Everybody, I think we'll get started here with our luncheon keynote speaker. I'm William Katz. I cover the asset managers, brokers, and Citigroup, and very pleased to have a new face at our conference. This is our fourth annual conference, and the first time that we have the privilege of having David Hunt, who is the President and Chief Executive Officer of PGIM, the asset management business of Prudential. Just to David's left is Mark Finkelstein, who heads up the IR operations for very helpful as well. Thank you both for joining us. Just before we get started, I just want to call out that Suneet Kamath recently joined Citi on the insurance side, covers Prudential. He's here as well. I also want to thank Dave Ma, who was very helpful in securing David here as well.
Thank you, everyone, for helping with this as well, and welcome.
Thank you for having me.
David is the President and CEO of PGIM. It's the global investment management business of Prudential Financial. By way of background, and possibly to the surprise of many, certainly not us as we got to know the story, PGIM's a $1 trillion. There we go. $1 trillion asset manager. Wow, that's what I sound like. That's not good. Which would put PGIM at the-
You should do radio.
My mother says I have a face for radio. Okay. Would put PGIM as one of the bigger players, including in our coverage universe and certainly on a global basis. What we like about it is the company spans a couple of different kinds of distribution channels and geographies. I think we'll hopefully get a unique perspective here into what's going on in terms of asset allocation from a regulatory perspective and even other trends that are here as well. Dave's also on the operating committee for Pru, but I think for today, we're going to sort of limit this to the asset management discussion as well. Just from a big picture perspective, maybe before we even get started with our own sets of questions, and again, for those of you in the room here, if you'd like to ask a question, feel free.
Just raise your hand and we'll get to you. If you're sitting in the outside seats, there are some microphones so that the webcast can pick up the question as well. It'd be very helpful. Maybe spend maybe five to 10 minutes just sort of talking about an overview of the business. Maybe a level set of where you are for everyone in this room as well.
No, I'd be happy to. First, thanks to Bill and the team for having me. It's a real privilege. Thanks to all of you for spending the time to get to know us a little bit. I did think it was worth just painting a little bit of a picture of the business because we are quite different than many of the other managers as I looked down the list of people who were speaking at your conference. I think these are important differences that really have their roots in the history of how PGIM grew up. The business overall was set up about 20 years ago by the person who was now the head overall of Prudential. He had my job.
He decided that it was of paramount importance to separate out the investment businesses from the insurance business and set them up independently to run third-party money. His basic belief was that no great investor wanted to work for a Fortune 500 company, and it was really important that the people and talent, which are the most important assets we have, were handled very differently and very much in line with our clients' interests. To do that, he needed to pull the business out completely. That was set up, about 20 years. If we look forward from that point, we now are a fully fledged third-party business. Of the $1 trillion that we manage, about $400 billion of that is the general account.
About 20% of the fees, which I think is a better way to look at it, that I collect, actually come through some association with Prudential. A full 80% of the fee base that comes in is third party. This is a fully grown up third-party business. Our client base is the world's most sophisticated institutional investors. We cover the largest pension funds in the U.S. and increasingly around the world, and pretty much all of the major sovereign wealth funds, central banks, and other sources of capital. Our client base is at the high end and the really sophisticated end. We do relatively little, I would say, in the middle market, and we do relatively little with endowments and foundations and some of the other groups. We are a large, sophisticated pension-oriented firm.
We've complemented that by building out very rapidly our retail business, which we've done very differently, I think, from other institutions. We have started in the institutional space. We've taken strategies that have strong track records, really good attribution, risk analytics around them, and moved those to the retail world. We've been beneficiaries of the fact that the retail sale now more than ever looks like an institutional sale. Our sale into the gatekeepers and the home offices of the major wirehouses, increasingly even the IFAs, is very comfortable for us because those are the same kind of people that we sell to in the institutional space. As a result of that, we have the fifth fastest growing mutual fund family over the last couple of years in the U.S. It's because of this institutional focus that we have.
We do have also a much broader range of assets than many of the other asset managers that you'll be speaking with. We have amongst our businesses the largest real estate business in the world, where we span both equity, debt, and all forms of mezzanine and structured products in between. We have one of the largest private placement businesses in the world. I'm always surprised when I hear that asset managers are now discovering the lending world. We've been in the lending business for well over 100 years, and we have two big businesses, private placement and commercial mortgages, which are really important to us that have been lending money through good times and bad times, both into the U.S. and abroad. We have two public equity businesses, one that focuses on fundamental. That's run by Jeff Becker, who's here with us today.
Quantitative Management Associates, QMA, which does all of our quant and asset allocation work. We also have one of the world's largest public fixed income businesses, which is based in Newark, but it has substantial growth in both London and particularly in Japan. We've been building out our Tokyo and London presence pretty aggressively, which I'll come back to in a moment. That's the shape of the business overall. You can feel how it's a bit different, both its real estate presence. We're a very large player in infrastructure. We have about $18 billion out to infrastructure around the world. We're one of the largest investors in airports, ports, pipeline construction around the world. Real assets such as agricultural lending are important to us.
We find that because our client base really want long-term assets, the kinds of new product development and the kinds of areas where we're investing in tend to be much more of these real long-term institutional plays. If I just talk about the health of the business for a moment, the thing that we judge ourselves on every day is investment performance. That is what we live by and we die by. We are an active manager and proud of it, and we'll come back to that debate in a moment. As a result, we have to look very closely, not just at whether or not we've beaten our benchmark, but whether or not we did it for good reasons or because we were lucky.
We spend a lot of time on attribution analysis, and I'm very pleased to say that whether you look out over three years or five years, we have about 70%-80% of our strategies beat their long-term benchmark averages. We are an active manager, but we also have the track record to back it up. I think the best way to prove that is our clients' reaction. That's to look at what we've done on the flow side of things. We just concluded our 14th consecutive year of net institutional positive flows, and we just finished our 12th consecutive year of net positive retail flows.
Not only are those big numbers in absolute terms of flows that we've had come in, but the consistency of every year having those positive flows, despite all of the difficulties that you've heard from active managers overall, we think, on a relative basis, it was a very strong performance. Financially, we've been growing quite rapidly, about 8% a year in terms of our AUM and our overall AOI, which is our pre-tax operating metric. We've done that while keeping our margins in the mid to high 20s. What that does is basically mask the significant growth investments that we've been making in our business overall. We've had real operating leverage in the underlying asset management business, but we've been redeploying that to build out growth strategies for the future, and I'll talk a little bit about what those have been in a moment.
Our strategy overall has been to effectively self-fund this growth through taking operating leverage we've had and putting it back in the business. Major areas where we've been investing in, I just want to highlight a couple, then we'll come back to some of the issues, Bill Katz, that I know you wanted to highlight. First has been a global build-out. This business was somewhat U.S.-oriented, if you go back a couple of years. We have meaningfully moved that over the last 5 years. We have put a lot more people into both Tokyo and London and Singapore, which are our main hubs. We now do believe we're the largest foreign institutional manager of money in Japan.
Japan's been one of the biggest growth markets for us overall in terms of flows, and we've been building out our non-dollar products and suite of products, including UCITS in London. That's been that globalization of the product there has been one big investment area. A second one has been the build-out of our overall real assets and infrastructure capability. We've launched a whole series of new real estate funds. Actually, this year, for the first time, we had new real estate funds launched in Europe, in Latin America, and in Asia, the first time we've ever had all three markets in one year. We also have a new energy fund that's in the market now. We have a new mezzanine debt fund.
We have an overall mezz private placement fund, and we've been pushing hard at these kinds of investments that have attractive yields, and that have a 7- to 10-year duration, which we find that our clients are really very hungry for. That's been that real asset push has been an important piece for us. Last has been really to take advantage of the move toward multi-asset class solutions, which is a word I'm sure you've heard a lot about this morning. For us, it means a couple of different things. Within our QMA business, we already manage a lot of money in multi-asset class products. We've been taking that out to the marketplace increasingly under at least what we call a multifactor. Other people have called it smart beta, but multifactor investing more aggressively.
We've also been using it to augment our target date fund series, which we sell through our own record-keeping platform, as well as other third-party businesses. We've been developing out a third-party business to actually do multi-asset class investing more broadly for institutions. The whole globalization piece, the build-out of a broad variety of real assets and multi-asset classes are the three things that we've been investing in with that additional margin that we've. With that, let me just pause in terms of the overall landscape and then dive into some of the issues that you want. I think my view will probably be formed by the somewhat different footprint that I just described.
Okay. If anyone has any questions, please put your hand up. We're happy to take those as well. Actually, I had a whole series of other questions, even before we heard you speak here. There's just a couple I'd like to go off script, if that's okay, for a moment and ask about. I sort of wrote in the margin, just given that you're such a big institutional pension oriented manager, everything we read is that pensions are struggling in terms of the liability asset gap, number one. A number of pension investors are continuing to reduce their rate of return assumptions a little bit. Can you talk a little bit about what you're seeing from an allocation perspective in your conversations with them, how they're contending with these dynamics? Is it a great shift to alternative? Is there a passive barbell situation going on?
What are you hearing in real time in terms of trends there?
Sure. I think that the world has never been more divergent than it is today. For certainly most of my career, you could go into almost any pension fund, and if you guessed 60/40, you were pretty close to the allocation mix that you would find. Today you can go to a corporate plan on one street corner, and you can be told that they have put in place a sophisticated glide path to take risk off the table, that they are 60% in fixed income, and they're looking to go more than that. They'd like to actually take some risk completely off the table through a pension risk transfer, which we can come back to operation, but they want to de-risk the portfolio.
Then you walk down the street and you visit the local public pension plan, and they explain, "No, that's not the case at all. Actually, we are quite underfunded and the only possible way out of this fix that we can tell is, one, we're certainly going to lower our return expectations, but we are also going to go all in. We are going to go with as many private equity as we can. We're going to put a lot of money with hedge funds." Real estate has been very popular there, and they've been actually taking down some of their fixed income and other allocations. We've never been in a situation where we've had such a divergence of views, and by the way, a divergence of who's taking the risk that we have in today's environment.
For us, that's basically been extremely good news on the corporate pension side. Obviously, a lot of our flows have come in through fixed income, through these de-risking paths. We've been very privileged to have been awarded some of the largest and most complex pension risk transfers, where large clients have actually said that they'd like to take the liabilities off their books, and they put them on our books or actually within a group annuity contract, technically. I manage the money underneath that. Overall, that's been actually a really strong growth story for us. On the public plan side, I'll be honest, I'm very worried about this movie. They are taking more and more risk. The underfunding has gotten worse. We have refused to play in a lot of the operations that are going on there.
They are looking for return expectations we don't think can be realistically achieved at leverage that they would like. We have had growth in real estate. It's probably the one area where that's been quite positive for us. We believe that they are going to discover that quite a lot of the so-called alternatives that they invested in, particularly hedge funds and others, are not going to end up providing the returns that they hoped. This is a Hope I'm wrong, but that's my current focus.
Is that an overarching for the bucket at large, or is that more specific to hedge funds? We also cover Blackstone and Apollo and others of that nature. They'll tell you that they still think they can get reasonable rates of return even though they have a considerable amount of liability. Is it more the long/short book you're talking about, or is it more general to the whole asset class?
I think it is very much strategy by strategy. In fact, we did a pretty in-depth quantitative look at the use of alternatives in pension portfolios that went back about 15 years. We released this about 6 months ago. I think the debate has been somewhat misinformed up until now, where people have really just been looking at return. People as prestigious as Warren Buffett or others go on and compare the returns of hedge funds or private equity to the return. People don't invest only for the returns in alternatives, right? One of the key reasons that people invest in them is actually for the diversification of risk that they add a portfolio. To properly come to a view as to whether or not alternatives add value, you need to look at both the return and the diversification.
That's what we did in our technology. What we found was, as you would expect, that there's a wide range of outcomes depending on strategy. Private equity, to your point, actually really did add value, both in terms of diversification and return. Real estate also was absolutely . Some relative value hedge funds also did . The vast majority of equity and event-driven hedge funds turned out to be largely levered beta plays with very little diversification . The big bucket of alternatives needs to get broken down. Unfortunately, there are large groups within that where I think that many sophisticated institutions are deciding that the fees are not worth what they're getting in terms of the real diversification and .
Within that, on the hedge funds in particular, I guess there's been some discussion. Last year was a very bad year for flows for the industry and the hedge fund industry at large. There's been some discussion early part of this year that the worst is behind. Where do you think the pension allocators are in their mindset in terms of their exposure to hedge funds? Is that a stabilizing issue right now? And/or is it continuing to shift into private equity and real estate, and credit maybe, perhaps?
Well, clearly our view would be that they need to generally de-risk. Our first recommendation for many of the public plans, it has been to take down their expectations for what they're hoping to achieve. Our long-term number for what you could reasonably expect across the balanced portfolio is about 5%. Other people have been out with numbers even lower than that. If you're looking at a 7.5% expectation right now, you're probably going to be disappointed. What that does is there's only one way to move up that, which is to take on more risk. Our view would be it's much better to have people take down their expectation and then invest against that.
If you're willing to do that, there's actually a wide range of fixed income and real assets that will actually achieve that and achieve that at a much lower level of risk than what you have in some of the portfolios.
The other thing I wrote in the margins as I was listening to your opening remarks was the very strong investment performance you've had and also the very consistent level of flows. It's almost we dropped in from a different universe, basically, from what we heard earlier today. Could you maybe peel back one more layer and say why you think you've been so successful from the consistency of the return perspective, number one? What's the secret sauce you think you have, particularly on the retail side of that persistency of growth is just coming off a very small base, but it's obviously something else that must be going on to have that consistent flow level.
For us, we really believe that our secret sauce on investment returns are getting this balance right in our multi-manager model of having each one of our businesses feel like a small investment partnership, but being able to run some of the big investments like one of the top 10 asset managers. That's the delicate balance that I work every day. None of our businesses have more than 700 people in them. If you went to Jeff's senior leadership meeting, if you went to the fixed income senior leadership meeting, you would find 10 to 12 guys who absolutely are invested in those businesses, who feel deeply accountable and committed for the investment and business results of them, and who feel as if they run their own business. That is an incredibly powerful motivator. I think it's one of the reasons we don't lose people.
I also think what it does is it drives real focus. I like the fact that our real estate business just worries about real estate. I like the fact that our equities teams worry about equities, and our fixed income team worries about just that. It creates real alignment with our clients. When our clients put money with us, they like the fact that those portfolio managers are going to be paid based on the business and investment results that are generated in that unit, not because I did something else in another investment unit or Prudential overall lost money in Malaysia or whatever we might have done. That alignment of interest they find very powerful, and I think that accountability and direct line of sight is what has driven this very strong and repeatable investment that we have.
How about on the flow side? I think it was like 14, 12 years respectively of a positive flow. I guess maybe you talked about the institutionalization of the business. How does that translate into unit growth? When you talk about that unit growth, what are you seeing? What kind of products, maybe vehicle that you're seeing in it?
I think the story overall of why the consistent flows is the strength of the pretty variety of products that we have. If you were to go back a decade, you would find that a lot of our inflows were in the equity businesses. Had a big runup. If you looked at the last couple of years, not surprisingly, it's in fixed income and in real estate. I'll bet we'll go back to the other way around in our lifetime here, too. We really do have a very broad range of things that we offer. On the institutional side, I will say that I think that the key has been the investment returns. Many other active managers, both in real estate and in fixed income, have struggled a bit in the active space, and we've had very strong returns. Secondly, it's been the global footprint.
A lot of those flows have come from large Japanese institutions, Middle Eastern institutions, Asian sovereign wealth funds. For them, the U.S., for all the difficulties that we see here, looks pretty good. The relative returns look pretty good, and they want to increase their exposure. That's been a big source of the flows. On the retail side of things, in the last couple of years, it's absolutely been the strength of our fixed income business that's driven. Part of that has been, I think that we have, again, a very complete suite of products. I think also it's been that we've had some difficulties in some of the main competitive, mostly income, but there's been a few others as well, so that we've had some pretty big dislocation of assets.
How important is the RIA channel for you, and how have you attacked that versus marketing that channel?
It's, I would say, of growing importance. It wasn't where we originally started, which was more of a wire house orientation. It's also been probably the source of some of our fastest growth off of a low base. We have, for the most part, tackled it through both the consultants that specialize in that, and then directly with our wholesalers.
Maybe we could talk about some of the big picture themes that we've been hearing overall, then maybe you could overlay your perspective. What's nice is that you have a fresh vision of how your business come together. One of the key themes we heard this morning was this sort of duality of tough business conditions for many players. Many markets continue to trend higher, that's a big masking agent of some of the underlying issues. Fee pressure, overall revenue pressure with an upward bias on expense growth versus excess capacity, but the difficulty of consolidating that capacity.
How do you think about M&A, or how do you think the industry, as you look out the next couple of years, it sort of transforms itself to contend with some of these macro issues or fundamental issues or even some of the regulatory changes there as we move along?
Why don't we start with the fee pressure, then we can work our way into the industry dynamics that come from that. First, just as a factual matter for our business, we have not seen fee pressure. That is mostly the result of the mix of businesses that we have. I mentioned the very strong institutional business and the fact that we've had a lot of new products which have been in higher fee, higher margin areas across real assets and fixed income, which has kept pace with what has been, without a doubt, pressure on the equities businesses and pressure on retail businesses. For us anyway, those have come out wash. I think that overall in the industry, you are seeing this dichotomy of people who are feeling the pressure intensely and others who aren't.
I know a lot of you cover the publicly traded managers are heavily in public securities, and that, of course, does tilt your view of pressure. If I were to ask all of you, do you think that the pension funds around the world spend more or less money today to have their money managed than they did 10 years ago? What would you say? All told, all asset classes. The answer is they spend more. They spend more. Why is that? It's because of the shift in mix of what they invest in that we talked about a moment ago. When you have that big shift into private equity, into hedge funds, into others. The overall asset management industry on the institutional side, I would argue, is not under revenue pressure.
the traditional managers have had a hard time getting into those products in those areas. I think one of the unique things about our business and our model is that we very much have been in those for a long period of time. We have a lot of alternatives asset classes that we can offer. If you don't have those, it's a much tougher story. I think where the fee pressure has been, has been primarily in equities and primarily in the retail side. If I look at that for us, that's about 10%-12% of our AUM. It's an important issue, but it's not existential.
I think for those players who are mid-sized and who are primarily in equities and primarily in retail, this is a very significant issue. We are starting to certainly see a number of those folks who are much more open to M&A opportunities than they would have been a couple of years ago. I think the problem they're going to find is that many people like us are probably not that interested because their business models are under real threat. We generally have better active management than they do anyway. We don't necessarily want to overweight our business into the areas that they're already in. Maybe there'll be some consolidation plays that happen in that. Maybe there'll be some foreign players that decide that's a way to get in.
I'd be surprised if you see that resulting in a lot of the already established players in.
Can we just pause on that for a second? There has been some consolidation. Whether or not it takes out capacity is another question. Janus, a name we do follow, agreed to a no premium Merger of Equals with Henderson Global, which is followed by some of our peers outside the United States. Would you anticipate more MOEs as an opportunity here to scale the business to contend with some of the changes on the way, or how do you see the other end? Do you see more M&A, and if so, what form might it take? Let me ask it that way.
I think there will be probably on balance slightly more M&A than there has been because of some of these pressures. That said, for as long as I've been in the industry, which is a long time now, we've almost always been on that wave of consolidation, and it's never actually happened, and I don't think it ever will. The industry is not materially more consolidated than it was a decade ago. It's a little bit. There's, I think, important reasons for that in a talent-based business. As you say, capacity doesn't really come out. Even when things are acquired, capacity doesn't necessarily come out. I do think there will be some uptick, though, in M&A, and I think the question for all of you as you follow the companies is to really ask yourself, what's this doing for the end investor?
Why is this in their interest? That's really what we ask ourselves when we think about M&A. There are some types of M&A that we could imagine would be a natural bolt-on to our multi-manager model and which would actually really help fill a need that our clients have. I think you think about something like that and would view it positively. I think there are other mergers which always happen in times of stress, where effectively you're just putting together two business models that are both having their own issues. In that case, two relatively difficult players coming together often is just delaying a very difficult set of outcomes.
For you all following this, deciding which of them has strategic value and which of them really is just kind of putting things that aren't working very well together, I think is a critical question to ask.
Yeah, thanks. I think one of the interesting topics of the last number of years, particularly in the alternative asset space, has been the shifts in the strategy in retail. I'm just curious on your thoughts of if you've seen any progress with that, and maybe what kind of innovative structures or what have you, kind of thought of as you attempt to add into the retail channel, whether that be through broker-dealers or IRA type of vehicles?
It's a great question. I think that the truth is there's been pretty marginal progress in trying to do this, for good reason. Most of these institutional real asset strategies, one of the reasons you're getting paid for them is they have real liquidity premium. That is that they are not daily mark-to-market, and they are not daily available to trade. Putting that into something that does trade more frequently, you're kind of asking for trouble when something goes upside down on that. We have looked really hard at things that we could do in real estate, and we think there may be some more that we could do. We've looked at some kinds of structured credit and in particular commercial mortgages, and we think that may be something that we could do.
To take the real institutional strength of a private closed-end opportunistic fund and make that available to retail, we really think there's just too big a liquidity gap to make that work. I wish I had a better answer for you.
Yeah. Question in the back there?
You mentioned that some activity around global reach. Looking at strategy and span, how do you negotiate when you go into these markets?
I think there's no question that expanding globally is always a very difficult task. Not only do you end up having to weave together obviously teams of people from different locations, but you're dealing with a very complex set of regulatory environments where you're covered at a variety, and those, of course, are changing by the day. I will say that I think we've seen some of our compliance and legal costs go up, without a doubt, as we've expanded globally. One of the things that we're absolutely certain of is that those players who are able to bring these very sophisticated investors a true global perspective will very quickly outdistance those that can't. You can actually see it in the league tables.
If you look at the top 20 asset managers who really have global capabilities, they are adding distance between them and the rest of the group. That's partly because CIOs around the world, whether you want to visit a Dutch pension plan or Japan Post, they want you to be able to talk about global capabilities. In general, they're shrinking the number of asset managers that they want to do business with. They can't deal with 320 or whatever you read in the paper. They want to deal with fewer, but if you want to be one of the fewer, you've got to be able to deliver on a global agenda for them. That's not just in terms of the return piece of it.
They want to be able to talk about risk, and they want to be able to talk about factor investing on a global scale. If you can't bring around the table a macroeconomic view, a set of products, and a set of risk mitigants that span the globe, I think increasingly you get shut out from that. I think that's what those league tables are telling you, that that is in fact happening.
I hear another question.
A couple of quick things on the pension managers. One, on that realistic return of 5% that you advise pension managers to have. What are your underlying assumptions for fixing the thing that we're losing there? Just if you can generalize. Then second, what do you think could be the trigger, for lack of a better term, to get some of those pension managers to actually reset the bar? Obviously there's some pretty negative consequences for them to do that as it relates to how they're managing what they have to with state governments and those sorts of things.
It's very tricky, and I don't mean to trivialize the challenge that they face at all. The math of 5% is fairly straightforward, and I think you can look out at quite a number of asset managers and you might get some number between four and six, but you're certainly not going to get the net to get to seven and a half, I think, from anybody. The problem, I think, as you all know, is that once they do take that number down, what happens is that their unfunded liability will immediately take a rather gargantuan leap up. That is a really difficult thing to face with when you're already somewhat underwater in that.
I think we would say that amongst bad options, that is better because it does give you an ability to begin to de-risk the portfolio and to gradually earn your way back into it. If you carry on the way you are and you insist on these higher returns, which are going to be quite difficult and require you to take a lot more risk, we think that the way the movie ends is with some pretty big bankruptcies. That is a very difficult scenario to play out. Ultimately, the fight between who bears those liabilities is not a pretty one.
One of the topics that's been coming up, in addition to the conference today, but over the last several quarters and even the last couple of years now, is the implication of regulatory change on the business. Maybe most specifically for this discussion, the Department of Labor fiduciary reform, which I guess got delayed a little bit today. The question is, does it delay the inevitable? The question is, what implication, if any, does fiduciary reform have on the business? Does that view change if, in fact, the DOL decides the fiduciary reform is delayed, dismantled, dismembered, whatever verb or adjective you want to use on that going forward?
Let's start a little with the longer-term perspective on regulation, then I'll come back to DOL at the end. Although the teams in my business complain a lot about regulation, there's no question that we have been subject to more regulation over the last couple of years than any of us can remember. As part of Prudential, we also have the SIFI requirements that have been brought into that in addition to some of the other regulations. The reality is that from a strategic point of view, the cost of being this business has just gone up quite a bit. That is not a bad thing. Fewer and fewer people are going to be able to afford the cost of the really high-quality legal compliance and finance structure that you need to compete in this business, and we have that.
I would say, actually, as I talk to businesses that think about joining our family, one of the most appealing things that they see is the fact that we have a really good control infrastructure that they could actually fit into. I would say that oddly enough, for as much as a pain it is on a day-to-day basis, one reason why you will see the big slowly getting bigger and you will see some of the smaller players having a more difficult time is going to be the consolidation that occurs because of regulation. We've seen this play out in the securities industry, we've seen it play out a bit in the banking industry, I think we will start to see it more and more play out in investment management.
If I come specifically to the DOL situation, I'm just going to speak to the asset management pieces of this, not to the broader Prudential views on it. Our view is that this direction is already very clear in our clients' minds of how they would like to take this on behalf of their investors. They want to get to a situation where investors' needs are paramount, they want to be able to do it in an environment which has lower fees and costs. Those trends are going to carry on. The DOL would have accelerated it. If it goes through in its current form, will accelerate it, I don't think it actually changes the endpoint that much at all in terms of what we need to do.
As we think about serving both the end investor and our major wirehouse clients, we actually aren't taking our foot off the pedal at all in terms of our achievements. We think that we need to be prepared for there to be much more central home office control over money. We think we need to be prepared for lower costs in that. We need to have a wider range of share classes on other vehicles, including ETFs that are part of that. That's the way that we'll be serving them going forward. Whether that goes at 40 miles an hour or 60 miles an hour, I don't quite know. These trains have left the station, I don't think we should be expecting them to snap back. That's certainly our expectation going forward.
Just on the pension risk transfer issue, when is going to be the inflection point where corporations have enough confidence to do these transactions? Has it been the sensitivity to rates and if rates actually go up, it's easier to pill to swallow than if they're lows across the curve?
Yeah, it's a great point. The pension risk transfer is one of those markets that we overall really believe in and we've been investing in quite heavily for the last decade. We do believe we have the best team in the industry in doing this. Obviously, this is something that insurance companies at the low end have been doing for a very long time, so it's not a new technology. What we brought to the table in 2012 was to do this really in scale, first with the GM and then with the Verizon plan.
We haven't seen other large cases like that, and I think the reason is reasonably simply said in that no CIO wanted to be the person in this very low rate environment to do that only to see the 10-year pop up to 3% and feel like, boy, I would've been a lot better off if I had waited a bit. Our expectation is that if we do see rates begin to move up, that we will see quite an active pipeline in that. Even with the relatively low rates of the last 12 months, we've done a reasonable number of deals, just at a bit of a smaller level. This is something, though, that is a good answer to a complicated problem that corporations have.
We won't be able to predict the timing exactly, over the next seven or eight years, this will be a very big business for us.
Maybe talk a little bit about the structures. You said that you have more of a manager model. What are the pros and cons of that? We cover, I would say even like stealth manager managers, like a Franklin Resources, which has several different brands and then has a centralized distribution model. Then we obviously follow some of your peers like AMG or like Mason that have the more affiliate boutique orientation to it. Then there's the consolidated players like a BlackRock or an AllianceBernstein, if you will. Maybe from your seat, if there are pros and cons to be had for this, is there a better structure than others, or it really just depends?
Well, we are a big believer in the structure that we have, we didn't end up with it just as a matter of history. It actually was a matter of time. There are some things that are very different from some of the other managers, what I think call a multi-manager terminology. One is that we actually do share quite a lot of very important capabilities across the business. Most particularly the fact that we have clients, legal, finance, have a common kind of platform that we use across the businesses. Secondly, we only have one manager for asset classes. In general. We have a few small exceptions to that. In general, we don't have managers that are competing with each other. Third, we own all of our managers, and these are real long-term capabilities that we are taking to institute.
We don't intend to kind of nurture them and grow them and then turn them around in any other way. These are really long-term parts of the business. Third, we have a lot to offer our managers. The fact that if it's a capability that the general account needs, if it's a capability that our retirement business needs, if it's a capability that our annuities business needs, we actually have real assets that a manager manage from being part of our family. They have to compete on even basis as all of them do. There's real assets to be had. In many of the others that you described, that really doesn't happen.
Few more from me. Number one, you mentioned Japan has been a big area of contribution for growth. That's something that we've been hearing from others today as well. Can you talk a little bit about what your strategy is in that market, maybe even Asia more broadly, if that is the right way to think about the question? Underneath that, what kind of products itself are of big demand right now?
Sure. Well, to handle your second one, anyone who thinks of Asia as a region, I think is deeply mistaken. If you don't have a separate business for Japan and a separate business for either China and a separate business for ASEAN, I think you've really lost your mind. We don't make any mistake between those at all. We have a Japan business. It is almost exclusively led by Japanese nationals based in Tokyo. We manage our own general account assets there. We manage assets for the large pension funds. We manage money for the large financial institutions. We've been increasingly recently getting into the business of effectively sub-advisoring into the retail space there for some of the other broker The products that the Japanese are interested in on the institutional side anyway, are almost solely products that are outside of Japan.
We've done a little bit of domestic management there, but by far, what they want is good old-fashioned, U.S. corporate credit, and they want high yield. To some extent they want markets. Recently they've been interested in structured products, which we had not seen much before. They want yield, and they want yield outside of Japan. The swap back has been a challenge. It's gotten very expensive. We really do have to have good yield to make up for that. We've still seen the flows of those very active amounts. For us, the China story has been a couple of different fold. One, we obviously have a privilege to have many of the large sovereign wealth funds as important clients, and we cover them very closely out there.
We have a joint venture with Everbright, where we have a retail business on the ground serving retail clients and certain investors. We do believe that the market for real estate is poised there for active development. We have a big Asian, but mostly ASEAN-based real estate business based in Singapore. We're one of the largest owners of shopping malls in Singapore and Malaysia. We've been expanding that into China, and I think that could be a very active future market for us. Real estate and real assets is another area that we think can be active.
You started off by talking about the 60/40 bucket of investors. If you look at those, would you say they're underweight or overweight at the equity component? If to the extent that people use a benchmark for equities, do you think most of your clients are underweight or overweight at just plain equities at this point, the traditional long equities?
I think it's really hard to generalize. If you looked at corporate plans today, they've obviously been taking their equities down pretty significantly, and they're on a glide path. For the most part, they've taken the benefits of rising rates and rising equity markets, and they've used that to simply keep rebalancing in that direction. Jeff may know the answer
Aren't we at an all-time low for corporate plans in terms of their equity portfolio?
Pretty close.
Down below 50% on that?
They're really low, despite the fact that equity markets have come up so much. That's quite different from the public plans, where many of them have, as I mentioned, really been re-risking. They've done that partly through alternatives, but it's also been that they've kept a lot of their public equities. I haven't looked recently as to whether that's over or underweight in kind of a neutral benchmark. My impression is that the public equities has come down, and that the money from that allocation has gone into alternatives, if you were to look at it over the last three years.
Just within the insurance portfolios, we haven't had much in terms of challenges in the general accounts for a couple of years. Same with energies last year. Are there any asset classes that you're focusing on from a risk perspective that you would think are one of the solutions that you guys are offering?
Want to talk to the general account?
Spend more insurance general account versus-
Just other clients? I would say that the thing that most insurance clients have been focused on has been areas where they can really pick up yield, and they want to have it with some kind of duration. For us, that's meant a lot of demand for our private placement businesses and a lot of demand for our commercial mortgage business. Obviously, whenever you see that kind of heating up of demand, you have to scratch your head and say, "At what point does this become a little bit overblown?" We would say, at the moment, we have not seen supply in real estate actually getting to places that really concern us. We have been selectively selling some of the big cities. We've been net sellers of New York, of London, and of San Francisco. At the same time, we've liked a lot of second-tier cities.
We still have been investing in the Austins, the Munichs, the kind of tertiary areas around Paris, very happily. Which have been, again, supply is in quite good situation. We've been watching carefully multi-family. Multi-family's obviously been one of the most attractive sectors within commercial real estate finance. Rents have come up quite rapidly, and I think the question is, can that really be sustained? If I were to say, is there an asset class which is in the later innings of the game, I would probably put multi-asset class place right there.
Just if you think about the general account, you think about commercial mortgages. Our tilt is a little bit more defensive than you would see in that one here.
Okay, just one last one from me. I can't ask this question from the parent free cash flow analysis, so I'll ask it from an expense perspective. You said your margins are in the mid-20s range, was a little bit below where the companies I follow, their margins are probably closer to 30%. Maybe there's an accounting issue in there that I'm not aware of. Reinvestment needs, how are you thinking about next couple of years? Where do you see the biggest rate of plowback back into the business? What do you think about just go forward margin really for the industry?
I think that margins for any individual company are very much determined by the mix of businesses that they have. If you have an at scale equity or fixed income player, you're going to clearly have a different set of margins than if you have the blended rate across all of the businesses that I described. One of the trade-offs that we have, when you look at some of the private businesses, when you look at real estate, is that we probably do have a little lower average margin than many of the publicly traded firms, and that's a little bit of the price we pay for this incredible diversification that we have. We would say our businesses should, right through a cycle, be able to operate in the mid to high 20s in terms of margin.
We're very comfortable that we can continue to reinvest to grow the business at those kinds of levels. A reinvestment we would say will continue around the themes that I talked about before. I think we'll continue to see disproportionate investment outside of the U.S. We'll see a disproportionate investment in real assets, including a lot of infrastructure, a lot of real estate, and some of the other agricultural and other kind of long-term private investments. We'll continue to see the build-out of our multi-asset class. I think those two things together will continue to make up a couple of points of margin where we're generating real leverage, and we put it back in the business.
Any last questions? All right, please join me. You've been very gracious with your time. It was great insight.
My pleasure.
Thank you very much.
Thank you very much.