On the occasion of PGIM Fixed Income winning Asia Asset Management’s Best of the Best Performance Award 2025 for Global Absolute Return (3 years), AAM spoke to Ryan Kelly, CFA, head of special situations for PGIM Fixed Income and senior portfolio manager for PGIM Fixed Income’s Special Opportunities Fund, on the challenges of delivering absolute returns in turbulent times.
He says that periods of volatility can seed some of the best absolute return opportunities across market cycles. The challenge, he says, is to avoid drawdowns given the sheer number of opportunities from which to decide.
“Situational awareness and rebalancing liquidity in highly convex periods in the market is crucial, so that one can capitalise on volatility and hunt for attractive opportunities,” he explains.
He also notes that a key factor to successfully navigating this environment is understanding how much beta is in your opportunity set and in the investments under consideration.
“Beta is your number one enemy, and in a world dominated by systematic, non-discretionary, and passive capital pools, beta-driven dislocations tend to be amplified and can create substantial amounts of distortion, which is both good and bad.”
Pointing to the importance of understanding how much beta is in the underlying investment he explains how to measure the non-systematic risk or idiosyncratic risk factors to see if they are adequately priced given the various outlooks, for example macro, industry, and company, and how fast those outlooks are changing.
“Throughout a cycle, whether mid-stage or late-stage credit cycles, we are very focused on securities selection, such that we invest in credit that has very little beta and mostly trades on idiosyncratic attributes,” he explains. He adds that this can reduce correlations, act as a diversifier, and reduce the need to tail hedge, which in turn preserves the upside due to reduced hedging costs.
“By avoiding beta and running towards positive asymmetrical payoff profiles, a volatile environment can be very rewarding,” he says.
The absolute return toolkit
Kelly notes that a relative value lens along with deep specialisation or expertise across industries and credit are top of mind when attempting to consistently deliver favourable returns. And while scale of resources can be helpful, he warns that this only works if a robust operating model is in place that allows the manager to utilise resources effectively to monetise the numerous and idiosyncratic views that exist across the organisation.
“We rely heavily on our proprietary relative framework that we use across all of corporate credit globally. It’s a systematic process that we conduct every month within a well-defined framework between senior credit analysts and sector portfolio managers who jointly rank industry and credits in the sectors they cover,” he explains.
Kelly adds that this means relying on decentralised teams of experts to identify where their views differ materially from the market, which he says “acts as a jumping off point for all investing, whether via traditional benchmark strategies or all-weather opportunistic capital pools that may require a special situation lens.”
He says this has to be done in a transparent manner so the entire credit platform can understand the firm’s foundational view and the risks that are embedded in the assumptions used to arrive at the collective view.
Indeed, PGIM Fixed Income’s relative value framework and sector-based approach is part of a broader operating model that is based on an open architecture, which has been very helpful in navigating and thriving across increasingly complex markets, and specifically credit markets.
Looking forward Kelly believes that slowing economies and recession risks will be the primary factors to monitor over the next three years. High valuations, he says, will play an important role, especially when looking across to private markets and specifically private equity.
“Public equity valuations [are likely to] remain quite elevated in the face of low earnings growth over the next several years.”
We expect the next credit cycle to be more classically shaped than what was experienced during the GFC and pandemic. Those more distant cycles in the past were known more for their duration and persistence rather than severity with central banks inserting floors in the market. Whether stagflation or full-blown global recession, central banks are likely to play less of a role in the next set of rough patches which will be unfamiliar to a large number of market participants who have only witnessed central bank ‘puts’. We expect a heightened level of volatility and greater dispersion across sectors and various asset classes. Private capital recycling will continue to slow and pressure valuations across all of private debt and equity. Altogether these factors work to create enormous opportunity.
