Stewart: Insurance companies are looking for yield, but where to find it particularly on a risk adjusted basis? Andrea DiCenso is our guest from Loomis Sayles. And she’s going to tell us where to look. Andrea, welcome.
Andrea: Thank you, Stewart. Great to be here.
Stewart: My name’s Stewart Foley. This is the Insurance AUM Journal podcast, and we’re thrilled to have you. Can you please tell us just a little bit about your background and what your focus is at Loomis Sayles?
Andrea: Sure. My background is within the fixed income markets. I work within the alpha strategies team at Loomis Sayles. We are 1 of 10 fixed income teams that are looking to meet client’s needs, and whether that be book yields or income objectives, as we think about investing across the fixed income universe. Now, what is unique about the alpha strategies team within Loomis is we not only utilize the expertise from our credit research department that is doing deep value fundamental research, but we also take the approach of incorporating a robust top-down view to understand what is the macro environment we’re in and what risk taking are we being paid to allocate to across the different fixed income asset classes?
Andrea: So, when you think about the style of funds that we run on our team, we run multi-asset credit funds that invest across the fixed income spectrum. Everything from investment grade, high yield, emerging market, bank loans, and securitized credit.
Stewart: And when you look at multi-asset credit, is that a global opportunity set, or are you focused in the US? Where are you looking?
Andrea: Sure, great question. We do look globally and the reason that we do that is, what we have found is, the fixed income universe has become global in nature given the unprecedented coordination we’ve seen across global central banks. And as we think about finding value in a global setting across those different areas of fixed income markets, we utilize a credit cycle approach to investing. And what I mean by that is we like to classify where every country and every industry is trading within their own credit cycle.
Andrea: The way we do that is, again, harnessing the research capabilities, both from our fixed income research teams and our macro research teams. They’re charged with really rolling up their sleeves and digging into the financials on countries, as well as individual corporates to understand where leverage is building and falling. And that’s going to dictate, to us, in what stage of this four phase credit cycle, which encompasses downturn, credit repair, recovery, or expansion late cycle is that country or that industry trading in. And what we take away from that is that a better understanding of the risk and return profiles of that asset class or that individual country, as we think about how much risk are you being paid to take in today’s environment, and how much risk premium might be available in the market?
Stewart: I mean, that’s always the game. We had a CIO interview this week with Joe Eppers and we were talking about the same thing. It’s where are you getting paid? It’s not just what’s the ultimate highest spread, it’s also a risk. And, as you identified, there’s a number of different risks in different countries, in different stages of the credit cycle. One of the things I think that is always sort of on people’s minds, particularly globally, is this concept of what I would refer to as market fragility. And I don’t know how you want to define that, but do you consider market fragility? And if so, how do you measure it?
Andrea: Sure. We do factor market fragility into our investment process. And really the catalyst for having that be incorporated is, if you think back to how people traditionally viewed a credit cycle approach, they were relying on either macro economic data or, perhaps, data being reported in financial statements. Now, all of that information can be lagged anywhere from one to six months. So, if you’re thinking about asset allocating across the fixed income space on lagged data, you’re always inherently going to be late to that party. And the market may have already repriced before you can adjust your portfolio.
Andrea: So, what we did is we tried to incorporate more market-based data into our analysis of the environment that you’re trading in. So, what we look at is the interconnectedness of the underlying constituents of really any index. It could be a fixed income index, like the high yield universe. It could be an S&P 500. And we do that on a global basis. The reason being for that is we want to look at global equity markets, global fixed income markets, and where are the constituent, think of it as, cross asset correlation rising or falling? Because what we know is we are not smart enough to predict the next crisis. But what tends to precede any market crisis is rising correlations across constituents within an index. So, we want to be monitoring all global equity in global fixed income markets to see where is there a potential for agility building? Also, where is it falling? Because that’s going to help us think about the risk taking environment that we’re in. And, like you said, how much risk are you being paid to take in today’s market?
Stewart: I mean, it kind of leads me into my next question, where you’re talking about measuring market distress, or fragility and potential market dislocations. Some insurance companies are somewhat buy and hold. Others, not so much. So, can you talk to me about the asset allocation process, whether it’s dynamic, static, kind of how do you think about investing in periods of dislocation?
Andrea: Sure. And I think that this is where getting to know your end client is so crucial because that end clients need, perhaps, they have a gain/loss budget that they have to adhere to, or they’re more book yield focused we want to understand how much optimization they can have at any given point in time. So, those lines of communication become extremely important during periods of market dislocation.
Andrea: Now, our job as portfolio managers is always to be identifying where there’s value across the different areas of fixed income markets and, ideally, be optimizing those allocations for our clients, so they can meet their book yield objectives, or achieve a higher risk adjusted income for them. However, we are always balancing their constraints against that optimal asset allocation. And that’s where that dynamic process comes into play. Now, our team has been customizing solutions for clients for over a decade now. And that partnership with the end client is really what drives that process.
Stewart: It’s really interesting. And I think that unless you’ve been there and done that it is difficult to communicate how challenging it can be to run a strategy, and yet deal with all of the constraints and their logical constraints that make sense, but it’s still hard to get as much of your strategy into the insurance company as you can be and is… I’m from Missouri, Andrea, you don’t know this, but we’re full of sayings. And my saying about insurance companies is insurance companies are like snowflakes. From a distance, they all look the same, but when you’re up close, they’re all different and they can be very different. So, it’s interesting how the approach that you’re taking with those insurance clients, I mean, it’s roll up your sleeves, but that’s what you got to do, right?
Andrea: Yeah. And I think, really, the advantage for the end client, in my experience, has been we stand ready with the asset classes at your disposal for when there is a market dislocation and we can act faster than the end client could’ve on their own. Like you said, I thought it was a perfect analogy, the snowflake analogy because, at the end of the day, our job is really to identify to them when we see that dislocation and then work with them to adjust.
Stewart: My wife would warn you at this point, don’t encourage him. So, you’ve got a global research team, you talked about top-down. What about security selection and the bottom-up side of things, how do you work that into your process?
Andrea: No multi-asset credit investing product could work without both of those being simultaneously strong. You need that robust top-down process to identify when to take risk. However, once you may identify the high yield universe looks attractive, it becomes a game of identifying what specific industry and what individual issuer within that industry is most attractive. So, my background is actually fixed income research, that’s where I started my career at Loomis. And the team that we have in place is so strong and their ability to have a consistent process around identifying ideas, as well as having a systematic portal, if you will, for communicating those ideas across the different fixed income teams. The team I sit on, as I had mentioned, is only 1 of 10 fixed income teams and our risk return objectives are going to be vastly different from another team at the firm. So, we need to be able to harness the output of credit research to meet the needs across the different teams.
Andrea: Now, the way that we do that is we’ve created bespoke tools that allow our individual research analysts to measure the risk premium that is available in all the names that they cover in each individual industry. And this is a living and breathing tool, meaning that real-time data is feeding it. So, as spreads are either tightening or widening, they’re able to adjust their views. And that is immediately communicated across the portfolio management teams. So, at the end of the day, when I sit down with a research analyst, I don’t have to even ask them, what is your top idea? I know what their top idea is. It becomes a deep dive into what is the catalyst for spread compression or spread widening, as it might be.
Stewart: So insurance companies, as I opened the top of this podcast, they’re in a search for yield and it’s not new. It’s an incredible problem. You’re seeing entire blocks of live business being sold to private equity firms because they can’t make money with IgE fixed income. And I think if you look back 10 years ago, the asset allocation for insurance companies was overwhelmingly core bonds. And, now, I would say that it’s anything but. And some people have gone down in credit, some people have gone down in liquidity, some people have gone to EMD, and some bank loans and some people have done all of it. So, in your experience, are you seeing insurance companies wanting to do mandate in a sleeve format, a high yield specific mandate? Are you seeing allocations to say, “Hey, look across this group of asset classes, let’s invest where the value is the best.”
Andrea: I think what we’re seeing a shift towards is away from the sleeve mandate. And that speaks specifically to this search for yield that’s not only isolated in insurers views, it’s everywhere, whether you’re a public pension fund, or you name it. The search for yield is real. And the reason it’s real is that unprecedented central bank coordinated activity that we’ve seen just flooding the markets with liquidity. And, as a result, it’s pushed investors out that risk return spectrum to find that yield.
Andrea: Now, the reason that we believe we’ve seen such an uptick in interest away from the sleeved approach more towards a holistic multi-asset credit investing style is because countries and industries are moving around that credit cycle at a much faster pace due to that central bank activity. And the opportunity set your risk adjusted income opportunity set is shifting at a faster pace. So, can people react quick enough as that opportunity is in the market? Or do they want to give that mandate to the individual manager to say with confidence, you identify where risk premium is most attractive and optimize that asset allocation for me, again, paying close attention to those risk parameters that insurer might have in place or those gain/loss budgets that they have in place. So, what I think we continue to see is the desire for asset managers to be willing to customize for the individual insurer.
Stewart: Yeah. And I mean, it gets into even, I have yet to meet an insurance CEO that didn’t say we have a conservative investment philosophy. But what that means, what that looks like on their balance sheet can be all over the place. And it is driven by their capital position, their tax position, their lines of business, their place of domicile. There’s a lot of things that goes into that.
Stewart: I was talking with another reference to Joe Eppers, but we were talking about the regulatory regime and the idea that insurers are moving out of core bonds into these other asset classes because the opportunities that’s where the yield lives, but you got to be smart about it. So, understanding the needs of an insurer, kind of down the path on that we throw around the term book yield like it’s normal. That term only exists in insurance world. I am a dedicated insurance geek and so, it’s part and parcel of my world, even though I’m not running money actively anymore. So, book yield versus total return, there’s a two ends of the spectrum, opposite ends of the spectrum. How do you deal with the insurer’s need for “book yield,” which is an insurance centric thing versus a total return strategy? And does it have an impact on performance?
Andrea: Sure. It’s a great question. And it’s something that we see time and time again, as we’re meeting with clients and understanding their end needs. What we see in the book yields constrained clients, or focused clients I should say is really at the end of the day, when we are looking at every individual bond at their potential spread compression at any given point in time, we need to also factor in is that yield contributing the most attractive yield in that asset class, in that industry and match that up with the clients end need. Because, at the end of the day, if I’m looking at swapping one name for another name, for a difference of 5 to 10 or maybe even 15 basis points of spread compression, if that yield component is more attractive to the client’s end need that is going to change the investment opportunity set.
Andrea: So, having the flexibility and the tools on the optimization side to meet that client’s end need is really what is driving, and is helping us manage those two different return opportunity sets. The total return opportunity set, just given it has less constraints, may allow the end user to achieve a higher return in different time horizons. However, that’s not to say that a book yield focused client won’t also have attractive risk adjusted returns.
Stewart: Yeah, it’s interesting for folks who aren’t steeped in the insurance tea, the concept of book yield. But it’s critical. It’s critical to the industry. I mean, people are struggling. I mean, it’s a challenging environment to say the least.
Stewart: Andrea, no discussion of yield is complete without a discussion of risk management. So, how do you deal with the risk management of a multi asset credit strategy for an insurance company? Do you do any modeling? How does that work?
Andrea: Sure. We’ve created a number of bespoke tools in-house to really help us think about risk management in a variety of lenses. Everything from daily risk reports that are generating all the metrics that you would imagine, betas, cross-asset correlation analysis, generic scenario testing that’s cans. Like what if the 2013 taper tantrum happens again to your portfolio? Where are you most vulnerable?
Andrea: But then, we took it a step further and we said, “Let’s create a live tool that allows us to optimize our portfolios for either upside or downside scenarios that we think up on the fly in team meetings. So, my co-portfolio managers, and I can look at our portfolio for a client and say, “What if we think the next OPEC meeting could result in a $20 downdraft in oil prices, where are we most vulnerable? What asset classes in that scenario or individual securities are you not being paid to hold that risk?” We also can do really interesting analysis on what if the curve steepens by 50 or 100 basis points. What asset allocation is most appropriate, given that macro environment playing out? And it allows us to have a pretty deep fruitful conversation around what would the asset allocation look like? And then, we can take it a step further for those book yield focused clients to start the analysis around what would we be buying or selling? So, we’re prepared to act if that macro scenario plays out.
Stewart: Yeah, I hadn’t heard the term 2013 taper tantrum in quite a while. That’s good. That appeals to the inner geek in me, I love it.
Stewart: So, always at the end of every podcast, I tend to ask one question and I’ve cooked up another one question that we haven’t talked about. And so, here we go. This is the get to know your guests segment. So, I happen to know that you have a 13 year old dog named Andy. It’s one thing we should know. So, here’s my scenario, this is one of two. So, this is the new one, ready? So here it is. It’s Friday night, whatever and you’ve looked at your phone, you’ve read every email. There’s not a single unread email in your inbox. And you’re like, “Wahoo.” Now, you checked it two more minutes, two more minutes, two, you checked it four or five times because I know, because I do the same thing. What is your go-to activity, if you had a free weekend, what would it be?
Andrea: Free weekend? I mean, barring the blistering cold Boston temperatures, I’d be at a beach drinking with friends on Cape Cod. There’s nothing better than that.
Stewart: All right, cool. So there you go. There’s a new signature question, I really like that. So here’s the other one. So, there you are at Bentley, it’s your graduation day. Now, regardless of the festivities, the evening before you are looking bright-eyed and bushy tailed in your cap and gown. There you are, you’ve made it up the stairs, you’re getting ready to across the stage. And they call your name. The crowd goes crazy. Then, you walk over to the university president and he or she hands you a diploma, shakes your hand, quick picture and you walk off the stage. As you come down the stairs, you run into yourself today. What do you tell your 21 year old self?
Andrea: I would tell her, relax a little bit more, have more fun. There’s no one path to your end job. Just network and have some fun.
Stewart: See, there you go. I love that. That’s so awesome.Andrea, thanks for being on. Andrea DiCenso, Loomis Sayles, thank you very much for coming on.
Andrea: Thanks Stewart.
Stewart: Well, thanks for listening. We appreciate all of you. If you have ideas for podcasts, please send them to email@example.com. If you like us, please tell your friends. If you don’t, tell us what we can do better. My name is Stuart Foley, and this is the Insurance AUM Journal podcast.
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