Analysis

Prudential Financial: A Deeper Look at the Performance

Analysis

Prudential Financial is a Fortune 500 company based out of Newark, New Jersey. Traded on the New York Stock Exchange (NYSE: PRU), Prudential Financial employs over 49,000 people across 40 countries. Their services include insurance products, wealth management, fund management, and retirement plan solutions. As of the end of the Q3 2017, Prudential had close to $1.3 trillion in assets under management and $3.7 trillion in gross life insurance. 

Its roots date back to 1875, when insurance agent John Fairfield Dryden set up its operations in Newark. According to its own home page, "Prudential was the first insurance company to extend life insurance policies to the general public." But a lot has changed since 1875. As with most financial companies who started out with a single service such as banking or insurance, Prudential has extended its reach into almost all financial service offerings.

Like the fate of many of the largest financial institutions that adopted the same business model, the performance associated with the fund management arm of their business has not delivered added value to investors. We have taken a deeper look at the performance of several other actively managed mutual fund companies and hedge funds and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can read our previous reviews by clicking any of the links below:

Controlling for Survivorship Bias

It is important for investors to understand the idea of survivorship bias. While there are currently 53 strategies offered by Prudential, it doesn't necessarily mean that these are the only strategies that Prudential has ever managed. In fact, there is 1 fund that no longer exists. This can be due to a variety of reasons including poor performance or being merged with another fund. When making conclusions about performance, it is important to include funds that no longer exist.

Fees & Expenses

Let's first examine the costs associated with their current strategies (53 total). It should go without saying that if investors are paying a premium for investment “expertise,” then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, as well as 12b-1 fees. These are considered the “hard” costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities due to short term and long term capital gains distributions relative to those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 53 active funds offered by Prudential that have at least 3 years of complete performance history. Of the 53 total strategies, 49 have at least 3 years of performance history. On average, an investor who utilized an equity strategy from Prudential experienced a 1.21% expense ratio, a 0.84% 12b-1 fee, a 5.50% max front load, and 3.86% max deferred load for those strategies that have 12b-1 fees, front loads, and deferred loads associated with them.

Similarly, on average, an investor who utilized a fixed income strategy from Prudential experienced a 0.83% expense ratio, a 0.47% 12b-1 fee, a 4.06% max front load, and a 5.00% max deferred load for those strategies that have 12b-1 fees, front loads, and deferred loads associated with them. These expenses can have a substantial impact on an investor’s overall accumulated wealth if it is not backed by superior performance.

The average turnover ratio for the strategies offered by Prudential was 74.28% for their equity strategies and 122.31% for their fixed income strategies. This implies an average holding period for each position of about 10 to 16 months. It is safe to say that Prudential makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor, but is definitely embedded in the overall performance. In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term.

You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Deferred Load Max Front Load Global Category
Prudential Emerging Mkts Dbt Lcl Ccy Q EMDQX 196.00 0.88       Emerging Markets Fixed Income
Prudential Core Short-Term Bond PBSMX 29.00 0.03       US Fixed Income
Prudential Muni High Income B PMHYX 39.00 1.12 0.50 5.00   US Municipal Fixed Income
Prudential National Municipals B PBHMX 17.00 1.09 0.50 5.00   US Municipal Fixed Income
Prudential CA Municipal Income A PBCAX 20.00 0.92 0.25   4.00 US Municipal Fixed Income
Prudential Core Bond Z TAIBX 224.00 0.45       US Fixed Income
Prudential Total Return Bond A PDBAX 102.00 0.76 0.25   4.50 US Fixed Income
Prudential Corporate Bond Z TGMBX 165.00 0.55       US Fixed Income
Prudential Government Income B PBGPX 759.00 1.77 1.00 5.00   US Fixed Income
Prudential Short Duration Muni Hi Inc Z PDSZX 70.00 0.60       US Municipal Fixed Income
Prudential Short-Term Corporate Bd A PBSMX 51.00 0.77 0.25   3.25 US Fixed Income
Prudential Short Dur Multi-Sect Bd Q SDMQX 66.00 0.60       US Fixed Income
Prudential High-Yield B PBHYX 28.00 1.32 0.75 5.00   High Yield Fixed Income
Prudential Absolute Return Bond Q PADQX 38.00 0.84       Other Fixed Income
Prudential Global Total Return A GTRAX 86.00 0.88 0.25   4.50 Global Fixed Income
Prudential Jennison Global Infras Z PGJZX 82.00 1.25       Other Sector Equity
Prudential Jennison International Opps Z PWJZX 65.00 0.90       Global Equity Large Cap
Prudential QMA International Equity Z PJIZX 114.00 1.16       Global Equity Large Cap
Prudential Jennison Global Opps Z PRJZX 88.00 0.95       Global Equity
Prudential Growth Allocation Z JDGZX 24.00 1.27       Aggressive Allocation
Prudential Jennison MLP Z PRPZX 37.00 3.02       Energy Sector Equity
Prudential Income Builder Z PDCZX 90.00 0.70       Moderate Allocation
Prudential Conservative Allocation Z JDAZX 25.00 1.09       Cautious Allocation
Prudential Real Assets Z PUDZX 99.00 0.93       Moderate Allocation
Prudential Moderate Allocation Z JDMZX 20.00 1.17       Moderate Allocation
Prudential Balanced Z PABFX 230.00 0.93       Moderate Allocation
Prudential Jennison Conservative Gr A TBDAX 246.00 1.28 0.30   5.50 US Equity Large Cap Growth
Prudential Jennison Growth A PJFAX 36.00 1.03 0.30   5.50 US Equity Large Cap Growth
Prudential Jennison 20/20 Focus Z PTWZX 73.00 0.90       US Equity Large Cap Growth
Prudential Jennison Blend B PBQFX 53.00 1.68 1.00 5.00   US Equity Large Cap Growth
Prudential Jennison Focused Growth Z SPFZX 58.00 0.99       US Equity Large Cap Growth
Prudential Jennison Equity Opportunity Z PJGZX 59.00 0.77       US Equity Large Cap Blend
Prudential QMA Large-Cap Core Equity Z PTEZX 89.00 0.48       US Equity Large Cap Blend
Prudential Jennison Equity Income C AGOCX 48.00 1.91 1.00 1.00   US Equity Large Cap Blend
Prudential QMA Defensive Equity Z PDMZX 96.00 1.05       US Equity Large Cap Blend
Prudential Jennison Value B PBQIX 29.00 1.82 1.00 5.00   US Equity Large Cap Value
Prudential QMA Strategic Value Z SUVZX 126.00 0.82       US Equity Large Cap Value
Prudential Jennison Small Company B CHNDX 37.00 1.84 1.00 5.00   US Equity Small Cap
Prudential QMA Small-Cap Value Z TASVX 72.00 0.73       US Equity Small Cap
Prudential Jennison Mid-Cap Growth Z PEGZX 24.00 0.76       US Equity Mid Cap
Prudential QMA Mid-Cap Value C NCBVX 87.00 1.95 1.00 1.00   US Equity Mid Cap
Prudential Financial Services Z PFSZX 68.00 1.12       Financials Sector Equity
Prudential Jennison Health Sciences Z PHSZX 25 0.87       Healthcare Sector Equity
Prudential Jennison Utility B PRUTX 47 1.55 1 5   Utilities Sector Equity
Prudential Global Real Estate Z PURZX 80 0.94       Real Estate Sector Equity
Prudential Jennison Natural Resources B PRGNX 28 1.95 1 5   Natural Resources Sector Equity
Prudential US Real Estate Z PJEZX 122 1       Real Estate Sector Equity
Prudential Floating Rate Income Z FRFZX 67 0.7       US Fixed Income

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Prudential’s “expertise.” We compare each of their 49 strategies that have at least 3 years of performance history, which include both current funds and funds no longer in existence, since inception against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

  • 55% (27 of 49 funds) have underperformed their respective benchmarks or did not survive the period since inception.
  • 45% (22 of 49 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha
  • 2% (1 of 49 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes

It is safe to say that the majority of funds offered by Prudential have not outperformed their Morningstar assigned benchmark. The inclusion of the statistical significance of alpha is key to this exercise, as it indicates which outcomes are due to a skill that is likely to repeat and those that are more likely due to a random-chance outcome. We also expect 1 out of every 40 funds to have a positive t-stat at a level of 2 or greater just by random chance alone. The fact that Prudential has 1 out of 49 of their funds with a statistically significant alpha does not give us a lot of confidence that this is a true act of skill or that Prudential, as a whole, can consistently offer funds that can produce a statistically significant alpha.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indices assigned by Morningstar, then we may form a false conclusion that Prudential has the “secret sauce” as active managers. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio. Let alone the fact that the style attribution of a fund often changes over time (see Step 6: Style Drifters).

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based funds from Prudential that have been around for the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for the multiple Betas that we know are being systematically priced into the overall market. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2016. As you can see, of the 10 funds that met the criteria, 0 produced an alpha that was statistically significant at the 95% confidence level (green shaded area). In fact, the majority of the funds had a negative alpha after controlling for market, size, and relative-price risk factors. Why is this important? It means that any perceived alpha that these strategies have over their Morningstar assigned benchmark can simply be explained by the differences in risk factors between the fund and the Morningstar assigned benchmark. If we wanted to simply replicate their risk exposure, we could do so more cost effectively through the use of index funds. Given the lower costs associated with index funds, we could have more confidence that we will experience a more desirable result compared to more expensive actively managed funds.

Conclusion

Like many of the other financial institutions, a deep analysis into the performance of Prudential has yielded a not so surprising result: active management is likely to fail the majority of investors. We believe this is due to market efficiency, costs, and increased competition in the financial services sector. As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold, and rebalance a globally diversified portfolio of index funds. 

Below are the individual alpha charts for each one of the currently available Prudential funds. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.
The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.