Prudential Portfolio Management Group Ltd (PPMG)

For Adviser use only not approved for use with clients Adviser Guide Prudential Portfolio Management Group Ltd (PPMG) Dynamic Focused Portfolios

2 Prudential s Portfolio Management Group (PPMG) :: Adviser Guide

Content Page Introduction to PPMG 4 PPMG approach 5-6 Governance 7-8 A team based approach 9 Some examples from our multi-asset fund range 10 In this guide you ll find information on: What PPMG multi-asset funds can provide? Diversification Asset Allocation Expertise Governance Risk managed solutions Asset-liability management Additional product features What benefits these can offer you and your clients? The benefit of spreading risk through a range of assets can be a fundamental investment starting point for many. As a global company we offer expertise in investing in assets around the world. Our specialist and dedicated asset allocation knowledge can offer the solution for you to outsource this time consuming and resource heavy work. A key focus for the Regulator! Having the time to review and understand each part of the investment management process, on a regular and comprehensive basis, for funds that invest globally can be very difficult. We offer funds that include governance controls from either internal, or independent third party, experts. Working within risk targets, for example with our range of Dynamic Portfolios, and then aiming to maximise potential return within those parameters, means a fund manager does not chase performance and provides funds that stay true to their original risk profile. Funds, such as With-Profits, come with controls and independent reviews in respect of their financial strength and how liabilities are managed. The fund manager can then work within these parameters, whilst the investor knows these are being monitored for them. Not all clients are the same, and a range of choices (such as smoothing mechanisms, guarantees and other product features) gives more choice in meeting different clients needs. Information in this guide is correct as at 9 September 2015 unless otherwise stated. Prudential s Portfolio Management Group (PPMG) :: Adviser Guide 3

Introduction to PPMG Multi-asset funds have been available and popular with both adviser and their clients for years. In the modern market, with changing regulatory guidance and the Retail Distribution Review, multi-asset funds offer the chance to outsource time consuming and costly asset allocation and stock selection work that may simply not be cost efficient for you to carry out for all your clients. This can then allow you to focus on the areas of business where most value can be added such as understanding and supporting the needs of existing and new clients. Who are PPMG? Prudential Portfolio Management Group Limited are the Investment strategists and manager of managers for Prudential in the UK. They are a team of over 50, which includes economists, mathematicians and analysts who are specialists in different areas of the investment world. They control over 154.9 billion of Prudential's Investments, as at the end of June 2015. PPMG manage a range of funds for Prudential and Prudential International. Whilst, at a basic level their job is to provide asset allocation expertise, in practice their remit is far wider. At Prudential we offer a range of multi-asset funds, which benefit from the skills of the team at PPMG and that we think can meet the needs of large numbers of investors. In this guide we ll highlight the knowledge and expertise that PPMG offer. 4 Prudential s Portfolio Management Group (PPMG) :: Adviser Guide

PPMG Approach PPMG control of 154.9 billion (as at end June 2015) of Prudential's Investments PPMG believe in the importance of asset allocation and the key role that multi-asset funds could provide as an investment solution for many investors. Indeed, academic research has suggested that as much as 90% of investors return could be attributable to asset allocation rather than other factors, such as stock selection or timing. PPMG also believe that asset allocation is a specialist skill which should, to avoid conflicts of interest, exist separately from the other investment activities in any fund. PPMG approach PPMG manage our multi-asset funds using a team based approach to reach a consensus house view. They then aim to implement that view as consistently as possible whilst working within the specific requirements that are applicable to different funds for example these could include appropriate solvency management or staying within agreed risk parameters. To help them inform their view, PPMG, as part of the Prudential Group, have access to the skills of a large number of investment professionals both here and around the world. The Prudential group has over 500 investment professionals around the world, investing in 505 billion (as at end June 2015). MAGIM PPMG PPM America M&G RE EI (Hong Kong) EI (Singapore) PPM South Africa PPM = Prudential Portfolio Management M&G RE = M&G Real Estate EI Eastspring Investments MAGIM = M&G Investment Managers PPMG = Prudential Portfolio Management Group Prudential s Portfolio Management Group (PPMG) :: Adviser Guide 5

PPMG approach continued The following are some of the factors that PPMG consider. > Minimise reliance on economic forecasting PPMG s experience is that for forecasting approaches to work systematically, a manager's forecasts would need to be superior to those of the market as a whole on a consistent basis and this is very difficult to achieve. > Look for irrational behaviour They do believe some things are more reliable than economic forecasting, notably the propensity of investment markets driven by human beings to suffer identifiable and irrational miss-pricing phases or "episodes". This belief is rooted in behavioural finance, and works because of human nature's reaction to fear, greed and tendency to make judgements looking backward rather than forward. Their process centres on an objective analysis of market levels compared to the known facts and stated opinion regarding underlying fundamentals. They then employ subjective interpretation to help identify when an apparent dislocation between a market level and the known fundamentals has arisen from nothing more than a "behavioural episode". Examples of such episodes are the extreme excesses of equity market levels during the late 90's TMT bubble (driven by greed), or the slump in valuations of Corporate Bonds during the credit crunch (driven by fear). > Take a long-term approach Throughout, PPMG take a long term and rational view an approach which has sometimes set them apart from the crowd in terms of where they are investing, and which has demonstrably delivered over the history of our long standing With-Profits fund. > Fund management During their ongoing management of many of these funds the PPMG will consider the longer-term strategic positions based on their current market views, and in line with set risk targets. These views can be at several levels for example on a real versus nominal asset level, on a geographical basis or, for fixed interest, between sovereign or corporate debt. > Asset-liability management Within PPMG the Capital Management Team provide insight into the optimal asset allocation for the With-Profits and annuity funds after taking account of the constraints posed by the nature of the liabilities and capital regulations. Their work involves combining actuarial knowledge of liabilities with quantitative finance and Monte Carlo techniques to build models representing the interaction between assets and liabilities. These models provide input into the optimal investment strategy. What does this mean for our funds? All our PPMG managed funds benefit from their range of knowledge and skills. PPMG apply their asset allocation decisions to Prudential s multi-asset funds as appropriate for that fund. The level of latitude they have in changing asset allocation positions depends on many factors such as the risk level that can be taken by each fund and, where applicable, appropriate liability management. 6 Prudential s Portfolio Management Group (PPMG) :: Adviser Guide

Governance Governance internal funds Whilst PPMG make use of the global investment expertise, described on the previous pages, to inform their asset allocation views, they also have the role of monitoring and managing those same Prudential Group investment experts. In this respect PPMG undertakes the manager of managers role for our Prudential Group funds, and over the years they have built a thorough and effective governance framework. This not only fulfills a key role within the Prudential Group, but this also gives them a unique level of insight into the day to day work, skills and views of these Prudential Group investment experts. Controls 1. Compliance and limit monitoring (Frequency Daily) Where PPMG create a fund mandate which includes specific limits (e.g. an equity fund should hold no more than 5% in cash), then these limits are monitored for breaches daily, with PPMG reviewing any breaches monthly. 2. Best practice monitoring (Frequency Monthly) Notwithstanding whether daily limits are being breached or not, PPMG looks at key exposures in funds on a monthly basis to see if there's anything untoward going on. For example, whilst they set a cash limit of 5%, as explained above, they will be interested if a manager is sitting at 4.99% for a very long period of time and ask them about it. This monthly process, results in a number of conversations, around focus, approach and existing holdings, between PPMG and the underlying managers. 3. Performance review (Frequency Quarterly) PPMG also have quarterly meetings (in person for those based in London, and by phone or video conference for those overseas) for managers to present on standard topics such as the performance being achieved, key risk positions and changes in holdings over the quarter. 4. Investment due diligence (Frequency Annual) For our key fund managers, where the largest sums of money are invested, PPMG have an in-depth process to review their approach to running money on an annual basis. Previously this has been solely site visits; however from 2011 onwards they will be doing alternate years of: > Site visits face to face interviews carried out by two PPMG representatives.this leads to comprehensive feedback to the asset management company. > Questionnaire this requires fund managers to evidence what they do and why in full written format, and allows PPMG to review processes in a different way to site visits. The frequency of visits and questionnaires to fund managers with lower funds under management (e.g. South Africa), will not always be on an annual basis. Prudential s Portfolio Management Group (PPMG) :: Adviser Guide 7

Governance internal funds continued PPMG have governance responsibility for each of these Prudential Group fund management companies, and they in turn manage the stock selection for underlying internal funds used by PPMG in our multi-asset funds. PPMG Governance M&G Eastspring Investments PPM America M&G Real Estate And other available options UK & Euro Equity UK & European Bonds Asian Equities Asian Bonds American Equities American Bonds UK Property International Property Stock Selection Governance external funds Other PPMG managed funds use Morningstar OBSR, to select and recommend funds to be held. PPMG review Morningstar OBSR's approach to researching and recommending external funds annually. For our Dynamic Portfolios, where PPMG decide the asset allocation but use external managed funds selected and recommended to them by Morningstar OBSR, then it s Morningstar OBSR that provide the governance control for the funds being invested in. Morningstar OBSR regularly meet fund houses and managers to review over 2000 funds Around 250 are given Fund Ratings or are recommended by Morningstar OBSR Around 20 are used in each portfolio based on Morningstar OBSR recommendations to PPMG What does this mean for our funds? Where the underlying funds being used are from Prudential Group fund managers (e.g. for PruFund), then they benefit from PPMG's extensive governance oversight of these managers. However, where funds use underlying funds and fund managers that are external to the Prudential Group (e.g. Dynamic Portfolios), we recognise that this overview is better served by a company with an existing approach and access specially designed for third party funds. We have contracted Morningstar OBSR to carry out this third party fund oversight on our behalf. For both groups of funds, PPMG are responsible for asset allocation, and all funds benefit from the insight and input PPMG receives from Prudential Group's fund managers around the world. 8 Prudential s Portfolio Management Group (PPMG) :: Adviser Guide

A team based approach The teams that contribute to PPMG PPMG believes that investment success should be built on clear philosophy, demonstrable processes and a team based approach. They believe that this will not only deliver superior returns, but also provide greater continuity and dependability. As such, PPMG runs funds as a team, and they are decidedly not a "star fund manager" culture. Portfolio Management Group Financial Modelling Team Experts in understanding the interplay between investment markets, and how investment markets and fund liabilities may interact. Responsible for producing the assumptions and economic scenarios upon which Prudential Group s solvency position is assessed, and which are used to inform the Strategic Asset Allocation decision. Portfolio Management Team The Portfolio Managers and their assistants are responsible, day to day, for the running of Multi-Asset funds, including the management of cashflow, regular interactions with the fund managers of Prudential Group, and reporting to the relevant oversight committees within Prudential. Business Development Team This team are responsible for operations, governance, analysis and efficiency management for Prudential s unit linked and collective fund businesses. Including both funds managed by our internal managers and those managed by third parties. Risk and Oversight Team Responsible for collating the data to enable PPMG s monitoring of the Group s asset managers. Also responsible for ensuring that the procedures and controls operating within PPMG itself are sound, and that appropriate standards of documentation are maintained. Prudential Group s Asset Managers around the world Prudential s Portfolio Management Group (PPMG) :: Adviser Guide 9

Some examples from our multi-asset fund range The following are some examples of funds from our multi-asset fund range. Further PPMG multi-asset funds are available, including versions of the funds below from Prudential International that offer different currency options. Prudential Funds With-Profits Optimum Bonus 45/55 3 Optimum Return 62/38 3 With-Profits 62/38 3 3 PruFund Funds** * Asset allocation is as at end June 2015 and may change in future. Real assets include equities, property and alternative assets, whilst nominal assets include fixed interest and cash. ** For each of the PruFund Funds, there is a separate Fund for each of the investment vehicles listed (Life, Pension and International). *** Life version of fund. ^ ISA only. ^^ Capita Financial Managers are responsible for all the regulatory and legal aspects of the OEIC funds. Accordingly OEIC fund names are prefixed with "CF". The asset mixes shown for the funds are the expected position as at 9 September 2015. 10 Prudential s Portfolio Management Group (PPMG) :: Adviser Guide Smoothing mechanism and guarantees Smoothing mechanism and guarantees Smoothing mechanism and guarantees PruFund 0-30 30/70 3 3 3^ Smoothing mechanism PruFund 10-40 46/54 3 3 3^ Smoothing mechanism PruFund 20-55 58/42 3 3 3^ Smoothing mechanism PruFund 40-80 72/28 3 3 3^ Smoothing mechanism PruFund Cautious 31/69 3 3 3 3^ Smoothing mechanism PruFund Growth 62/38 3 3 3 3^ Smoothing mechanism PruFund Protected Cautious 31/69 3 3 3 Smoothing mechanism PruFund Protected Growth 62/38 3 3 3 Distribution Funds Managed Distribution 65/35*** 3 3 High Yield Managed Distribution Dynamic Focused Portfolios Dynamic Focused 0-30 Availability Approximate Real/Nominal asset split* Life Pension International 28/72 3 OEIC /ISA Fund Platforms Portfolio 28/72 3 3 3 3^^ 3 Dynamic Focused 10-40 Portfolio 42/58 3^^ Dynamic Focused 20-55 Portfolio 56/44 3 3 3 3^^ 3 Dynamic Focused 40-80 Portfolio 70/30 3^^ Dynamic Focused 60-100 Portfolio 84/16 3^^ Additional Features and guarantees Smoothing mechanism and guarantees Natural income on Life version Natural income on Life version Range of risk targeted funds

Prudential Funds Dynamic Portfolios Availability Approximate Real/Nominal asset split* Life Pension International OEIC /ISA Fund Platforms Dynamic 0-30 Portfolio 30/70 3 3 3 3^^ 3 Dynamic 10-40 Portfolio 46/54 3 3 3 3^^ 3 Dynamic 20-55 Portfolio 58/42 3 3 3 3^^ 3 Dynamic 40-80 Portfolio 72/28 3 3 3 3^^ 3 Dynamic 60-100 Portfolio 88/12 3 3 3 3^^ 3 Additional Features Range of risk targeted funds * Asset allocation is as at end June 2015 and may change in future. Real assets include equities, property and alternative assets, whilst nominal assets include fixed interest and cash. ^^ Capita Financial Managers are responsible for all the regulatory and legal aspects of the OEIC funds. Accordingly OEIC fund names are prefixed with "CF". For more information please talk to your Prudential Account Manager or visit www.pruadviser.co.uk/funds Prudential s Portfolio Management Group (PPMG) :: Adviser Guide 11

www.pruadviser.co.uk "Prudential" is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is also used by other companies within the Prudential Group. Registered office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. INVP11431 09/2015