OPEC Fights Against History, $1 Trillion Money Manager Says

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  • PGIM’s Hunt sees long-term trend pressuring oil prices
  • Pension managers need realistic expectations, he says

Investment Strategy of PGIM's $1 Trillion Money Manager

David Hunt, chief executive officer of PGIM, Prudential Financial Inc.’s $1 trillion asset manager, cautioned against overreacting to the surge in oil prices as OPEC clinched a deal to curtail supply.

“For us who are long-term investors, we tend to look at the group of people who are gathering in Vienna and say ‘they’re fighting against history,’ ” Hunt said Wednesday in a Bloomberg Television interview. “The costs of producing crude, largely due to fracking technology, has dramatically changed the marginal economics of oil.”

Brent crude jumped 8.2 percent to $50.19 at 4:19 p.m. in London as the Organization of Petroleum Exporting Countries’ three biggest producers -- Saudi Arabia, Iraq and Iran -- resolved differences over sharing the burden of cuts to rein in supply for the first time since 2008. Still, it trades for less than half the price from mid 2014.

Hunt’s PGIM unit invests for clients including pension funds, and he said it’s important to have a long-term view. That means taking into account that the price of crude “is not going back to where it was,” regardless of current negotiations, he said. Such a realization should influence investors’ approach to oil-importing nations such as Japan and India, and to industries like airlines that are huge consumers of fuel, he said.

The money manager also focused on the big picture in the broad U.S. stock market, saying that investors should guard against excessive optimism after voters selected Donald Trump as president. Equity indexes have rallied since the election.

Lower for Longer

“The market seemed to really want to focus on the pro-growth and pro-business aspects of a Trump agenda, but not necessarily as much on some of the risk,” he said, citing the possibility of trade embargoes, tariffs and disruptions tied to the president-elect’s immigration policies. “The markets have been very optimistic in their interpretation of political risk and to some extent currency risk. And we would say those two are yet to play out in a fairly big way.”

Hunt’s remarks build on a statement that he made in May that the search for 10 percent returns can be dangerous. He said Wednesday that “the lower-for-longer prediction that we’ve been out with for a number of years will continue.”

Pension View

This means that managers of pension funds need to avoid overly aggressive assumptions about investment returns when determining how much to set aside for retiree obligations, according to Hunt. He said that many programs for government employees have failed to meet the standards of the private sector and bet too much on risky assets.

“Many corporate plans have, over the last number of years, been more realistic about the returns that they can earn,” he said. “They’ve also valued their liabilities in a more realistic way.”

The surge in bond yields after the presidential election could provide a boost.

“With the kind of Trump trade that we’ve seen over the last month, there is reason for optimism that some of those funding levels that we’ve seen in corporate land will actually rise," Hunt said.