Bernard Winograd is something of a Renaissance man, who came to money management after several other careers. He worked on election campaigns in high school and college but after five years was bored "out of my mind." He became a public relations officer at Bendix Corp. and then the executive assistant to the company's CEO, Michael Blumenthal. When President Carter named Mr. Blumenthal Secretary of the U.S. Treasury, Mr. Winograd went with him to Washington. When Mr. Winograd returned to Michigan-based Bendix, he was asked to become treasurer of the company by Bill Agee, the new CEO. "That's how I became a financial executive. It was like drinking out of a fire hose for the first six months, " Mr. Winograd said. He moved on to work for Al Taubman of Sotheby's, first doing the family's private equity investments and later becoming executive vice president and chief financial officer of Taubman Centers Inc, a regional shopping center company. He was recruited to head Prudential's real estate company in 1992 and became president of Prudential Investment Management in 2002. He spoke with P&I's Christine Williamson about the asset management company that now fully covers the investment spectrum.
Q Why did you join Prudential?
A I came originally because I thought Prudential would be a very interesting platform in which to participate in the transformation of the real estate capital markets. The rise in public ownership in the real estate industry at that point was substantial, and it was making a big difference in the way people thought about valuations, financing and everything else about the real estate industry.
What I discovered after a few years was that what I really liked was the investment management business. And (I mean) the business. The investment management industry is full of people who come up from a background of investments, and while I've done some of that ... I've always thought of myself, primarily, as a business manager. And the business of managing investment management, managing investment management firms, is not very well studied and not very well understood, at least in my opinion. And often is done poorly.
Q Are you planning to get into hedge funds?
A No. We have one hedge fund that we have managed in-house for the general account that we have some discussions (about) with selected other potential investors... with similar kinds of investment needs as the general account.
We wouldn't have any hesitation in selling a hedge fund that we had particular skill or expertise in (managing). But we don't expect to get into having a broad, diverse product line of hedge funds or funds of funds. The problem with the hedge fund business is that it is not an asset class. And therefore if you are going to offer investment management capability, it has to be tied to a very specific investment strategy. And those don't come on trees. They come organically out of your skills. You don't just sort of go hire (people) and get into that business.
Q Don't you have plenty of talent who could manage hedge funds?
A We have plenty of talent to manage asset classes and by an asset class, I mean a category of investment that has a predictable rate of return over time. I don't think hedge funds fit into that category. There is nothing in the capital markets that hedge funds finance. They are not part of the capital structure of the American economy or the world economy, for that matter. In that sense, a long-term expected return for them is impossible to define. They are no different, in some ways, than commodities investment.
What's interesting to me about the hedge fund phenomenon is that a lot institutional investors that I've talked to expect it to be a major problem in the next three to five years. And they're still going in the business and they're still giving money to hedge fund managers. It is an interesting example of the sort of collective mindset that you sometimes get.
Q Is Prudential in an asset accumulation phase?
A Yes. As an owner, we like the balance that we have in the asset classes. We like the diversity of income sources. We like the diversity of clients. We don't really see big gaps in any of that. Our objective is to grow the assets significantly.
We see more opportunity to get people interested in strategies they may not realize we offered in the private asset classes ... We think we have a lot of interesting expertise there - in mortgage portfolio construction, in private placement efforts and in real estate. A lot of people who today are looking for new sources of return are going to be interested in these.
Q So you're basically offering alpha?
A Everybody offers alpha. We're offering what we think are unusual sources of alpha that people haven't necessarily thought of.
One of the striking things to me is that one of the essential insights of Modern Portfolio Theory is that you have to multiply the sources of uncorrelated alpha that you have. That's the job of the portfolio manager. And yet the way the practice has developed in the industry is we try all the time to narrow the number of asset classes in which we're investing.
My favorite example might be that the corporate mortgage market is as large as the U.S. Treasury market, but I can count on the fingers of my hand the number of corporate and public pension plans that have an explicit allocation to commercial mortgages. Now why isn't that an asset class? A private asset class, but an asset class? The real obstacle to this is a matter of culture and training.
Q So why aren't institutional investors more diversified across asset classes?
A I think it's because of the way Modern Portfolio Theory teaches everyone to manage risk: by limiting the ability of any individual manager to deviate from the benchmark, by tracking becoming such a big thing. There's been some interesting work done that points out that the result is that you end up with a risk budget that is too small to achieve what you set out to achieve in the first place. But putting that aside, the point of it is that by defining risk in that way, we find ourselves as an industry in the position of ignoring common-sense definitions of risk as well. Like the risk we're all putting too much money in an asset category at one time. Why don't we avoid loss by stepping back and asking ourselves how big a risk that is? We all live and work in this intellectual climate that has been created by the adoption of MPT, which is sound and which makes sense, but it has its limitations.
Bernard Winograd, president, Prudential Investment Management, and chairman, Prudential Real Estate Investors, both in Newark, N.J.
Assets under management: $277 billion
Performance (as of Dec. 31):
Prudential fixed income enhanced index composite:
1 year 10.52% (10.26%)
3 year 10.39% (10.10%)
Prudential value equity composite:
1 year -11.28% (-10.85%)
3 year 3.57% (-9.5%)
jennison growth equity composite:
1 year -30.00% (-27.88%)
3 year -21.84% (-23.62%)
Benchmarks (respectively): Lehman brothers aggregate; s&p 500 barra value; russell 1000 growth