After a year of robust growth in global markets in 2017, the emergence of pointers to a potential economic downturn has left US insurer Metlife looking to add to its positions in what it considers to be the relative safe haven of private assets.
Chuck Scully, chief investment officer for Asia at MetLife, pointed to several concerns.
“There are areas where there could be pockets of volatility [in the coming few years] because of trade tensions and potential breakouts of inflation, and just a generally changed environment of higher rates," he told AsianInvestor.
“That really is pushing us towards private asset categories, and that would be privately placed corporate bonds and commercial mortgages.”
MetLife has about $105 billion under management in Asia Pacific, Scully said.
The insurer's global portfolio assets under management (AUM) was $418.7 billion in March 2018, of which 17.4% is in mortgage loans, 15.4% in structure finance and 3.5% in real estate equity (see chart below). Its corporate and foreign government bond portfolio accounts for $214 billion (51.1%) of the total AUM, of which private bonds represented around about 20%.
Scully did not provide a breakdown of its Asian allocations to private assets, but said it aims to invest more into them and is in the process of finalising exactly how much to allocate.
“We expect to have increased allocations to these sectors in the coming year and are still working through what that looks like at the moment,” he noted.
MetLife's search for more private assets reflects a belief that the markets will witness steadily rising interest rates for some time. That said, Scully said the company doesn’t anticipate a drastic uptick.
“We don’t expect a [US] recession in the next year or two, but we don’t think the business cycle has disappeared either, and so we would expect a recession over the next few years,” he noted.
Given this outlook, Scully suggested asset owners not take unnecessary risks when investing. “I think it’s time for people to focus on what they know, where they have the greatest expertise, as opposed to areas they’re less familiar with, and where you think you can get good value,” he added.
For MetLife, this area of expertise is in private markets, in particular private debt. Such assets offer good value in the current market and perform well if conditions deterioriate, Scully said. Hence the firm will always have a steady presence in this area, he noted, going on to outline their appeal in more detail.
Assets such as commercial mortgages particularly appeal to Metlife, said Scully, because they offer wider spreads than for equivalent vanilla bonds and better credit protection.
In addition, commercial mortgages offer the flexibility of fixed or floating rates, and the latter are preferable in a rising rate environment, Scully said.
Such assets also provide collateral, which helps during an economic downturn and in terms of improving underwriting credit fundamentals, he added. Private bonds also provide better credit protection because of their stronger covenants than those in the public markets, he said.
While investing in private assets means giving up some liquidity, he argued that the advantages outweigh the disadvantages.
“Because of our focus on [asset-liability management] and the way we have our portfolios constructed, we’re confident we can afford to give up that liquidity in exchange for quite a few benefits in return,” said Scully. “We’re getting wider spreads on these types of assets, and we’re getting better credit protection," he noted, without offering specifics.
MetLife’s rising exposure to private assets reflects a trend among Asian asset owners to build positions in alternatives such as private debt, as they can provide higher returns than public instruments in exchange for sacrificing liquidity.
Institutions such as Korea’s Public Officials Benefit Association (Poba), the Hong Kong Jockey Club, New Zealand Superannuation Fund, and Australia’s Construction and Building Unions Superannuation fund (Cbus) have all either started investing in private debt, or increased their allocations over the past year.
Asset owners elsewhere are also pushing into private debt, with Canada’s Public Sector Pension Investment Board (CPPIB) having doubled its private debt allocation over the past year, for example. And the Teacher Retirement System of Texas is looking to raise exposure from around 3.5% to 5% of its $151 billion in AUM.
Meanwhile, defined-benefit pension funds in the UK now have a typical allocation to private debt of around 5%, up from almost zero a decade ago.