong or is it wrong?
HUNT: Well I think that there are two aspects of the question and one of them is just are they doing the same job and the answer to that is in general, no. If you look at what goes into a detailed liability study of one of these, most pension funds are not staffed to do that and by the way, we only do that every few years, it would be silly for them to do it. So I think that’s actually an effective way to do it.
RITHOLTZ: In other words, they have an expert from the outside as opposed to needing to develop an in house for the occasional…
HUNT: Right.
RITHOLTZ: You know quadrennial need.
HUNT: And the other then is having a second opinion on asset allocation such as most CIOs do have their own internal views and group that does that, they have a pension group, they may even have a second pension group that they get views on that because they do want to get the very best thinking on those questions and I think that’s completely appropriate.
RITHOLTZ: Quite interesting. We discussed your clients, we talked about pensions a little bit, lots of pensions in the United States especially public pensions seem to be somewhat underfunded although there are plenty of corporate pensions that are underfunded also. How is that going to play out? What should these underfunded public pensions be doing today so that the rest of the taxpayers on the hook for a big bill 20, 30 years down the road, the pension guaranty trust is eventually going to run out of money, how do we deal with this?
HUNT: Well I think it’s a great question, I mean for most of my career you could walk into a corporate pension and a public pension and guess that the asset allocation was 60/40, and you would largely be right with a few percentages. Now you go into a corporate plan and for the most part they have fundamentally derisked their portfolios, they have moved out of risk assets, they are much heavier into fixed income, they started the match through liability driven investing, match their investment, and in some extreme cases, they’ve even done a pension risk transfer which is to literally take that pension off their balance sheet and give it to an insurance company to manage.
But they really worked very hard to derisk because what they care about is not absolute return they care about whether or not their funding level relative to their liabilities is going to be appropriate so they can meet their obligations. So they have been derisking.
At the same time, the public plans have really been going in the other direction because the assets and liabilities there are not actually managed in the same place, the politicians generally control how large the liabilities get by what’s promised to unions and others, the CIOs tend to then need to manage those assets to match that and only…
RITHOLTZ: Even if it’s unrealistic.
HUNT: Even if it is unrealistic, and so the only way they have been able to do that has been to continue to move out on the risk curve.
(Crosstalk)
RITHOLTZ: So we can leverage all equity with a little private equity…
(Crosstalk)
HUNT: A lot of private equity, hedge funds to try to do that. Now, if you do the math you really can’t convince yourself that investment returns will actually make up for the shortfalls in a lot of this, there is really no way.
RITHOLTZ: And when you look at the recent decade of alternatives that most of these pension funds are in, I know they for some reason I don’t — can’t explain it, they all have higher expected returns but the actual performance for the most part across the whole industry has been pretty poor.
HUNT: That’s true and I would say that that’s been as we’ve — we did a big study on different forms of the alternatives and the group that did come in for the toughest test was hedge funds because not only did you have the return problem but actually most of them turned out to be quite correlated with the equity…
(Crosstalk)
RITHOLTZ: Right.
HUNT: And so you know one of the reasons they were called alternatives was it was supposed to give you a different risk profile, right? Than you had with your public markets? And they really haven’t delivered on that. Private equity interestingly did as did real estate.
RITHOLTZ: Private equity least correlated and high returns than the rest of the alternatives.
And some of that has to do I would imagine with the ability to not only have these longer holding periods where you are not…
HUNT: Absolutely right.
RITHOLTZ: To market, but the ability to take advantages of the volatility in the dislocations when value presents itself, private equity has the best seat to jump into that, or am I overstating it?
HUNT: No, I think that that ability to take the kind of 7 to 10 year view and not be forced to either mark to market or necessarily to invest this year even is a very attractive piece of the business model.
I wouldn’t underplay though the role that getting kind of common incentives have played, I think that if you go back in the history of private equity in the early days a lot of this most financial engineering and it was done with leverage.
(Crosstalk)
RITHOLTZ: The LBO side, it’s in the name.
(Crosstalk)
HUNT: That is not so much true today, you really do find that private equity have been good owners, they have been investing behind their businesses, they get the incentives right with management and I think they’ve proven that when you have a longer time frame, that’s actually a very effective way to run a firm.
RITHOLTZ: So I pulled this off of the website under your bio, I have to have you explain this a bit, Mr. Hunt oversees all aspects of the asset management business including its public fixed income, real estate, public equity, private fixed income and mutual fund units.
That sounds like in an enormous job, what is your day to day like? What is a day in the life of David Hunt like at PGIM?
HUNT: So I’m not sure there is any typical day which is one of the wonderful things about a role like this is that it’s endlessly, endlessly varied, but I can say that over the period of a year, I would say about half of my time is spent leading but not managing the businesses that you described.
About a third of my time is spent out with clients and kind of outwardly focus so I’m trying to keep my ear to the market what clients are really needing and wanting, and then the remaining time is spent more on kind of corporate governance issues and working with Prudential executives and our board.
So it’s a pretty nice mix of activities.
So you mentioned you have your ear to the ground and listening to what clients are talking about, what are clients saying today? What are they concerned about and what do you think is kind of interesting that’s bubbling up from that client base?
HUNT: so I would say the most interesting thing is that to watch the battle between the head and the heart of many of our clients right now. So they look at all the numbers and the economy is doing really well, you we’ve got the 4 percent growth in the second quarter, earnings were up 25 percent, inflation looks really good, and they should be feeling pretty, you know, comfortable with risk assets.
And then that conversation ends pretty quickly and then the heart comes in and they are very defensive, all of the questions they ask me are about positioning their portfolio to get through the next downturn, they’re worried about trade and political risk, they are not worried about the traditional business cycle there.
RITHOLTZ: Sure.
HUNT: So you have this very strange paradox where the numbers all actually look really good and yet people’s questions and behavior is actually much more of a group of people who is worried that we’re going to have a pullback.
RITHOLTZ: That’s quite fascinating, it is that battle between head and heart is a is an ongoing issue amongst all investors, so how do you respond to people when they say you know we want to be defensive and how much of that is still the scar tissue left over from the ’08 ’09 crash?
HUNT: I think it’s a great point, there’s a fascinating anthropological study to look at those CIOs who were in their seats when we went through the crisis versus the guys who got their job more recently and may have very different behaviors and there’s no question there’s a lot of scar tissue that still remains on the people who have their jobs.
RITHOLTZ: I don’t know if you remember the book “The Money Game” by Adam Smith, he — within the book there’s a chapter that describes a person running the funds and he says I have to hire all these young Turks to trade because I would never touch any of the stuff, I’ve been through the previous cycles and all the stuff looks like junk to me that I would underperform if I didn’t have the hotshots and when they blow up I’ll still be around afterwards, they’ll lose their jobs, but I’ll capture the return now that I wouldn’t have otherwise.
It’s kind of an interesting thing.
You are at McKinsey in the middle of the financial crisis, what was the experience like they are when it looked like the world was teetering on the abyss.
Well I think like almost anybody who was working in the financial industry, it was absolutely frightening, particularly because of the ramifications all around the world on almost any industry of what was happening in the financial world. You know, to some extent for consulting firms, there was an enormous amount of problems to be solved coming out of it and if you’re in the business of solving problems, that tends to be a good thing.
The type of problems, let me tell you growth strategies pretty much came to a grinding halt but workouts and liquidity and risk management really came to the fore. So the mix of work changed on but it was absolutely fascinating and terrifying at the same time.
RITHOLTZ: So the one question I didn’t get to that I would be remiss if I did not bring up is the role of all the new financial technologies both for managing assets and for running an asset management business, how is PGIM looking at all the new FINTECH that’s out there and what does this mean for the industry going forward?
HUNT: Well I would say were at peak hype on the technology…
RITHOLTZ: Peak hype, I love that.
(Crosstalk)
HUNT: …front at the moment I’m convinced that if I just slap the word AI on the name of any mutual fund I could raise another billion dollars and that’s really not a good place to be. So I think that it’s important to focus on technology but I also think you can’t be carried away with a lot of the things that you’re reading in the press at the moment.
We have spent a lot of time on artificial intelligence and how to apply it to the investment process and we do think there are some real possible breakthroughs in that particularly coming from the use of satellite imagery and also the use of location devices for example in our real estate business, were able to underwrite an office building using that kind of information in a far more sophisticated way than we would had before.
RITHOLTZ: Satellite information or?
HUNT: Sure, imagine you are about buy an office complex and you’d like to know for the last five years what has the traffic been like, how cars have been parked in there, what is the foot traffic around it and you can actually get data on that, you don’t just have to look at what’s happened to what the sales.
So there’s — alternative data is important but it is going to be an evolution and many people will find false signals for a long time and we know running money quantitatively, you look at 100 signals before you find one that has real staying power and so it will take time before we figure this out I think that is an important piece of it.
The other side of it is that the use of robotics and we do see a lot of the kinds of repetitive tasks that happen in an asset manager as being able to be done through bots, we are certainly using those and have plans to do more of that which simply allow us to use our associates in ways that make better use of their talents than doing repetitive tasks.
RITHOLTZ: What does this mean for headcount in the world of finance going forward? So far we’ve, post financial crisis, seen not just fee compression but an ongoing reduction in total employee headcount, is that going to continue for the foreseeable future?
HUNT: So I would say — let’s leave for the financial services broadly out of it, we just talk about the investment world, I think that broadly, fee compression has been a concentrated in a couple of different areas mostly in public equities but there’s been relatively little fee compression in the alternatives world, in private equity, in private credit, so if you look at PGIM for example, we really haven’t seen any real price compression if you look across the total platform.
RITHOLTZ: That’s fascinating, the two areas where I’m — where it’s noticeable active mutual funds clearly under pressure from low-cost indexes and then the hedge fund world that was known as 2 in 20 has become 1 in 15 or less and there are some really interesting alternative fee structures where it’s 50 basis points and then a percentage of alpha as opposed to 20 percent of profits much of which is beta.
So that’s really been under pressure, you’re not seeing that in the private equity side or the real estate side.
HUNT: No, you really aren’t. I mean if you’re able to generate alpha and you have a scarce source of that, I would say that people are willing to pay for it, and you know, it’s very interesting if you were to ask yourself the question from a client’s point of view, so do you think that large pension plans pay more or less for asset management now than they did 10 years ago?
RITHOLTZ: I would assume less…
(Crosstalk)
HUNT: No, I think you’re wrong.
RITHOLTZ: But you could surprise me.
HUNT: Because the mix has changed, because we were talking about before about how the asset allocation has worked…
RITHOLTZ: Sure.
HUNT: As they moved much more into risk assets and alternatives, they are actually paying more now, a lot of that’s in performance fees so they’re getting the return for it but they’re actually — their total bill in many cases has gone up. What they’re paying for beta has definitely gone down and I’d say that’s good.
RITHOLTZ: Right, I think people are very comfortable paying up for performance if they get performance, what they were doing before was paying up for the possibility of performance and then not getting it, that business seems to really be under pressure.
HUNT: I think it is, I think if you were a closet index guy and charging active fees for it, you’re having a really tough time, in my view you would be and so you should be.
RITHOLTZ: Bill Miller, the famous fund manager said the exact same thing, it’s not necessarily passive overactive, it’s closet passive with active fees, because there is no reason people should be doing that.
HUNT: I would agree with that.
RITHOLTZ: And I think for a long time, people didn’t recognize that but a little bit of turmoil and suddenly everybody comes a little cost conscious.
I know I only have you for a finite amount of time so let me jump into my favorite questions, these are what we ask all of our guests. Tell us the most important thing that people don’t know about you? What is it that is the deep dark secret of David Hunt?
HUNT: I don’t think there’s any deep dark secrets or I hope not but I think that one of the most important things about my development has been the fact that I’ve had the opportunity to work around the world for much of my life…
RITHOLTZ: What parts of the world?
HUNT: I worked. when I first graduated from school I worked in Asia for several years, I remember your traveling throughout China when there were literally very few roads and only those big Russian black cars to ferry the government officials around. I worked in Paris, I’ve worked for six years in London and so I really feel that I have been able to develop a much broader perspective on business and on people and on management because I’ve actually not just traveled but worked and lived in different cultures around the world, and I think that is so important for people to have that experience.
RITHOLTZ: Because you have a global perspective as opposed to home country bias.
Who are some of your early mentors, who helped guide your career when you getting started out?
HUNT: So I really feel very fortunate in that having grown up at McKinsey which is a partnership that there were many other senior partners around who wanted to help and mentor people and explicitly made it a part of their day-to-day life to do that. And I would point that particularly a guy named Ron Daniel who was the managing director for many years who was the person who urged me to really step out of the consulting world and go on a series of not-for-profit boards as a way of building a whole different perspective and different set of skills.
And so he’s a person who got me a really onto both the international rescue committee and then ultimately on the Lincoln Center board where I’ve been for about 15 years.
And that these are incredibly important and formative experiences for people to have today, I urge many of my colleagues to try to go on boards because it does open an entirely different world to you and the mentorship that I had early on really encouraged and supported that and I’m am forever grateful.
RITHOLTZ: Quite interesting. What about investors? Who influence the way you look at the world of finance and investing as you coming up through Princeton and Wharton and beyond?
HUNT: I think it’s hard to pick on any particular person in all of this because I think that the one does pick a style that depends on who your clients are, so for large institutional investors, the whole theory of asset pricing and what Markowitz and the work that they did or Fama were the people that I studied the most.
But I also think that the world changes and that as we see now what is an efficient frontier and how pricing works is very different in a world now with beta the way we have it than it was when they did their work. So I think that while it’s good to have early informative you know kind of stars that you study, you need to be willing to continue to update those views as well.
RITHOLTZ: Have to be intellectually flexible. Let’s talk about some of your favorite books, this is everybody’s favorite question, what have you been reading? Fiction and nonfiction? What do you like to recommend to people?
HUNT: So might my pick for the summer has been “Why We Sleep”
RITHOLTZ: “Why We Sleep.”
HUNT: Yes, which is written by the head of the Berkeley Sleep Lab and that it is an absolutely fascinating exposé on what does sleep really do for you, why do you sleep it starts even with the broadest a range of why do all animals sleep, do you know that giraffes need four hours? And did you know the dolphin sleep with one half of their brain and then they wake up and the other half goes to sleep because they need to keep moving in the water. It talks about the importance of REM and non-REM sleep and what the to do and their involvement in that in learning.
And that it does talk a bit about how, you know, as a society we don’t nearly get enough sleep and don’t value it nearly as much as we should and how the technological wave that we were talking about earlier has actually intruded on people sleep in very important and fundamental ways and he makes the case that America is an incredibly sleep starved society.
RITHOLTZ: And not only are we a sleep starved society, we’ve exported that around the world with and other countries have unfortunately been following our lead. That sounds fascinating, I’m going to put that on my list.
Any other books you…
HUNT: I think that is a good one for this.
RITHOLTZ: All right, for sure.
Tell us about what excites you right now about the industry? What do you think is the most interesting development that’s taking place today?
HUNT: I think it’s a good — it’s a fabulous time to be in the investment world and we are really seeing that the change of business models in almost every single aspect of the industry whether or not it is in what is a technology company, what’s happening to online retail, what’s happening with Internet companies in the developed countries?
So you know, we see some of the most interesting opportunities in China and India actually being in technology companies there because they don’t have all these legacy systems, they are going right to the smart phones and we see fascinating opportunities disrupt industries in that.
So I think there’s never been a more interesting time given the pace of change to be an active manager because there’s so many places where you can add significant excess returns.
RITHOLTZ: Quite interesting.
What changes are you looking forward to? What do you think is in flux? What does is the next decade look like and how is it going to be different than what we just came out of?
HUNT: Well, I think the biggest changes is going to be this confluence of a private and public into a very different form of asset manager who is able to do both of those and to deliver integrated solutions to their clients and we will no longer have a world where you know Bloomberg has a reporter for private equity and a reporter for a long only, I mean all of a sudden, these will become fundamentally integrated with each other.
RITHOLTZ: Quite interesting. Tell us about a time you failed and what you learned from the experience?
HUNT: I mean so many times, it’s really hard — it’s hard to know what to pick. So you asked earlier about the that the financial crisis if I go back even beyond that to the early knots when we had the big meltdown around technology stocks, so I was the leader of the capital markets practice at that point, and literally our revenue went from a very large and global to zero in about four months, and I had partners all around the world who you were very worried about what this is going to mean for their careers and families, we had clients who were obviously in the deep disarray about what they were going to do.
And it was a monumental task to try to get that group up and running and confident and staying with clients and being willing to take the five-year view on their success rather than whether or not there would be anything to do over six months.
And I would say in the beginnings of that I failed utterly at finding the right way to motivate and enhance that and it took me a lot of trial and error before I got to the point where I realized that what was needed here again was not management but inspiration of the role that they could play with their clients.
RITHOLTZ: Those are two very different things.
HUNT: Very different things and I really learned to shift between the two, people didn’t need day-to-day instruction on what they are to be doing and mostly they felt badly because they weren’t generating any revenue and that wasn’t the point that they needed to feel that they were making a difference with their clients and once I got that right, then good things began to happen .
RITHOLTZ: Quite fascinating. What you do for fun when you’re not in the office what you do to relax or for entertainment?
HUNT: So I’m a poor but enthusiastic tennis player and have been for a long time…
RITHOLTZ: As am I.
HUNT: And I have found that that tennis is been a really important part of my life, we talked earlier about living all over the world well you go to Hong Kong, you don’t know anybody you take your little rackets and you go down to the local tennis club and in two weeks you have a whole set of friends and by the way their friends that you wouldn’t necessarily meet through your regular workday, so you are all of a sudden involved in a different society.
It’s really a wonderful sport, it’s a life sport and it’s one that you can do anywhere so I when I travel I take my tennis racket and I always try to get the my time on courts.
RITHOLTZ: Have you been watching the U.S. Open? We are recording this right in the middle of it.
HUNT: Of course I have, I went on Monday and I saw Madison’s big match on Monday so I do, I watch as much of it as a as I can, I think it’s one of the great — I even went to the French Open this year as well.
RITHOLTZ: No kidding, I was a little shocked by Federer, that was a surprise.
HUNT: It was a big surprise and you know it’s a reminder to all of us that even the great ones do begin to slow down a little bit.
RITHOLTZ: He’s what? 37, something like that.
HUNT: Yes, but that he was brutally intense, I can tell you on Monday when I was there it was the hottest I can ever remember.
RITHOLTZ: 94 and humid, feels like 105 and you got to play for four hours.
HUNT: I don’t how they do it actually.
RITHOLTZ: And Serena Williams this is pretty amazing…
HUNT: Wonderful.
RITHOLTZ: She just had a baby six months ago, it’s crazy.
HUNT: It’s a wonderful story and incredible level of athleticism and most importantly ability to compete you know and you think about that even in a corporate context of how difficult it is to actually play better when you’re under pressure and that is a unique and wonderful skill and she does it time and again.
RITHOLTZ: She very easily could be the greatest tennis player of all time, by the time her career is done…
HUNT: I agree with that.
RITHOLTZ: She will certainly have more opens in the modern era than anybody, maybe more of all time, that’ll be interesting.
So let’s talk a little bit about, we’re discussing millennials earlier, what would you say to a recent college grad or a millennial who is looking for some career advice and was interested in the world of finance?
HUNT: So very similar to the story I talked about in terms of my own career, my biggest piece of advice is while you’re young make sure you have an opportunity to live and work abroad, it’s really important that you gain that broad-based experience, it will change what — who you are as a person it will change how you feel about being an American, it will change how you learn to interact with other cultures and people and so while you’re young and you don’t have kids and you have some flexibility, move to Europe for two years.
RITHOLTZ: That sounds like really good advice. And our final question what is it that you know about the world of business and finance today that you wish you knew 30 years ago when you were just getting started?
HUNT: The value of time, I think that that when you’re young it’s really hard to understand what 20 years can do in the investment world and it’s very easy to get wound up in what happens to markets today and tomorrow and whether or not they go up and down and what you learn as you get older is you have the perspective of cycles, you know what it’s like to take the perspective of a broad portfolio and you actually embraced difficult times, you embraced volatility as opportunity rather than concern.
And when you’re younger and you haven’t been through a downturn or a crisis, it’s very easy to overreact to those things and I do think there’s a reason why many of the great investors are older and I do think it’s one of the few things that you can potentially get better at as you get older because you have more pattern recognition of how things happen through a 10 year cycle. And I do think that the appreciation of time is really important.
RITHOLTZ: Quite fascinating. We have been speaking with David Hunt, President and CEO of PGIM.
If you enjoyed this conversation, well, be sure to look up an inch or down an inch on Apple iTunes and you can see any of the other 200 such interviews we have conducted over the past four years, you can find that wherever finer podcasts are sold, Apple iTunes, Bloomberg, Stitcher, Overcast et cetera.
We love your comments feedback and suggestions, write to us at MIBPodcast@Bloomberg.net.
I would be remiss if I did not thank our crack staff who helps put together these conversations each week Medina Parwana is my producer/audio engineer, Taylor Riggs is our Booker/producer, Michael Batnick is our head of research.
I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.
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