PLANSPONSOR - October/November 2019 - 9

Enhancing Fixed Income
Returns With Diversified
Credit Opportunities
F
ixed income allocations of defined benefit plans are usually viewed as the
anchor of the portfolio, offering protection against the volatility of equities.
But today's fixed income markets present their own unique risks, and with
interest rates at such low levels, don't offer much yield as compensation. To identify
the unusual challenges and opportunities, PLANSPONSOR spoke to Jude Driscoll,
Head of Public Fixed Income at MetLife Investment Management, which manages
global fixed income assets across the maturity and risk spectrum.
PLANSPONSOR: Growth in the U.S.
economy has been stable, but inflation
and interest rates have been unusually
low for so long-what risks does that
pose for the fixed income markets?
Jude Driscoll: Globally, the geopolitical
environment
is unsettling-trade wars,
tariffs, sanctions, and Brexit. And it looks
as though the European Central Bank is
out of bullets to stimulate those economies.
In the U.S. we are worried about
corporate earnings and the economy
would
bring
opportunities
higher credit spreads?
Driscoll: That's a good point. The fixed
income markets have all been moving
together, and that's probably the most
difficult time to populate a portfolio, as
there are limited compelling opportunities.
A shakeout in the credit universe
could be helpful by widening credit
spreads. We believe sometimes the best
" Rather than trying to predict and time interest
rate levels, we think investors do better
over the long-term through careful security
selection in spread sectors. "
sustained low yields and challenged
corporate earnings through the end of
the year and into 2020.
In a market environment like this, where
yields and credit spreads are low and
interest rate volatility is high, it's difficult
to add alpha in traditional core and
core plus strategies only from a rotation
among market sectors. It's also challenging
to time fixed income duration and
yield curve positioning.
So rather than trying to make a call on
interest
rates, we think investors are
more likely to benefit long-term from
benchmark-like durations coupled with
diversification across fixed income
sectors globally.
PS: In this environment, could bad news
be good news-in that disruptions in
time to build a fixed income portfolio is
when the market is a little upside down,
and all asset classes are not moving in
lock step.
PS: Is there an advantage to investing
in fixed income through passive strategies?
Driscoll:
We feel it is difficult to replicate
the returns of the fixed income markets
with passive portfolios. An index-like or
passive strategy might get you some of
the right bonds, but may not represent
the entire market.
Additionally, a manager being able to
allocate away from the index and toward
spread sectors may turn up more return
opportunities over the long term. For
example, for the 10 years ended June
30, 2019, every manager in the eVestSPONSORED
SECTION
through
Jude Driscoll, EVP, Chief Investment
Officer for Public Fixed Income at MetLife
Investment Management.
ment Core Plus Fixed Income Universe
outperformed the Bloomberg Barclays
U.S. Aggregate Index.
PS: Diversified core strategies of investment
grade securities, or core plus
strategies, have been the mainstays
of pension portfolios. With yields so
low, should pension sponsors consider
adding separate portfolio mandates for
fixed income with greater credit risk?
Driscoll: Plan sponsors who are able
to expand their guidelines to allow
for increased exposure to high yield,
emerging market debt, non-U.S investment
grade credit, and securitized
credit can achieve added diversification
within their portfolios. However,
for smaller plans this exposure may be
better accessed through pooled vehicles
that have the benefit of size to achieve
diversified and cost efficient exposure.
For either approach, a broad separately
managed account or pooled vehicle, we
believe manager selection should be
focused on those managers with a fundamental
approach to investing in these
asset classes and an established history
in the space.
In this market regime, we continuously
search for opportunities that are consistent
with our investment process and
sustainable in periods of market difficulties,
while leaving some powder dry
to seek opportunities when the market
breaks down. n
PLANSPONSOR - October/November 2019

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