Multi-asset strategies have been one of the big success stories of recent years, with relatively low overall portfolio management costs when one considers the inbuilt diversification across asset classes, geographical regions, strategies and managers. They come in many flavours and are particularly appropriate for modern uses such as defined contribution (DC) pension schemes default funds – but one may be forgiven for feeling the approach is not entirely new.

“In many ways we are almost going back to the 1980s and 1990s – multi-asset these days is very similar to what we used to do in balanced funds. It’s almost gone full circle,” says Al Denholm, CEO of Prudential Portfolio Management Group (PPMG).

Starting his 30-year career in equities, Denholm moved into multi-asset and was on the asset allocation committee at Scottish Widows in the 1990s. He has been the CEO of PPMG for two and a half years.

“They are very similar in construction in that you have a broad diversity of asset classes and geographic exposures,” he says. The old balanced funds would typically contain equities, fixed income and property as well as domestic and overseas assets. “What is different now is that there is much more thought and science is applied to the allocation to each asset class.”

Balanced funds went out of favour due to the herd mentality that they encouraged and ultimately lost out to the best-of-breed approach of selecting individual managers. “You used to look over your shoulder at your competitors – your job was to be in the top quartile of your peer group. Nowadays, we think independently and really do not look at our peer group at all. We build portfolios by putting the risk / reward objectives of our clients at the centre. Allocations aim to optimise risk/reward, taking into consideration return expectations, volatility, efficient frontiers, cross-correlation and so on. It may look similar but the way they are constructed is very, very different.”

The PPMG approach does not rely on generating economic forecasts more accurately than the market. “We do not spend a lot of time on micro-analysing GDP data points – but we absolutely have a view on things such as whether a consensus is likely to be disappointed or on the attractiveness of a certain asset class. We believe in having a view in terms of short and long-term expected returns.”

At the moment, Denholm says that his portfolios (of which there are many, each with their own specific objectives) are generally at near-historic highs in terms of equity allocations. He considers government bonds to be the most overvalued asset class with equities relatively better priced and property “quite good value with an attractive yield”.

PPMG manages £170bn of assets, with over 90% of assets managed by Prudential Groupentities (M&G, PPM America, Eastspring Investments). “The reality is that using internal managers has worked very, very well for us over the years,” he says.

The remainder is mainly with thirdparty alternatives managers. “Alternatives – hedge funds, private equity, infrastructure – make up a larger proportion of our portfolios now than they have historically, up to 6-7%. And, we also have more in overseas assets than we have ever had.” A team of eight, that selects third-party hedge fund and private equity managers and “runs a multibillion pound portfolio,” reports directly to Denholm.

One of PPMG’s flagship funds has an annualised return of 7.8% over twenty years against its peer group average of 6.8%. “The attribution of that 100bps annual outperformance is evenly split between the three arrows in PPMG’s quiver: the underlying managers’ alpha, or stock selection skills, as well as tactical asset allocation and strategic asset allocation.

“I think that is a great result and is testament to the skills of the Prudential Group managers. It is also testament to the value of active management – between a quarter to a third of our outperformance is due to stock selection skill. It is working so I am very happy to use internal managers – it would be a different matter if they were not skillful.”

Perhaps not the flashiest investment house on the street, Prudential’s 150- year lineage and dependable image is one in keeping with the times. It has been instrumental in attracting nearly £100m into the Prudential Dynamic Growth Funds since inception 12 months ago and many billions more into PPMG’s other multi asset funds.