PGIM CEO on Fed tapering, state of play for economic recovery

David Hunt, PGIM CEO and President, joins Yahoo Finance Live to discuss the Fed’s taper plans, outlook for rate hikes amid the pandemic and what trends investors find attractive in late 2021.

Video Transcript

BRIAN SOZZI: The market continues to hover around record highs, even as investors digest the daily dose of concerns ranging from the Delta variant to a looming Fed taper. So what should your playbook be like next? Let's welcome in PGIM President and CEO, David Hunt, for more insight into just what your playbook should be.

David, good to see you this morning. As someone who leads a company managing $1.5 trillion in assets, how concerned are your clients about a potential Fed taper?

DAVID HUNT: Well, Brian, good morning. Good morning to you. Without a doubt, our clients around the world are watching the Fed very closely. Because the dominant feature of the landscape today in investing is it's never been more punitive to hold cash. So we have negative real rates right around the world. And that is driving a hunt for yield into risk assets, the likes of which we really haven't seen much before.

But everybody knows that does depend on rates staying low. So that's what brings this incredible focus to the Fed. Now, there's been a lot of people who've been following the inflation measures. I think that's largely a waste of time. There's more noise than signal.

What people should really be focused on is the labor market. And that's why this meeting in Jackson Hole this week is so important, so we begin to understand how the Fed is thinking about how much of a cure to the labor market have we seen.

BRIAN SOZZI: And David, you're right on the mark. In this market rally the past year from those lows when the pandemic was really taking hold, it has been really liquidity driven, really driven by low rates. Why do you think we won't see a real shift in market sentiment when the Fed tapers? Because theoretically, that might send rates higher.

DAVID HUNT: Theoretically, it could. Although I think I could make a very good argument that actually even with the tapering, and even with some rise in rates, we may not see much of a move in long term rates at all. I think what people don't realize is that there is an enormous amount of liquidity out there-- not just here in the United States, but all around the world.

And so, when we do see rates rise here in the US, we see pretty dramatic flows coming in from Europe, from Japan, from Asia, which then kind of caps how much rates can really rise. So our view, is even as we come back from this pandemic, we will have lower rates for longer. And that's not dependent really on central banks. That is because we have a fundamental imbalance in our liquidity profile.

JULIE HYMAN: David, it's Julie here. As you pointed out in your note to us, you guys-- in addition to the amount that you guys manage in equities and fixed income-- you also have a sizable alternatives business, $259 billion. And a lot of that has been driven by this search for yield in a low yield environment.

Now, given what you're saying about rates not going up by much, I assume that there then won't be necessarily a spillover effect into those alternatives. Because if rates do go up, one would think that there would be a shift in asset allocation.

DAVID HUNT: Well I'm really glad that you raised that, Julie, because it's a great point. Alternatives have been one of the fastest growing asset classes out there over the last decade. And PGIM is the third largest player in that market globally. And what we've seen, anyway, is that our clients are becoming much more sophisticated about the range of asset classes that they manage. I mean, think back 15 years ago, people really were just using stocks and bonds. And now you've got significant allocations to private equity, to private credit, to infrastructure, to real estate.

And that wall has made for a much more balanced and more diversified portfolio with a better risk return characteristic. And we think that trend will absolutely continue over the next decade.

MYLES UDLAND: And David, I almost wonder, though, if on the flip side, if that leaves more opportunities in the traditional asset classes. Like as everyone sees shiny new objects and equity and private equity, and so on and so forth. And a story in Bloomberg, I think just yesterday, about the return of hedge funds, and maybe good old fashioned stock picking has a place with everyone looking at a broader suite of asset classes.

DAVID HUNT: Well, I think it's a great point. And I don't think that there's ever not been a time when people who are really good at choosing stocks have not had an important role to play. I mean, active managers do well when we have the kind of dispersion that we've had over the last year. And indeed you've seen active management have a very strong year, even as overall markets have also risen.

So I do think that there's always a place, whether or not it's stocks or bonds, for really outstanding security selection, and certainly something that we are betting on fully as an active manager.

BRIAN SOZZI: And David, really, there's-- over the past two years, there's been a lot of consolidation in your industry as some of these acquisitions and mergers, now that they've been digested, has this been good for the industry or bad?

DAVID HUNT: So I think it's been pretty much of a mixed bag, to be honest with you, Brian. I think that at the end of the day, the most important thing that we deliver to our clients is investment performance. And a number of the mergers that have happened have happened amongst players who have kind of had pretty average to middling investment performance. And putting two firms together that don't have great performance does not generally lead to one that has great performance.

And so those have really suffered, even while they have been able to really take out costs and maybe improve margins. But at the end of the day, our business is a fiduciary business and it's driven by our ability to generate excess returns, not about whether we can squeeze an extra couple of basis points out of the cost base. And I think that's the most important thing to look at when you're looking at whether M&A will create value-- what does it do for the investment capability.

BRIAN SOZZI: Well said. We'll leave it there. PGIM President and CEO, David Hunt, good to see you. We'll talk to you soon.