Managing Stable Value in an Environment of Heightened Risk, Uncertainty

Cristopher Centers

Careful evaluation becomes crucial in this market, where the potential for mistakes is higher. With the potential for default rates to climb to 8% or higher — according to MetLife Investment Management, sell-side institutions, and rating agency estimates — the market could get one in 12 credits wrong, Funk said. […]

Careful evaluation becomes crucial in this market, where the potential for mistakes is higher. With the potential for default rates to climb to 8% or higher — according to MetLife Investment Management, sell-side institutions, and rating agency estimates — the market could get one in 12 credits wrong, Funk said.

Further, each of those mistakes can have an outsized impact on a portfolio — an unacceptable result in stable value — because default recoveries in COVID-affected sectors have been challenged during this cycle.

“How many downgrades can you sustain in an investment-grade portfolio and earn that back with a sub-2% all-in yield?” Funk asked.

Perhaps more prevalent for stable value performance is the potential for spread-widening related to rating agency downgrade risk. So getting ahead of high-profile downgrades is key. In this volatile and challenging investment environment, MetLife Investment Management believes investors should be seeking managers that have a defined track record in security selection and the expertise in portfolio construction to help mitigate some of this uncertainty, all underpinned by a fundamental research platform.

“When unexpected outcomes occur, resulting in difficult credit situations, we believe that our assessment of the issuer’s underlying quality and intrinsic value will be a critical driver of success during challenging time periods” Funk said.

Potential opportunities

That said, there may be more opportunity today, as markets have truly dispersed for the first time in a decade.

“We tend to think that volatility can be your friend if you’re resourced properly with the right people doing the right jobs,” Funk said. “Analyzing credit the right way is getting bad ideas out of client portfolios and good ideas into portfolios. We welcome the dispersion.”

Among the potential opportunities are fallen angels in the oil sector and some well-positioned consumer businesses, he said.

Regardless of sector, in every case, Starr, Funk and their teams look not only at a company’s fundamentals, but at the financial policy decisions that management is making. Such decisions might include how they’re dealing with historic dividend payout ratios or go-forward share buybacks, or what they’re doing as far as acquisition versus asset disposition.

“We think that’s where we can add a lot of value for our clients,” Funk said. “In some circumstances, management teams still control the fate of their outcomes, the fate of their balance sheet and the fate of their corporate credit rating. We tend to like those names.”

The approach considers continuously evolving business models that further complicate the landscape.

“We believe the need to generate safe and attractive income in a stable value portfolio places a significant premium on a process that features extensive fundamental credit research and is enhanced by building portfolios bond by bond from the ground up,” Starr said.

Funk agreed and added that he and his team are seeking to take advantage of investment opportunities even as the fundamental business outlook remains cloudy. “We’re excited about our ability to navigate these types of markets regardless of where we sit on rates, yields and spreads,” he said. ■

This article has been prepared in conjunction with MetLife Investment Management (“MIM”)* solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any investments or investment advisory services. The views expressed herein do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. Subsequent developments may materially affect the information contained in this article. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This article may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements may turn out to be wrong.
Risk of loss: All investments involve risks including the potential for loos of principle. The strategies described herein are speculative and there can be no assurance that any investment strategy’s investment objectives will be achieved.
*MIM is MetLife, Inc.’s (“MetLife”) institutional management business and the marketing name for subsidiaries of MetLife that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/third party investors, including: Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), and MIM I LLC.

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