Prudential Financial : PGIM's best investment ideas for 2021 and beyond

A boom in suburban real estate, a golden age of credit investing and the rise of e-commerce and telemedicine are among the key trends that PGIM's asset managers see driving returns for investors in 2021 and beyond, according to 'The Future in Focus,' the latest installment of PGIM's annual best ideas series.

After COVID-19 devastated the lives of millions and crushed the global economy in 2020, investors are looking ahead for opportunities to be a part of the recovery.

PGIM Real Estate believes that the growing acceptance of flexible work-from-home arrangements is here to stay and will support a suburban rental market that was already growing prior to the pandemic.

'The large millennial population that drove the strong demand for urban housing after the global financial crisis is now entering the age of 'settling down' and is expected to increasingly prioritize such features as more space and proximity to good schools,' the report says.

PGIM Fixed Income sees opportunity in corporate credit, as belt-tightening coincides with accommodative monetary and fiscal policy.

'Credit investing is a rare world in which not-so-favorable news can improve the investment outlook,' the report says. 'Essentially, credit investors benefit the most when companies are in free cash flow conservation mode and they pull back on balance sheet destructive activities, such as share repurchases, dividends, and capital expenditures.'

Jennison Associates believes trends accelerated by the pandemic will continue to bode well for related equities, especially in e-commerce and healthcare.

'Investors have demonstrated their preference for businesses that were thriving before COVID-19 and that have benefitted from pandemic-related tailwinds and enhanced competitive positions. Prospects for their continued growth at above-average rates remain strong,' the report says.

According to PGIM Private Capital, in times of economic uncertainty, when some senior lenders may be looking to lower their levels of risk, mezzanine lenders who are ready to 'bridge the gap' in a company's capital structure may see opportunity.

'Mezzanine returns can match or exceed those of private equity returns in a challenging environment,' the report says.

QMA believes that with the backdrop over the next 10 years likely being less hospitable for investors than the last decade, traditional approaches are unlikely to produce the long-term returns that asset owners need to achieve their goals. A 'portable alpha overlay,' could be the answer.

'A well-designed portable alpha overlay strategy with a low correlation to traditional asset class exposures can provide diversifying, additive returns when asset owners need it most, in particular during drawdowns in risky assets that typically occur at the end of economic expansions,' the report says.

Finally, PGIM's defined contribution (DC) group concludes that the recent Department of Labor information letter affirming the legality of including private equity in target date funds gives plan fiduciaries the opportunity to take a more innovative, institutional approach to investing than the traditional self-service model of DC plans.

'Individual investors should have access to the same types of investment strategies currently available to institutional investors and high-net-worth individuals,' the report argues. 'Whether it's private equity, other alternative strategies or any investment strategy, a fiduciary should be able to go through a process and rely on their own expertise and the expertise of their advisors to evaluate whether they believe a strategy will benefit their participants.'

To learn more about PGIM's 2021 Best Ideas, read 'The Future in Focus.'