Enhancing Fixed Income Returns With Diversified Credit Opportunities

“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.”

Jude Driscoll, EVP and Head of Public Fixed Income at MetLife Investment Management

Fixed 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 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 corporate earnings and the economy would bring opportunities through higher credit spreads?

: 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 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?

: 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 eVestment 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?

: 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.


This document has been prepared by 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 securities or investment advisory services. The views expressed herein are solely those of MIM and 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. The information and opinions presented or contained in this document are provided as the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. Fixed income investments are subject interest rate risk (the risk that interest rates may rise causing the face value of the debt instrument to fall) and credit risks (the risk that the issuer of the debt instrument may default). These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 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 document 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, as well as those included in any other material discussed at the presentation, may turn out to be wrong. Past asset class performance is not indicative of future results. 


MetLife Investment Management (“MIM”) is MetLife, Inc.’s institutional management business and the marketing name for the following affiliates that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/third party investors: 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.