David Hunt on The Future of Asset Management, Strategy & Growing AUM

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Joseph Cass

Welcome back to Fixed Income in 15. Today, I'm talking to David Hunt, CEO at PGIM, and Maria Melendez, Global Head of Strategy at S&P Global Ratings. Today, we're talking strategy, how to grow an asset management business and the future of the financial industry. So a quick reminder that the views of the external guests are theirs alone, and they do not represent the views of S&P Global Ratings. Okay. Great. Let's kick off. David, would you be able to give us an overview of your career thus far, going into how your prior experience is informing your current role as President and CEO at PGIM.

David Hunt

Sure. And greetings to everyone. And Joe, it's great to be with you today. I think the most important thing about my background is that it was spent outside the United States. So I started out fairly early on. I lived in both Hong Kong and Singapore. I lived in Tokyo for a bit in my 20s. I still remember traveling all through China back before many of the roads were paved and they used to have the big black Russian-built limousines for all the government officials.

And now when you arrive, obviously, in Shanghai, you have quite a different view. In my 30s, I worked in Europe pretty extensively. I worked in Paris for a while. I worked in the U.K. before moving back to the U.S., where I was brought up in the 2000s. I spent 22 years at McKinsey & Company, the management consulting firm. I ran the securities practice, I ran the asset management practice. And then in 2011, I left McKinsey to join PGIM, the global investment management business of Prudential.

So I think that a lot of my comments today will be about globalizing the business and building out in new markets. And I do think because I have spent a lot of my life living in many of those markets is something that I have a lot of passion about.

Joseph Cass

Great. So Maria, could you let us know what you're doing at S&P Global Ratings, what you define as strategy and what that means for you on a day-to-day basis?

Maria Melendez

Sure, Joe. So I lead the strategy team for S&P Global Ratings, and I facilitate the end-to-end strategy process for the division. So that includes looking at things like market and competitive intelligence, partnerships and M&A, strategy formulation, analytics and performance measurement and working with colleagues on the assessment of strategic risk.

In terms of what is strategy, how I define it, to me, my basic definition is that strategy is a set of choices that you have to make in order to achieve your goals. And so for simplicity, I generally think about that in two categories. One is the business strategy and the other is organizational strategy. And it's very, very critical that these two things be in alignment.

So starting with business strategy, that's what you typically expect to hear a strategy. So what markets and customer segments you serve, what products, your position in the market, et cetera. The organizational strategy is how you organize the resources of the company to best deliver on these products and services, what capabilities need to be built, how do you maintain them?

How do you really achieve and sustain competitive advantage in terms of what you're doing? And so what that means is for me, sort of in charge of both sides of it and helping to facilitate that for Ratings is that my day-to-day is very varied. Like many of us, I spent most of my day in meetings. But one day, I may be looking at externally, how markets are evolving, looking at the future, how it may be impacted by things like decentralized finance.

The next meeting, I'd be looking to understand how we can align on objectives and priorities to deliver on our strategy and what sort of technology capabilities we may need to build and align on.

And then maybe brainstorming how we communicate strategy to employees to make sure there is that excitement within the organization. So in short, I would say every day is different, and that's what makes it very interesting and exciting.

 

Joseph Cass

Great. Great stuff. So David, what's your current take on the global macro environment, including what you see as maybe the main concerns, threats and also opportunities?

David Hunt

Well, Joe, it's an absolutely fascinating time both in the economy and in the markets. I mean the first thing I would say is that it's remarkable just the diversity that we have now around the globe. In many years after the great financial crisis, actually, most countries were in kind of a slow growth, low inflation, low-rate environment and then to different degrees, but the contours were largely the same. We now find ourselves very differently.

We find places like China are rapidly slowing, but so far have not really had the kind of inflation bite that other places have. Japan, really no inflation to speak of, but still extremely low growth. Europe has had an enormous spike in inflation, largely driven by energy prices and by food. And we really there have seen a real sharp uptick in rates.

And then in the U.S., I would say that we've had certainly a higher inflation and more broad-based inflation actually than Europe. And we have a central bank that has absolutely made it clear that they intend to continue to raise rates until they bring inflation down. So a very different landscape around the world. Personally, I believe that we're headed into a very new regime and that this will not look like the kind of post-GFC regime in the slightest.

We will have continued much more variability by country. We will have higher inflation that does not simply drop down to the 2%. And we will have slightly higher rates, although by historical standards, they'll still probably be pretty low. And unfortunately, I think we are going to go back to a somewhat low productivity, low growth in the real economy world for most of the developed world.

I hope that's too gloomy, but I actually think that is a reasonable starting point for this. So what all that means is that we kind of know what the two- or three-year picture looks like, but it's probably going to be a pretty volatile and bumpy road as we get to that because central banks are going to continue to tighten so long as inflation continues to stay very elevated. And that's going to lead to significant financial stresses and to volatility in the markets.

Joseph Cass

Great. Thanks, David. So Maria, let's just say you just joined a company. On day 1, what are some of the frameworks you're using to help you assess the long-term strategic direction of an organization?

Maria Melendez

Yes. So I think really, when I join a new company, there's a couple of things that I'd like to do. One is I think it's important to talk to people to understand two things. One is what is the company's strategic areas of focus. We talked about what markets they serve, are there in growing markets, mature markets, et cetera? And also what is the sense within the organization of the opportunities. I also like to understand the maturity of an organization's strategy process. And what I mean by that is how does the organization do strategy? And where is there room for improvement?

Again, I think it's important to align on -- as a strategist coming and leading that process, really understanding where I can make a difference in the organization. So I want to maybe by that, talk a little bit about an example. I remember one starting with an organization asking to see their strategy document and getting an Excel file of 200-plus strategic initiatives.

Another organization I joined, I asked what are your strategic initiatives? And I said, well, I'm not sure how to define that. There was no like clear list. And so again, I think in both of these, it was clear that there was a lack of alignment on what the strategic priorities were for the organization. So to me, that is the first thing I do is really try to understand what those are, is their alignment and really understanding how we can drive that alignment going forward.

That kind of experience is very typical in an organization. A lot of organizations formulate strategy through a bottom-up process, sort of cascading up priorities and action plans. And so it's really -- it's important I was sitting at the top to think about how to shift that process. And so how we do that, I think, might be interesting.

So when it comes to shaping the medium- to long-term direction and maturing the strategy discipline, I like to really think about three things. And I try to keep things simple. strategy, it's not that complicated. It's not brain surgery, as I always say. So I ask three questions. One is looking externally, what could markets look like in, let's say, 5 to 10 years, right?

I think some organizations make the mistake of saying, what are my pain points now and how do I fix them? But that's very important from an operational strategy perspective. But more broadly, I think it's important to understand where things are going in the future and set yourself up to achieve that.

So once you have a good sense of where markets are going, understanding what does winning look like for the organization in that future, what are some alternatives and actually choose a path to go down. And then lastly, I mentioned earlier, organizational strategy. So to me, it's very important to understand what are the business and enterprise capabilities that you need to invest in today to be successful and making deliberate decisions around what those are, what time frames you want to achieve those and also what constraints you're under real or perceived.

And that's -- I want to make a point on that last one as well. I think sometimes the real constraint and the perceived constraints might be different. And there may be more perceived constraints than real constraints. And so I think it's important to make sure those are well understood and really what is the organization's room for maneuver.

Joseph Cass

Great. Thanks, Maria. David, can you talk to us a bit about your view of private market investing? So is it an area that PGIM are looking at closely now? And if so, why?

David Hunt

So PGIM is the world's 10th largest asset manager. We have about $1.3 trillion in assets. And those are actually quite nicely balanced across the major kinds of asset classes, fixed income, equity, real estate, private credit. And they're also nicely balanced across client groups. So we have -- our dominant client group is probably institutional investors, but we have probably about 1/3 of our businesses with retail investors as well.

And I offer that just as context because actually, our private markets capabilities are about $250 billion. Most of that is real estate. We're the third largest real estate investor in the world. And we're also one of the largest private credit investors with over $100 billion in assets under management. And this whole area within private alternatives has been one of the fastest growing for us.

And one of the reasons for that is actually that the entire economy is changing how it actually finances itself. So if you go back 20 years, you would find that for the most part, it was the banks who did project finance, middle market lending, infrastructure. It was the consumer finance companies that did aircraft and other kinds of leasing.

Banks after the GFC and because of a lot of the new capital regimes that were put in place have really pulled back from many of these areas. And we don't really have any of the consumer finance businesses that are left at scale. And so into that void has stepped institutional investors in the form of large, mostly private funds, private credit.

And so that's been a very large area of growth for the industry and for us. And we actually think it's now really important because private capital and both LP and GP capital is playing a much more important role in fueling and funding the growth of the economy than it ever did before. And it's much less dependent on the banks, which I think in general is a positive scenario.

Joseph Cass

Great. So David, you joined PGIM as CEO in 2011 when the AUM was around $0.5 trillion mark. So now in 2022, the AUM stands at kind of $1.2-ish trillion. So more than doubled in that time period. So speaking on behalf of any other asset management CEO watching or listening, what strategies have you used to grow the business so quickly?

David Hunt

Well, one thing I would say is that AUM levels are a lagging indicator of success rather than a leading one. And I always caution leaders not to focus too much on AUM. For one thing, AUM can actually be the enemy of investment performance. And so in many ways, it's not so clear to me that your clients are better off just because you are larger, and I'll come back to the role of scale in a moment.

But I think that the most important thing in the investment management industry really can be boiled down to two major themes for a CEO. One is outstanding long-term investment performance -- and the other is a really strong culture and talent machine that really attracts the best and the brightest.

And if you can get both of those things going well, then all the rest of the world will take care of itself. Flows will take care of themselves, growth will take care of themselves, and you will have a robust business. So I always encourage people to focus on the leading indicators. And for me, that's why I start my morning in addition to breakfast with my excess return chart.

I want to know how are we doing. And I follow that religiously. And I care a lot about the attribution of why we're good, why we're bad, why we're wrong and what we can learn from that. And secondly, I care desperately about our people. I care about our culture. I care that we have a culture of meritocracy and inclusion and one where we're getting the very best ideas out of all of our folks. And if I can get that focus on those two things, all good things will happen to earnings and growth.

Joseph Cass

Great. Very interesting. Thanks, David. So Maria, you spent over 15 years in senior positions covering the world of strategy. So whether you're a CEO like David or you used to work on Windows 1 of the McDonald's drive-thru like me, you need to have a strategy to be successful in your role. So how can everyone watching or listening incorporate strategy into their day-to-day role in the most efficient way?

Maria Melendez

Yes. So I think for me, the #1 piece of advice I would give is to be very clear on your goals on what you're actually trying to accomplish, what is the problem you're trying to solve. I think in my experience, people sometimes talk about -- start strategizing or talk about solutions before they've really defined the problem. And I think once you've defined the problem, I would say, make the investment to talk to other people to see how they see the problem.

I think it's important to bring in that diversity of views and you might find that the problem you thought you were trying to solve is not actually the problem that other people think needs to be solved. So I would say, in the day-to-day, it's very easy to grab on to an idea and jump into action.

I think in the long term, it's -- I think it's more efficient to make that investment upfront to really understand and dive deep into what is the actual problem you want to solve, the outcome you want to create and getting alignment around that, I think will pay dividends in the end. So as my first manager used to say, it's really around speed, not haste. So don't be too hasty in driving forward with what you're trying to do, but just make sure that you've considered the angles.

David Hunt

Yes. I think, Joe, I think that's a really important point and just maybe to build on that. I think that one of the things about being an active manager is that you need to have a culture that supports non-consensus views and does that for a long period of time, right? If all we wanted to do is have money managers who basically believed in the consensus, then we could just all buy the index and go home.

We get paid for having views that are not in the price and then holding with that sometimes for years, by the way, until they become right or until we finally give up. But having a culture that is actually supportive of people being different from everybody else and having the courage of their convictions and knowing they'll be supported for that is very, very unique.

I mean most large companies actually operate on the other process, which is it's kind of a hierarchy and people kind of get ground down until there's kind of a vague consensus at the top.

And in order for our culture to work, the exact opposite has to be true. We have to have people that have different points of view and that are different than the markets, and they need to have confidence in that. And that's a really special, I think, sauce to at least our culture, and I think all very good active managers.

Joseph Cass

Absolutely. Thank you both. So David, we've seen a lot of consolidation in the asset management industry over the past kind of five years. What do you think the future could look like? And what, in your view, could be the largest disruptive threats to the industry?

David Hunt

So I think consolidation is always a difficult term. I mean, at the beginning of every year, all the investment bankers come out and say there's going to be yet another wave of consolidation in M&A. And unfortunately, it never actually happens that way. The industry has consolidated a little bit, by which I mean the top 20 players have a larger market share than they did 10 years ago. But it's by no means a heavily consolidated industry at all.

And in fact, it remains, I think, very active at the small end that there are many, many small boutique investment firms that have individual strategies who are doing quite well indeed. Thank you very much. So it does not look like the car industry, the steel industry, pick your favorite. But that said, there is clearly a separation of winners and losers that are happening within the industry and certainly in the top end.

And the reason for that is actually client needs. So clients are consolidating the number of asset managers that they want to do business with. They might have done business with 200 five years ago. They now are bringing that down to 100. And they want to go further.

They believe that they are going to be best served by actually working with fewer players, but doing more with them so that they really get the very best performance and they get the kind of risk management that they get with a truly global player. So a lot of the consolidation you're seeing here is being driven by the desire of clients to do fewer firms, but to do more things and more strategies with those fewer firms.

And I think that trend will actually continue, and you will continue to see the separation of winners and losers in the industry. But we're a long way, as I said, from what you would truly say is a consolidated industry, and I'm not sure we'll ever get there.

Joseph Cass

Fantastic. And what about kind of disruptive threats? Did you have any kind of thoughts on that?

David Hunt

Well, without a doubt, the most disruptive threat over the last decade to active managers has been passive. And I think we've seen most of that in the public equities business, but it's also increasingly coming to fixed income. And I think that it's posed a very important challenge to active managers that, hey, if you can't really beat your benchmark after fees, we have a better way of investing for this. And I personally think that, that's a very fair challenge.

I think that active is actually going to continue to grow even from here. And I think what it's done is to force good active managers to take more tracking error, to take more risk and to prove that they, over the long term, can really demonstrably after fees, beat their benchmark. And I think that investors have been well served by that competition, and we welcome it.

Joseph Cass

Great. Thanks, David. So Maria, which individuals from the world of strategy do you look to for integration or guidance? And that could be people very well known in the public eye or personal mentors.

Maria Melendez

Yes. So for me, I do enjoy reading a lot and getting perspectives from different disciplines. I wouldn't say that I'm loyal to one strategist. I really get my inspiration mostly from people I work with every day, whether it could be my manager, peers inside the organization and also peers in other organizations doing similar work.

So for example, I think that I used to be part of this group of strategists who would get together once a year to sort of commiserate around the challenges we had in our organization, sort of working with the business. And as I mentioned, a lot of organizations have very similar challenges in terms of execution or being strategic or really seizing opportunities that everyone agrees exists.

And so really being able to bounce ideas off of peers, looking at best practices and sharing those what works, what doesn't work, I think that's critical. So one piece of advice, I would say, is definitely build that network of peers that you can speak to.

The other thing is to look outside your own discipline. I think that strategy can sometimes be -- it seems very glamorous and there are all these frameworks and tools. And there's a lot we can learn from other disciplines as well. And so one of the things over my -- probably over the past 7 to 10 years, really understanding the intersection between strategy and change. Whenever you're implementing a new strategy, really driving change in an organization.

And so understanding change management and that organizational psychology in a sense, how quickly you can move an organization. All of that, it's really fascinating. I am by no means an expert. But I think that it's definitely worth getting to know the people that are and having them help you.

Joseph Cass

Great. Fantastic. David, tell us what excites you right now about the asset management industry. What do you think is some of the most interesting developments that are taking place today?

David Hunt

Well, Joe, I think it's an absolutely fascinating time to be an active investor. I mean, goodness. We have incredible transition in the economies around the world. We have big questions around globalization and whether that will go forward, backward or look somewhat different. We have enormous changes in technology, which is disrupting supply chain around the world. And then we have big macro forces like what in the world is going to happen with inflation and energy.

And so I think that our jobs at the end of the day is to allocate capital efficiently to new opportunities. And that's actually right now very difficult to work out. And I think that's a challenge that active managers really relish. I think most of us feel that the money we put out over the next 24 months may, in fact, be some of the best returning money that we've put out in a while.

Because remember, we're now going to be moving back into markets that relative to three or four years ago are just a much better entry point. And so while our portfolios may have taken a bit of a hit as we've kind of gone through this rate rise, looking forward for a couple of years, rates are too high, spreads are too wide. And I think this is going to be actually an extremely good time to be an active manager over the next 24 months, and that's a very exciting place to be.

Joseph Cass

Yes. Very interesting. So Maria, prior to S&P, you spent seven years at the Federal Reserve Bank of New York working on strategy. So what were you doing there on a day-to-day basis? How did you find the experience working at the largest and arguably the most influential of the reserve banks?

Maria Melendez

Yes, certainly. So the Federal Reserve Bank of New York is a storied institution. It was truly a privilege to work there. So I was hired into their newly formed strategic planning office. I was asked to take on the build and leading of the strategic planning and evaluation function for the organization.

And so again, that was around end-to-end strategic planning from sort of external environmental scanning, setting objectives, supporting the execution, sort of planning execution, monitoring performance and really understanding based on that performance, how can we improve, how can we get better at planning and improve our performance.

And so that was really fascinating. Again, I've done a lot of roles in my career where I was in sort of a start-up mode within a larger organization. And so I do really like building new things and implementing sort of capabilities inside an organization.

And that was really truly fascinating. How do I find the experience? It was just -- it was really amazing. They were super smart people, such a strong sense of mission and public service. I was truly humbled, I think, being in a room with a bunch of PhD economists and I felt very undereducated even educated.

But it was -- I'm really grateful for that experience. I still keep in touch with some of my former colleagues. It's a great organization. And so just -- I learned a lot there. And yes, just truly a privilege to have been there.

Joseph Cass

Fantastic. David, you mentioned previously, you were at McKinsey for around 20, 22 years, and you were responsible for being a key adviser to leading financial executives across the world. Can you tell us a bit about some of the biggest and some of the most impressive personalities you met along the way?

David Hunt

So this has absolutely nothing to do with McKinsey. But I think that in truth, we've lived through some of the most fascinating times from an economic perspective and from an investment perspective over the last 15 years. And I think as you -- hopefully, all of us try to learn from the past and recognizing that the future will not repeat itself in the same way.

But we have some people who really work through the GFC in a very fundamental way. And I think listening to them and understanding their version of both what happened then and what could go wrong in the future is incredibly important. I mean just think of the perspectives of somebody like Mario Draghi and what he can actually impart to all of us, both from his perspectives as the ECB, but also obviously, more recently in Italy.

Think about -- Maria, you mentioned the federal -- think about Tim Geithner. Think about Ben Bernanke. I mean these are amazing public servants who served us through some of the most difficult times that our country has seen. And they have a lot, I think, to teach us as we think now, oh, boy, are we going to have a period of volatility and what might break going forward? And I think those are the kinds of names and voices that we should tap into as we try to work out the way forward.

Joseph Cass

Absolutely. So David, the last question goes to you. So on this podcast, fixed income and 15, are usually into vas and influential individuals from the world or finance and beyond really. So who would you recommend that I asked to be a guest on a future episode of the show?

David Hunt

So I pick from my previous list. If I were you, I would try to get Draghi. I think that somebody who's sat in multiple seats that he has over the last 15 years and the perspective that he has also from as a European is just incredibly valuable. And I think your viewers and readers will really, really benefit from his perspectives now that he doesn't hold public office anymore.

Joseph Cass

Fantastic. Great stuff. Thank you so much to David and Maria, fascinating discussion for everyone watching and listening, see you next time on fixed income in 15.