Key Investment Themes Shaping 2025 with David Hunt, CEO of PGIM
Willy Walker: Good afternoon and welcome to another Walker Webcast. It is my great pleasure to have David Hunt, the president and CEO of PGIM, join me today. David, let me do a quick bio intro to you and then we'll dive into our conversation, which I've been very much looking forward to. David Hunt is president and Chief Executive Officer of PGIM, a leading global asset manager across public and private asset classes. Before joining PGIM, Mr. Hunt was a senior partner at McKinsey & Company and co-leader of its North American Asset Management Practice. Hunt has served on a variety of nonprofit boards, including Lincoln Center for the Performing Arts, International Rescue Committee, Graham Wyndham, and TOGO Foundation. He is a life member of the Council on Foreign Relations. He earned a bachelor's degree in engineering from Princeton University and an MBA from Wharton. Many people say that I have nothing but Harvard Business School graduates on the Walker Webcast, and I want to underscore that I've had back-to-back Wharton.
David Hunt: Diversity for you is Wharton. That's terrific.
Willy Walker: I had a Wharton grad last week, and I got a Wharton grad this week. I love it. Real insight, David. We're getting some real insight. It's a pleasure to have you with me. Let me start here, David. PGIM manages $1.4 trillion. I remember Alan Greenspan used to say “a billion here and a billion there, and at some point, you have real money.” In your case, it's a trillion here and a trillion there. You're pretty close to having 2 trillion AUM at PGIM. Is that the goal? Is the goal to continue to add AUM at PGIM and go from 1,000,000,000,004 to 2 trillion to 3 trillion?
David Hunt: It's not the goal, but I hope it will be the result. And maybe I can explain a little bit there. I think the most important thing for us as investors is to deliver excess returns to our shareholders and our investors, whether that's through a commingled vehicle or separate accounts. We have as our focus investment excellence. And that's what I start all of our meetings with. I start all of our town halls with that. And that's what I try to keep us focused on. If we do that, we will, of course, generate trust and deeper relationships with clients and we will grow our asset base for sure. But I view that as the outcome of success in investing rather than as the initial goal. It's not at all clear to me that necessarily my getting bigger is in our investors' interests. Because as we all know, sometimes there actually can be a real push and pull between size and investment performance. I focus on investment performance. The other thing I would say is that in our industry, there's never been more of a disparity around what a dollar of AUM brings if it comes through a passive strategy, if it comes through an active equity strategy, if it comes through an opportunistic closed-in real estate fund. Those couldn't be more different. I manage the business on net revenues rather than on AUM. It's a much better way of thinking about what the real inherent economic growth of the business is.
Willy Walker: I find that approach to be A, inspirational, B, insightful, and it has been successful. Was it the same way in 2012 when you joined PGIM? And the reason I ask that, David, is you have so much AUM today at a trillion for that I would assume the difference between 1,000,000,000,004 1,000,000,000,005 1,000,000,000,003, not that big a difference as it relates to overall financial performance. But when you first joined, was the focus still on investment performance? Because it's a field of dreams. If you build it, they will come. You have to have faith that if you build it, they will come. If that was the strategy back in ‘12, you had the faith that if you built it, they would come.
David Hunt: I did. And I will say, and I give the credit to the two people that were the CEOs before me in the 20 years of its history. When I got here, the ethos was investment performance. It has to do also with the alignment that we have with our owner, Prudential Insurance Company. When Charles Lowrey, the CEO of Prudential, calls me and says, “How's it going?” What he means is how's my bloody investment performance? Because you've got a lot of my money as opposed to how much money do you manage? And I think that the alignment of interests which creates this laser focus on investment performance has been there from its inception, which is about 35 years now. And what I think I was able to do was to take that and say, “I can take that focus on investment performance to new markets overseas and also expand the range of asset classes. But the one thing I don't want to change is that focus on ‘we're investors first and our client's interest come first.’”
Willy Walker: You talked, David, about Charles calling you and asking how things are going. How much of your AUM is Pru money versus third-party money that you manage for other investors?
David Hunt: The better way I would say to look at it is how much of my revenue comes because again, this difference between revenue and AUM. Right now, about 18% of the PGIM revenues come from some affiliated Prudential structure, whether that's the general account, the annuities business, or others. We are predominantly a third-party asset manager.
Willy Walker: In 2016, when fixed income was very low, I'm assuming everyone at Pru was working extremely hard to try and get the actuarial tables to work as it relates to the returns on fixed income. Now you have that, if you will, balance sheet it, Pru, kicking off what is relatively very cheap capital. How much of a competitive advantage is that to PGIM today?
David Hunt: I think being part of an insurance group has never been more of an asset than it is today for all the reasons that you described in terms of where we are in the interest rate cycle. But also, I think that we've always benefited from the fact that the general account of Prudential is willing to seed strategies and is willing to invest in new things that Prudential is doing, which, as you know, banks can't do. There's a real advantage to being an insurance-owned asset manager. In addition, what we found is that there's a whole new set of technologies that are allowing us to take advantage of reinsurance. The insurance industry overall is constrained in capital. And what you've seen us do and many others is actually to use reinsurance to bring third-party capital in. And then we are the asset manager that sits behind that reinsurance contract. And that's what the Apollos, KKRs, and others have been doing. And certainly, you saw us a year ago and then most recently just last month announce reinsurance transactions, which is bringing in significant amounts of capital, backing them with liabilities. And that we're using to drive our private asset growth. Because the liabilities of insurance companies and life insurance are very nice matches for the duration that you get on private assets.
Willy Walker: You mentioned a couple of large asset management firms and private equity firms. As you think about the competitive landscape and the melding of the private markets with the public markets, PGIM sits very significantly in both. As you look at the competitive landscape, David, I guess the easiest way for me to ask is, is BlackRock a bigger competitor to PGIM than Blackstone versus Nuveen? How do you look at the competitive landscape that goes into every day? Is it the private capital, either equity or credit players, moving into the public market or the public players moving into the private market that presents the bigger competitive threat, if you will?
David Hunt: No. It's a great way of framing. For most of our lives, the asset management industry has existed in two very separate ecosystems. There have been long-only managers who largely did fixed income and equities. And there were the privates, which started mostly in private equity and then more recently got into real estate. And now they're big proponents of private credit. I think both sides have now found that actually, the walls between them are breaking down fast. Clients are largely driving that. Clients now want somebody who can offer public and private together and can manage a mixed portfolio to a particular risk-return profile. We believe that the winners in the future will be people who can both offer public and private together rather than keeping those completely separate. At the moment, what we see as our biggest competitors are those people who can do both of those together. The number of those is there are no more than probably 8 to 10 players that actually can do public and private together. I would say in general, the other people who are winning in the market are the big passive players. You mentioned BlackRock, Vanguard, and State Street. They're doing very well, too. But we offer something very different than they do. We've thought occasionally about getting into passive and we've always decided, no, we're active managers at our core. We don't regret that decision at all.
Willy Walker: When you think about the 1400 investment professionals that you have at PGIM, I think I'm right on that. Is 1400 about the right number?
David Hunt: Yeah.
Willy Walker: When you think about them, two things, one, private versus public markets and sort of either the background, the training that those investment managers have. Any difference? At the end of the day, you're looking for very bright people who know how to make the right investment decisions. But is there any stratification, I guess, inside of PGIM, of someone who is on the public security side versus on the private side? And the way that you go about managing those two businesses?
David Hunt: There are. I would argue that the strength of what we call our multi-affiliate model is that we have different organizational structures for different asset classes. And I think that's important because their setup is completely different. Just to contrast, our public fixed-income business has all of its employees around three hubs. The majority of them are here in Newark on the eighth floor of this building. We have a big group in London and we have an important and growing group in Tokyo. But it's organized around these big trading floors. Now, look at our private credit business. It couldn't be more different. We have 16 offices around the world. We are calling on companies that are directly originating loans. It's a very distributed model of leadership. We believe that having people who know the businesses well and are in those communities is much better at making these private loans, whether they be investment grade or direct lending, than somebody from a central headquarters. We operate these businesses very differently and we think that's a strength rather than something we want to necessarily bring together.
Willy Walker: As I think about those 1400 investment professionals, many of them have a contrarian view of the world. They're independent. What you're looking for is investment managers who can find the right time to enter investments and then have the wherewithal to hold those investments. Then obviously realize the return once their contrarian play has played out. Two questions on that, David. The first one is, from a management standpoint, how do you manage such a scale group of what I would call contrarian thinkers?
David Hunt: It's a great question. I'm really glad that you've focused on this kind of contrarian nature. Because there's no point in having a great investment view if it's already priced into the market. Your best ideas and the ones that are going to generate excess returns for your clients are by their nature wrong today in the market, an idea that has not yet been priced in. You've got to be able to have thinkers not only who can develop those non-consensus views, but then you have to have a culture that will back them while they are wrong until they're right. That can be several years, to be honest with you. You need to have a culture that will support people through that journey. One is the culture of rigorous debate, I would say, which needs to happen to develop those non-consensus ideas. And that's where we believe in meritocracy. We have very rich discussions. It's also where I think the trust and the fact that we have people who have worked together for a long time that we can have knock-out drag-out debates on a topic and still have a beer together. And I think that that's important. The second piece of that, though, is the support. You have to be willing to back your people with those non-consensus views while they don't look so hot in the market. While the headlines go against them and everything else and I can think of a whole bunch of examples of that, but maybe most recently are co-op business which went like everybody else's through the quant winter. People were saying, “Well, that's going to be very well, lo and behold, here we are.” Values come back and quant is now back in fashion. We kept the faith in that. It's very nice to see that money is coming back into quant and there's real excitement around those strategies again. But you've got to be willing to hold the faith through the cycle. And once your people see that you don't do that, then they're willing to put their neck out and take that risk will go down commensurately.
Willy Walker: It's fascinating to me when I think about holding, if you will, supporting them through that. Clearly in your tenure as CEO of PGIM, there have been some great trades that have been put on that are sitting there and they haven't played out to the timeline that is there. And you have had to either double down on it or say, “Guess what, we've got to give up on this. It's too big a trade. It's too big an exposure.” How do you manage that point where you've supported someone through a certain period and then at some point you have to sort of say, “Okay, we got this wrong. For whatever reason, we got to unwind this, take our lumps, and move forward.” How do you do that given the scale that you have a PGIM?
David Hunt: It's a great question. I often think that the art rather than the science in my job is that I make judgments about people who make judgments. And that's always an extremely difficult thing to do. But the backbone to make the decision that you're talking about is an outstanding risk management process. You have got to believe that you can generate and see where the excess return is coming from. You've got to be able to believe that your attribution of that is clear. I know whether the idea is moving in the right direction or the wrong direction. The other thing is you've got to size the bet, right? We all know people who were very contrarian, but they took too big a bet and they may have ultimately been right. But they went bankrupt before they got it right. You've got to have a sense of what the conviction level is, and then you've got to make sure that you're sizing the bet to what you can believe through the cycle. The only way to do that is to have a robust, thorough risk management system that you abide by and that everybody buys into. And I think that it's great to have non-consensus ideas around, but that has to go with guardrails and that has to go with a really strong risk system that sits behind it for sure.
Willy Walker: When you talk about risk management, David, I had Mohamed El-Erian on the Walker Webcast one month ago, and Mohamed was talking about when he was at PIMCO, how they had their investment committee, and then they had a whole other committee that sole purpose was to test the investment decisions of the investment committee, constantly sitting there and rigorously poking holes in all of the decisions that the investment committee had made in it. It reminded me a little bit of Bridgewater in the way that Ray Dalio runs Bridgewater. What's the testing of the investment committee decisions that PGIM looks like?
David Hunt: Not so different, I would say. And we do it in two different ways. One is that we test our investment thesis under different scenarios. I think after a certain age, you get a lot of humility about your ability to predict the future, and we kind of go back to what we think the probabilities are of different scenarios. We try to create between 4 and 6, at least inherently consistent scenarios of how the world may unfold. We test our investment theses against those and we debate the probabilities of it. And the second thing we do is try to create a bear case for almost every investment that we have. We have a cage match between the investment team who will argue for their thesis and somebody whose job it is specifically to put the bear case of why this won't happen. Those are extremely useful. The process of going through it, of having to articulate either why your central thesis is or is not right is valuable. And I think that most strong investment practices have some version of that. And I'm sure PIMCO does as well.
Willy Walker: Do those decisions ever come up to you in the sense that there's a very rigorous committee structure there? Are there certain differences of opinion that come back to saying we are going to keep this trade on or we're going to take it off and David, make the call for us?
David Hunt: For the most part, I believe that those decisions are best made by people who are close to the asset class. Very rarely does something come up out of the affiliates that needs to be adjudicated. I spend a lot of time on the risk bets, the risk budgets, and how we do all of our sizing of bets. But in general, the actual investing of do we want this bond or that bond or when do we want to sell? That is done at the affiliate levels and I think probably done by people with a lot more expertise than I would ever bring to that decision.
Willy Walker: I will challenge you on that statement, but I get it from a management philosophy. I'll let that sit. Let me ask you, I heard you talk about chief investment officers who were in their seats during the great financial crisis and chief investment officers who have assumed their responsibility post-GFC, and how they take a distinct view as it relates to risk and risk tolerance and what they want to invest in at PGIM. The average tenure of your investment professionals, the 1400 is, I believe, almost 22 years, 21 plus years. Do you find the same thing in your investment professionals of those who were managing money during the GFC and their day-to-day thoughts as it relates to risk tolerance and those who have come into their responsibilities after the GFC?
David Hunt: We do. And I think it maybe goes back even earlier than the GFC because I think if we're honest, the GFC wasn't really a credit cycle. We haven't had a really good old-fashioned credit cycle in a very long time. The GFC started certainly as a liquidity cycle and then as you and I know painfully, it ended up in real estate and some other things. But it wasn't a good old-fashioned credit cycle. I do worry that not enough people in the industry have been through that. We haven't had the need for workouts in the same way that you would think. And part of the reason we're so proud of the tenure that we have in our profession is that they are responsible for training, mentoring, and educating the next generation of investors. But when I look out at the industry, I see the 26 new private credit shops that have been set up and they’re staffed by a 32-year-old who spun out from Goldman. I worry. I do. I don't think that those guys have been through that cycle. They can't work out the loan. If somebody gives you the real estate keys, they wouldn't know what to do with it. And I think that is a bit of a weak underbelly of some of the developments that we've had. And we are doing everything we can at PGIM to make sure that we don't fall into that trap.
Willy Walker: As you were talking about the credit cycle or lack, if you will, lack thereof during the GFC, I thought you were going to back up to the dotcom fallout, if you will. I heard you speak in a previous interview you did, David, where someone asked you about some of the biggest management challenges you've ever faced. One of the things that I thought was fascinating, and I'd love you to expand upon it, was you said it's not so much managing, but it's leading your team when something like the dotcom wipeout happens where people never think that the value is going to come back. They've lost the vision of what they were investing in. And the hardest thing is not to manage them, but it's to lead them back to the confidence that markets will return, that capital will come back to their strategy. Talk about that for a moment, because when I listened to that, I said, “Now that's a true leader right there who understands that it's not whether you can manage costs or tell people you've got to show up at this time or that time, but leading them back to the vision.”
David Hunt: Yeah, that was quite a remarkable time. And I didn't get it right at all for a while. I was the leader at that point in McKinsey of our securities practice. We had revenues in our securities practice that went from extremely robust in ‘98, and ‘99 to zero by the time we got to the end of 2000. We had all of these partners around the globe and all of these client relationships, but clients had no money to pay us. And of course, my first reaction was, “I’ve got to fix the financials. I've got to find a way to get through all of this.” And very quickly, I realized that was completely the wrong approach. Our clients needed us more than ever. They had incredible problems. They don't have any money to pay us at the moment. But they needed advice, they needed help, and they needed problem solvers who could help them in their c-suites. We're not going to pay too much attention to economics. We are going to invest in our clients. We're going to take the view that over the next five years, the investments that we make now, they will remember that. We'll find a way to make this up and bless the firm. They supported that. And I think that is exactly what happened. But it wasn't my first instinct, and I had to kind of learn that. But I do believe that if you do what your clients need to, economics will follow. If you spend too much time machinating over the margin, you will miss the big opportunity that is there with your clients.
Willy Walker: It's fascinating. I love you being transparent as it relates to not getting it exactly right at the beginning, but learning as you got the team to focus on that. Anything else from PGIM that was a similar type of experience where something happened potentially early on in your tenure back in the teens of 2014, or 2015, where there was a certain approach that you would take in as you dove into corrected course, if you will, as it relates to what you were trying to manage to or manage through?
David Hunt: I would say one of the bigger learnings that we've all had is how to position ourselves over the decade as the passive got bigger and took a lot of share from active managers. And that was particularly true in the equities business. Most of the people who lost a year were folks who were pricing for active but were closet indexers. They weren't generating much value. And I think that we fought that for a while and then we recognized that we needed to have a series of strategies with much higher tracking error that would work with a portfolio that had some passive at its core. We did move with a lot of our equity strategies to a much higher tracking error that has much more of a global growth angle to it from where we were. It was not obvious that was the right answer at the time. But if you look back on it now, obviously, that's been where the huge growth in the markets have been, in those growth stocks which have largely been in technology. But some of it has been some other sectors as well. Pharmaceuticals have been a great example. But that is really what has been working well in at least active equity. And I think if we hadn't made that pivot, we would certainly be looking back thinking we'd wasted a lot of time and probably lost in the fight against passive.
Willy Walker: You and your team back in 2012, ‘13, ‘14 called for lower rates for longer and lower growth for longer. And then PGIM invested in that strategy and did extremely well on, if you will, having called those two major macro drivers of markets over that decade from, let's just say, 2012 to 2022. We're now higher both on rates as well as right now, relatively speaking, growth. What's the outlook now as it relates to PGIM saying, “We're either higher for longer, not higher for longer?” Is this growth that we've seen in the U.S. versus other developed economies sustainable or do the others catch us or do we come down?
David Hunt: I appreciate your calling out, I think very good macro calls that we had in lower for longer. And I think we were again going back to some non-consensus views, that weren't what was in the market. We did turn out ultimately to be right there, although there were quarters when we were not for sure. But over the eight years of that cycle, it was the right move. Where we are now is we would say we're going to be higher for longer. We believe that interest rates are going to remain quite a bit higher than they were. We think inflation will be higher than it has been historically. We don't think that's necessarily a bad thing. We think that the U.S. economy is in reasonably good shape at this point. We can come back to some of the geopolitics and some of the challenges in it. But the raw performance in terms of the labor market, in terms of productivity, in terms of output of the US, I think has been impressive. Unfortunately, it's been quite impressive at a time when most of the rest of the world is not done very well. Nobody can find growth in Europe to save their lives. China has been a quite difficult place to put money to work in. Japan has been a little bit more of an upbeat market. Then we've gotten some real traction in some of the parts of the emerging markets that have taken on these new supply chains: the Vietnams, the Indonesias, the Mexicos of the world, who've done quite well. But it's been a story over the last 24 months of money coming into the U.S. We believe that it will continue to be a good trade. But it's making CEOs around the world very nervous. With every new kind of tariff announcement and everything else, all of these guys who've over-allocated to the U.S. are popping their Pepsi's for sure.
Willy Walker: You've talked about emerging markets. I believe your thesis at Princeton was on emerging market debt.
David Hunt: How in the world do you know all of this? It's quite remarkable.
Willy Walker: My question to you is, are you and your team backing Milei in Argentina and thinking that he can pull out what would be the greatest turnaround of a sovereign default crisis of any country possibly in the history of humankind?
David Hunt: For one thing, you're right. I did write my thesis on what was then the Latin American debt crisis and what happened with all of that. I think I've always had an abiding interest in developing economies and what are the policies that make countries rebound in a way like what we saw over 30 years that has happened in Singapore or South Korea, what you now see happening in Vietnam or Indonesia. I find that exciting. The story, as you know, in Argentina has very sadly been one default after another. Many of us at various times thought, “Okay, now it's going to be better.” But each time, the reforms don't hold and it falls back even though the country has wonderful natural resources and an educated population and all reasons why that should not be true. I think many of us are cheering on the economy and the Argentine people and hoping that this will be true. But we are not yet jumping back in as investors. The track record is just a bit too tough.
Willy Walker: When I think about the strategies that PGIM has, David, and the overweighting in fixed income and given where yields were when you first came into PGIM up until recently, it's got to be a nice turn as it relates to having so much in alternatives and fixed income where the equity markets were outperforming on those two. Now, all of a sudden, the world is sort of flipped on its head. My view would be that PGIM and the investments that you all have and the focus that you have are playing very well in the higher yields on fixed income, on many people looking for alternatives rather than the equity markets. Is my read on the composition of that trillion a correct read at this point in the cycle?
David Hunt: Yes, it is. Happily, 2024 has been a really strong year for PGIM on both flows, earnings, and margin points of view after two much more difficult years. It's been nice to be out with some very strong, good news. It has happened through the core public fixed income business as you've described it, but it's also happening through our private alternative business. We have about $300 billion in private alternatives, our fastest-growing businesses, and our private credit business, which grew at over 30% this year. That business has nice legs to it. We think that will continue. We think there will be new asset classes that are very much adjacent to that. But what I would point out mostly would be the asset-based finance business where we are seeing banks pulling back out of that. The ability for us to bring in and help structure and generate attractive returns has been pretty high. We had a very strong year in asset-backed and I think that'll be a big growing business for us in addition to our other securitized products.
Willy Walker: I want to kind of double-click on that comment on private credit for a second because the growth in your private credit business has been fantastic. You and I both know there are lots of other private credit shops that have grown dramatically over the past couple of years as banks have moved out of or pulled back from lending to that middle market. The Trump administration comes in with a general deregulation view and a lot of talk about whether we might see some consolidation again in the banking sector. Do you think that if you were to look forward as it relates to banks’ involvement in the opportunity for something like the growth in private credit to expand out? You talked about asset-backed lending. Do you think that the deregulatory push and the freeing up of the banking system might slow some of those opportunities down, David? Or do you think that they've pulled back? Let me add one other piece to it before I let you talk. But I've thought a lot that what the FDIC and what the new Basel III accords were going to try and do was make the banking system in the United States the lubricant for players like you and me to actually either make the investment or make the loan. They're allowing them to put back credit to us, but they have been trying to pull the banks out of the primary market of actually writing loans. Either a shadow bank participant or a specialty finance company, you can call it whatever you want to call us. It's been huge to us that Wells Fargo does better lending to Walker & Dunlop, allowing us to make the loan than they do, going out making the loan given the reserve requirement. It's against that loan for Wells Fargo to do the line of credit to us versus going out and doing it. I've spoken to many of my real questions and they go back to this: Do you think the banks are now free to get back into the market, or do you think this trend continues as they are being looked at as the lubricant of the market, which then presents opportunities for PGIM, Walker & Dunlop, and others?
David Hunt: I thought, as you originally phrased the question, you moved into M&A and Consolidation. I would say, “I would separate that from the change in regulation a little bit.” I think that as the bank oversight of capital begins to relax a little bit, and I think it probably will, banks will become more free to lend than they have over the last couple of years. We've already started to see that a bit. But it's all really at the margin, I would say. We still have a lot of banks that are willing to do joint ventures and partnerships with people like us where they maintain their relationships. But actually, we use our balance sheet and our investor's balance sheets to sit behind that. And I think the appetite for that remains very strong. If some of the caps on M&A got released and we saw a return to more consolidation, particularly at the high end, I think history would say that you see lending contract during a big acquisition and the incredibly complicated putting together of two systems that happen. Generally what happens is there are people who realize, “Wow, I've got too much concentration to now this combined megabank. And I'm going to be looking now for more lenders.” And I think that would create more opportunities for your business and ours if that were to occur.
Willy Walker: My understanding is that Prudential at one point was the largest owner of commercial real estate in the United States. You have been an extremely large participant in both the equity as well as debt markets of commercial real estate. I think you have over $200 billion right now of both credit as well as equity in commercial real estate. Generally speaking, David, what's your view on CRE and growth drivers in CRE at this point in the cycle after two years of a great tightening? I don't need to tell anyone who's listening on this webcast that it's been a challenging two years for people who own commercial real estate and have looked for a loan on commercial real estate. I think I've got earnings next week and we will give our outlook over the coming year. But I'd love to hear your thoughts as it relates to PGIMs exposure to real estate. Do you like being on the equity side or the credit side right now?
David Hunt: That's a little bit of a long answer. And I feel a little a little strange giving it to you as such an expert in this area. But overall, PGIM is the third-largest asset manager in the real estate base around the world. We like the fact that we are very broad-based. We have a big equity business. Some of that is in the core. We also have, particularly outside the United States, some nice value-added opportunistics. We have a big debt business, which we like. We also have an agricultural business. I think it's a highly nicely diversified business. Over the last couple of years, like everybody, we've seen this business certainly come under stress. But it's played out in very different ways in different sectors. Our debt business has come through this very well. I would say that if you'd asked us during Covid, we were thinking it was going to be a lot tougher than it ended up being. But boy, the rents keep coming in. And I think we spent good, particularly on things like apartments and others. We think that the damage was minimal, and things have continued to move up pretty nicely. The debt side of this has been very good for us. On the equity side, transactions have really come almost to a stop, at least for office and to some extent for retail. But surprisingly, the industry has continued on, multifamily has continued on, and some of our specialty offerings like data centers or senior housing have done well. It's been a little bit of a Tale of Two Cities. And when most people ask me about real estate, they're really asking me about the office. And the reality is, I think, that the pain has been taken in Europe and we actually are seeing things begin to rebound a bit. We would say that at the turn of the year here, we do believe now is the time to be getting back broadly into equity in real estate in the U.S. We think that the pain has been taken. We're starting to see a really good pickup in transaction values. I would say we're not yet starting to see real pickup at least in money changing and on the fundraising side. But the pickup in discussions about changing money has clearly happened over the last couple of months. We're clearly at a turning point in the cycle. As you would know better than anybody, the key to real estate is taking a thorough cycle view. If you can come back to our original comment with strong relative investment performance out of the cycle, you're going to do well. And I'm very pleased to say to you that our investment performance for our real estate investors is very good around the world. They will remember that as they come back to real estate. I think we're going to see a real acceleration in our business over the next couple of years.
Willy Walker: I love that you said when people ask you about CRE, they're really trying to get you to talk about the office. I am, just like you, fortunate enough to go on CNBC every once in a while, and I get on the stage and invariably they'll sit there and say, “So what's going on in the Manhattan office?” And I'm like, “Guys, I'm not your expert on the Manhattan office. I can tell you all sorts of things about commercial real estate. You can ask a lot of other people about Manhattan.”
David Hunt: Invariably, they ask you about last week, some building on Third Avenue traded. And they've done all the research on that. It's very hard to counter that narrative.
Willy Walker: It is very much so. I want to pick up on what you said there, though, David. Because I think it's something that is so interesting about both your leadership and then also the outlook at PGIM. The difference between institutional investors and retail investors is the ability to take a longer view of things. I've listened to you talk about this and I've been super impressed with the ability to take the long view. The ability to sit there and say, “Well.” The real question I want to ask here is this: the difference between risk and volatility. Talk for a moment about risk and volatility. Because what I've learned from you, from listening to you speak about this, is that vol isn't bad. Vol actually gives the opportunity for people to get a good entry point into an investment and that's really the risk that you're trying to calculate. Then go on that into the risks you all are seeing in the market and whether they're actually correlated to the investment.
David Hunt: No. I'm really glad you brought that up because I think it's so important. And the media does us all a great disservice because I think they really do equate daily changes in the stock market or the bond market to volatility and risk. And yet, you and I know, unless you sell an asset for less than you bought it or unless you permanently impair an asset, the daily mark to market doesn't really change the value that you own. We really think that a lot of these volatility and value-at-risk models are very wrong in the direction that they send you. Because if you're a long-term investor, what a lot of the volatility does is allow you a better point of entry. The biggest problem we all have right now, with the exception of real estate, I would say, but everything's very expensive. We look out, the equity markets look really expensive. Credit spreads are at almost all-time tight. Even though we're optimistic about the economics, we're not getting paid to take very much risk. We're actually not running our full-risk budgets right now at all, not because we don't believe in the economy, but because we're not getting paid to take the risk. That is a really important point. Now, if we had a real drop in prices, I think our view would be, “Okay, that now gives us a chance to really have a good entry point.” One of the reasons that we're excited about real estate now is that we have had that correction, and it's now a really good time in the cycle to get into it. But if you can't take that through a cycle view and you really are trading on the new, the volatility, and unfortunately a lot of retail does operate that way, you end up really sub-optimizing over your long-term returns.
Willy Walker: You talked previously about your Quant group and how ‘21 and ‘22 were challenging years as it relates to the returns out of Quant. Now, Quant is looking great. PGIM was one of the really pioneering firms in Quant. Your quant group started back in the 1970s where quite honestly, I don't know that there was anybody back there.
David Hunt: We were one of the very earliest.
Willy Walker: Outside in the first two.
David Hunt: To be honest, this is the 50th anniversary of our quant group. And we're actually celebrating that as Prudential celebrates its 150th. But we've had 50 years of quant. We've seen the cycle go through a few times. I think that also gives us the courage of our convictions to come through some of these quant winters. We know that things will begin to come back. But I must say it's nice to see that what happens is hard on everybody when a business goes through this cycle. I would just give a call out to the leadership of our quant group, PGIM Quantitative Solutions, for holding the whole thing and seeing through the cycle and what the opportunities would be on the next level. Then this year I had an extremely strong year.
Willy Walker: And that group has just over $100 billion.
David Hunt: They closed the year, about $110, I think the trade.
Willy Walker: Big. On that, it's a good segue to technology and AI, and how the evolution of technology is going to impact PGIM and the investment world. I listened to you in an interview you did in 2018, David, where you were asked about fintech. And I think the quote, if I remember it, was sort of like, “The hype about fintech is about as high as it's going to ever get right now in 2018.” As I look back on that, from 2018, you basically called it hype, with all the talk about how it was going to revolutionize the world and do all these different things. It's exactly right. I remember being at the JPMorgan Bank CEO conference back in ‘18 or ‘19, and they brought up these fintech start-up companies. I don't think there was a CEO in the room who didn't think that all of us were going to be completely wiped out by this new age of technology and these companies that could onboard a new customer with the snap of a finger and $0.02 of investment. Here we are in that room and most of the startups that were up on stage are either much smaller than they were at that time with venture capital, or they might have made it through or were acquired by somebody. But it certainly wasn't the revolution that many projected it to be. I want to underscore you're calling a little bit of the B.S. on that hype back in ‘18 on fintech. But it does appear as if we're at the advent of a new age. Talk for a moment about AI and how much of your time and your team's time is focused on investing in the AI world, AI companies, AI infrastructure, etc. Then also, how is PGIM investing in making sure that PGIM is up to speed on using AI or investing in AI for your own future?
David Hunt: Maybe just a little bit of the broader context: I've spent a lot of my career looking at how technology has been introduced into the economy, how it gets used, and then who have been the winners and losers in that. One of the things you do see very much in the financial services industry is that you go through these cycles, whether it was the dotcom boom or others, where there's lots of hype around the smaller companies. There's real excitement and there's narrative, and that does drive fundraising and everything else. But at the end of the day, they ultimately don't have the brand and the customers to make it work. And so for the most part, they get bought out by the larger firms, and that technology then gets actually used by the larger firms for their own clients. That is the model that, again, I think you saw play out with the fintech piece. It's not that those technologies didn't have an impact. And if you were to look under the covers at what Schwab does, you would find some of those nifty technologies that we all saw at the conferences. But they didn't succeed as a stand-alone piece. They needed to be integrated into a broader ecosystem. When I look at AI, I again see some of the similar things that are happening where there's a huge amount of excitement. I think, for good reason, there is way too much focus on what's going to be really different as adoption happens in the very near term. That gets way overestimated. Maybe the long-term benefit of some of this is even underestimated. Because the potential, I think, is truly staggering. We are certainly investing in AI. We have quite a lot of prototypes. We are very careful because there are real privacy concerns that have to go around this. But there's no question that we are going to be able to take lots of the rote tasks that happen around any asset management firm from spreading financials to writing RFPs---even the coding that now takes up a lot of time which will be done very quickly under AI. I do think the potential is there. I think it will raise the quality of the jobs that we have. But I also think that adoption is going to take longer than people realize. In some ways, the last week has been a great example of this where DeepSeek came out with this new model. Everybody's racing to figure out how they did it so cheaply and without some of the new chips. Yet nobody's covering the big story, which is: isn't it wonderful that these large language models are now undergoing real productivity gains and that they'll be made more cheaply? While that may be good or bad for individual players who are building and providing chips and other things, for society, it's absolutely a benefit because lower-cost technology is going to be adopted much more quickly. I take news like what we had this week as actually quite a good sign in the health of AI.
Willy Walker: If you were to look out at 2035, you've got 1400 investment professionals managing $1.4 trillion today. Does that ratio stay intact over the next decade, or is the number of investment professionals needed to manage that $1.4 trillion less? Another way of looking at it would be that you've got 110 billion of AUM in your quant strategy. Does that grow proportionately much more rapidly as technology is used more effectively to manage money versus the actively managed portfolios over the next decade?
David Hunt: I think that there's absolutely an element where some of the rote tasks will be able to be done with AI, which will mean you can have fewer people, whether they be investment management people or people who are doing some of the processing in that. But I think as exciting as the prospect of using data in fundamentally new and different ways is, the problem with a lot of data is, first of all, most of us don't do a particularly good job of making sure that we're storing it, tagging it, and using it effectively, which is what you really need to do to make AI work. But once you do have that basis down, I think about our ability as investors to take in many more types of data than what we have now, which is largely financial data. But we're going to be able to use traffic data, satellite data, and all new things in making decisions on investments that AI is going to allow us to do. I do think that the decision-making should be better, and I think that we will be elevating the level of thinking and analysis that needs to be done by a portfolio manager. I think they'll find that exciting and invigorating.
Willy Walker: Talking about exciting and invigorating, you've been an incredible leader of PGIM. What's the most exciting and invigorating part of what you do at PGIM?
David Hunt: I really do think that building something is what's really exciting. And I don't need to tell you this, given your amazing track record yourself. But it's really fun to come into something and see the potential for it, to be able to keep the parts of the culture that are really fundamental to the success. And we talked about keeping that investment culture even as we've grown, but at the same time really expand. We had no assets in Japan when I took my job. We have $200 billion now. We had, I think, 100 people in London. We have 550 now. We had no ETFs. We barely had any ESMA. Now those are big growing businesses for us. That notion of growing and building and having clients recognize that with more assets is really fun. It's not always easy, but it absolutely, I think, brings a level of satisfaction. We are meeting the needs of a population that increasingly needs money for retirement. That is a growth business for sure as our demographics change.
Willy Walker: You launched the PGIM brand in 2016, I think, David, as you built that program and really invested in it. What's been the most important thing for you to think about all the different brand-building things you've done, direct advertising, branding on buildings, branding on collateral, going to sponsor a golf tournament, and all sorts of everything? What's the one that either surprised you the most or seems to be the best bang for the buck as it relates to the growth of the PGIM brand?
David Hunt: I think that a little bit of the history of the brand change, which many of your viewers may not be aware of. But there is another Prudential and it's based in the U.K. It's Prudential PLC. They use the red color. We have the blue color. Basically, it meant that we could not use the Prudential name in pretty much all of Europe and almost all of Asia other than Japan. When I came into this, and I wanted to build a global unified asset management business, I couldn't use Prudential in the name. I had to find some other formulation that I could use everywhere in the world. We tried, as you can imagine, all kinds of different formulations of this. PGIM is the one that seemed to roll off the tongue most easily and didn't mean anything terrible in any other language, which is always a key factor for these things. But anyway, we ended up with that. I would say the answer to your question is that the most powerful thing is ideas. You can put your name on the back of the bus all you want. You can buy the outdoor advertising all you want. But what really stays with people is if you have powerful ideas that you can deliver at conferences, on TV, on podcasts, and whichever way. Ideas that stay with people. And if that's what you have, that's what will give you a share. We don't need that many people to know who we are. We're not a pure retail brand. If you can gain a share of “I heard an interesting investment theme,” that's the most powerful piece of that. And that needs to be done actually by your investment professionals. It's not a marketing tactic.
Willy Walker: It's fascinating. I have to tell you. I absolutely love hearing you say that. It is so contrarian. It's like you saying if we get great returns, the AUM will come. It is exactly what actually does it. But it's not the way most people approach those two issues.
David Hunt: No, It isn’t.
Willy Walker: It's really quite something, David. I absolutely love it. Final question, because I'm running out of time and I could keep going all day with you. You've been extremely generous. I loved our conversation. I know you are a tennis fan. I know you play tennis and you also go and watch the Majors, particularly when they're in New York at Flushing Meadows. What's your favorite major tournament? I'm assuming you've gone to all of them. If you haven't, you can say I haven't gone to Australia and seen the Australian Open, but I was just curious. Is there one that you like more than others?
David Hunt: They're all different. They have their own charms. I actually have not been to Australia. I have been to the stadium there. Every time I go to Melbourne, we just walk around the grounds. But I've never actually managed to get there.
Willy Walker: They're calling me because I have a friend who's down there.
David Hunt: Okay, great.
Willy Walker: Give me a call.
David Hunt: But they have their charm. I do love the French. There's nothing more beautiful than the way that they put on a tournament. And there's something wonderfully elegant about the clay and the tennis that's played on clay. Wimbledon remains, without a doubt, one of the most prestigious events of all of it. That's always fun to see. The US Open couldn't be more different. It is a two-week festival of tennis where half the people that go don't spend that much time watching tennis. And yet it has become this wonderful spectrum for New York City. And everybody goes. It's the single thing that funds all of the tennis outreach for the USTA across the US. That is what's paying for the development of our players and all the community programs that they do. I couldn't be more delighted that it turned out to be a successful venue and was again this year. But tennis, like all sports, is a great unifying force and we need more of those in today's environment.
Willy Walker: I know you're on the board of the Lincoln Center. Are you going to be able to see Renee Fleming when she's performing over the next couple of weeks at the Lincoln Center?
David Hunt: Absolutely, phenomenal. In general, it's nice to see the arts coming back now. Talk about an area that got hit with COVID-19! The arts struggled and even Broadway is now just barely coming back. But you could feel it this year. There's a real energy and an upbeat mood, whether it's on the Lincoln Center campus or down within the theaters. That's what's important to the city.
Willy Walker: I'm super appreciative of the insight, the energy, and the engagement that you brought to the Walker Webcast this week. Thank you, David. Congratulations on all you've done at PGIM. It's an incredible tenure. It's an incredible growth story. It's an incredible company. I'm very appreciative of you taking the time to share your thoughts for the last hour with all of our listeners.
David Hunt: No, it's a pleasure to be with you. I've enjoyed our conversation so much and I'm really happy you'll be able to get back out to the slopes. I don't want to keep you for another minute. Thanks for having me.
Willy Walker: Thanks, David. Take care. Bye bye.
David Hunt: Thank you.
