The stock market is a mess. Investor fears of inflation are fueling the meltdown. They also feed worries about a recession, which is another drag on the market. But PGIM Real Assets Z Fund (PUDZX) offers relative protection from the market miasma.
The $154 million fund aims for a leg up amid today's high inflation with its focus on hard assets like commodities, real estate, energy pipelines and gold.
Basically, the fund owns assets whose prices are rising.
The fund also has hefty exposure to TIPS. Treasury Inflation-Protected Securities were the fund's second largest asset class, with a nearly 20% weighting as of June 30.
The price of those Treasury securities is indexed to the rate of inflation. When inflation rises, the TIPS' principal values are adjusted up.
PGIM Real Assets Fund also aims to provide shareholders a way to diversify their portfolios.
Inflation Protection Makes This Fund Shine
With its portfolio allocated in that way, the mutual fund is outperforming the broad stock market. The fund was down 6.46%, less than one-third as much as the S&P 500's 21.85% tumble year to date, going into Tuesday.
The fund's direct rivals — 50%-to-70%-equity-allocation portfolios — tracked by Morningstar Direct were down 17.63% as a group. "We provide a hedge against rising interest rates and inflation," said fund co-manager Edward Campbell. "This fund is for people who want to take part in (the gains achieved by) typical investors in a 60-40 (60% weighting in stocks, 40% in bonds) fund while being more diversified."
Fund Of Funds
One trait that distinguishes the PGIM mutual fund from many rivals is its construction. Fund holdings consist mainly of other funds. Its exposure to most asset classes is through stablemate PGIM and Jennison funds. That way, Campbell and his four fellow managers of PGIM Real Assets do not have to reinvent the wheel by figuring out all of their own individual buys and sells. "Those funds already exist," Campbell said. "So it's an efficient way to structure the portfolio."
Only with TIPS and gold does PGIM Real Assets Fund pick its own individual securities, Campbell says.
Still, the fund's TIPS exposure is relatively low versus the fund's history. (The fund opened Dec. 30, 2010.)
"Our TIPS weighting was as high as 40% in our early years," Campbell said. "Now, it's pretty low. We're currently heavily allocated toward commodities at the expense of TIPS and real estate, which are likely to suffer more in a rising interest rate environment."
The Federal Reserve is raising rates to combat inflation.
Inflation leads to higher asset prices in general. But Federal Reserve rate hikes cause mortgage rates to rise. That dampens demand for real estate, which hurts many REITs.
PGIM Real Assets Fund sports a whopping 14.07% trailing 12-month yield. But Campbell says that is far higher than usual. Last December's distribution was abnormally high because of the gains in the underlying commodities fund, he says.
Commodities Shield Fund From Inflation
Commodities were the fund's largest asset class exposure with a weighting of about 25% as of June 30. Supplies of agricultural and energy commodities are pinched, due in part to the war in Ukraine. Also, military spending by NATO and Russia boosts demand for commodities that go into weapons. "With the supply-demand story, commodities are set up for a multiyear run," Campbell said.
Campbell's fund has a stake in $832 million PGIM Jennison Natural Resources R6 Fund (PJNQX). In that mutual fund, 64% of shareholder money in long stocks was in energy equities as of Aug. 31, according to Morningstar.com.
Oil and gas exploration and production companies Hess, ConocoPhillips and Devon Energy were the top three names overall.
Their returns are 70%, 69% and 67% respectively this year. Their trailing 12-month yields are 1.10%, 1.62% and 6.68%. Trailing 12-month yield is 1.63% for the broad market proxy, $250 billion Vanguard 500 Index Investor Fund.
Metal miner Anglo American was a big non-energy holding. So was gold, silver and gem miner Barrick Gold. Campbell says his gold exposure is relatively low.
Both are down about 20% this year. Their trailing 12-month yields are 7.96% and 3.35% respectively.
Cutting Back On Real Estate
PGIM Real Assets has trimmed its exposure in real estate due to inflation and mortgage-rate concerns.
Still, through $256 million PGIM Select Real Estate R6 Fund (SREQX), it had exposure to Prologis, a REIT that acquires, develops and runs industrial properties. It is a key player in logistics and warehouses.
Prologis is down 36% this year. Its trailing 12-month yield is 2.85%.
Select Real Estate's smaller stakes include Invincible Investment and Japan Hotel REIT Investment. Returns for both are around break-even for the year. Their trailing 12-month yields are modest 0.45% and 0.68% respectively.
Through $844.8 million PGIM Global Real Estate R6 Fund (PGRQX), Campbell's Real Assets Fund had a stake in Omega Healthcare Investors. That REIT invests in health care facilities, mainly long-term care facilities in the U.S.
Omega has notched an 11% return this year. Its trailing 12-month yield is 8.71%.
PGIM Real Assets Fund's zigs and zags are normal ways of responding to opportunities, Campbell says. "We're a well diversified fund, and we're staying true to our real assets investment philosophy," he said.
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