David Hunt, who oversees more than $1-trillion as head of Prudential Financial Inc.'s PGIM asset manager, said his firm needs to focus on active investing and must not be seduced by the flood of money into passive strategies.
"We really looked at whether or not we should get into the passive business, and we came back clearly with the answer of no," Mr. Hunt said Tuesday at a presentation by New Jersey-based Prudential. "It was a low-margin business that we didn't see how we had anything special to offer to."
Mr. Hunt is adjusting to the growing popularity of index investing, where savers look for the lowest-fee products that track broad baskets of securities. U.S. investors poured about $666-billion into passive mutual funds and exchange traded funds in the 12 months through April while withdrawing a net $304-billion from actively managed funds, according to Morningstar. Even billionaire Warren Buffett has said that most people are better off with a Vanguard Group stock index fund than trying to generate alpha, or market-beating returns.
While the growth of passive managers like Vanguard has forced retrenchment in the industry, with active managers Janus Capital Group Inc. and Henderson Group Plc combining last week, Mr. Hunt has pursued a different approach. Prudential has recruited from Wall Street firms like Goldman Sachs Group Inc. and BlackRock Inc. to help attract business and has used smaller deals to expand in niches or geographic regions, like when he acquired a business from Deutsche Bank AG in India.
Real Estate, Debt
The asset manager has had positive inflows every year for more than a decade among both institutional and retail investors. Mr. Hunt said one key is to look beyond stocks and focus on holdings like real estate and private debt, where it may be easier for an asset manager with scale and a long time horizon to spot unique opportunities.
"These areas really haven't seen the same kind of fee pressure," he said.
While PGIM has a substantial mutual fund operation, it also caters to institutional investors, serving 23 of the largest 25 U.S. corporate pension plans. More than 75 clients have invested at least $1-billion with Mr. Hunt's unit, according to a company slide show Tuesday. Pretax adjusted operating income from asset management climbed to $787-million last year from $584 million in 2012.
Mr. Hunt said that many investors who allocate funds to passive strategies still want a diversity of holdings. PGIM also offers quantitative strategies, which rely on mathematical models to pick securities, and more than three-quarters of the company's assets under management beat their benchmarks, according to the slide show.
"Fundamentally, we think that alpha will return to active-equity managers," Mr. Hunt said. "We've seen this come in cycles before."
Prudential, the second-largest U.S. life insurer, also highlighted its strength in the business of taking on retirement obligations for large employers. The company has won the largest deals in the pension-risk transfer market, including 2012 transactions with General Motors Co. and Verizon Communications Inc.
Phil Waldeck, president of the retirement operation, said he hasn't found as many opportunities this year, partly because competitors including Athene Holding Ltd., Securian Financial Group and London-based Legal & General Group Plc have been expanding in the U.S. market. He said Prudential's preference is for "jumbo" transactions, when the economics are right.
"What we've walked away from are either industry or liability mixes that we find, on a relative basis, to be less attractive," he said.