Prudential Gives ABCs of Investing During Market Turmoil

Prudential Gives ABCs of Investing During Market Turmoil
Feb 23, 2009
By: Barbra Murray, Contributing Editor, Commercial Property News

The current market can be a feast for those entities that still have funds on hand, and institutional investors are among the few. For them, this turbulent market is a fertile ground for opportunity but, according to a new report by Prudential Investment Management, certain steps must be taken to achieve maximum results.

The report was released the same week as a Jones Lang LaSalle report that claimed the investment market will soon be rife with bargains available to firms with capital to spend.

Most Institutional investors have a leg up on certain other investment vehicles like, for example, REITs--the Morgan Stanley REIT index plummeted 38 percent during 2008--because the majority of them did not rely heavily on leverage and, therefore, are not forced to sell large chunks of their portfolios for far less than they would have commanded two years ago. Alas, prospects are abundant.

As outlined in the PIM report, "Turbulent Markets: Challenges and Opportunities for the Institutional Investor," the first step to be taken toward successfully capitalizing on today's market mayhem is the reassessment of portfolio strategies. In the case of plans with liabilities that exceed assets, a decision must be made whether to invest aggressively in order to eliminate funding gaps, or focus on liability-driven spending as a means of reducing risk. Alternatively, fully funded plans have the option of pursuing liability-driven investing, which would lessen potential volatility down the road.

The next step calls for the fortification of risk management tools. Specifically, institutional investors should broaden scenario analysis to take into consideration previously unimagined risk factors, such as those that led to the current market situation. Additionally, they would be well advised to strengthen credit risk evaluation and avoid relying on rating agencies and fixed-income markets, which, when liquidity has vanished, do not supply information that can normally be culled from market prices.

Finally, the report turns the spotlight on the management factor, advising institutional investors to put in place a diverse group of internal and external managers with deeper and broader levels of expertise. Also of great importance in terms of managers is enhanced transparency. "The days of 'trust me' fund-raising are surely at an end, and managers unwilling or unable to provide insight into their investment process and positions will be at a disadvantage," PIM CEO Charles Lowrey noted in a prepared statement.

PIM is the investment management arm of Newark, N.J.-headquartered Prudential Financial Inc. and, as of the close of 2008, boasted a multi-faceted management portfolio valued at $395 million.