MetLife's CIO Steve Goulart manages one of the biggest and most diverse insurance asset portfolios in the US. While the insurer is feeling the pinch of low interest rates, its diversification has helped to calm some of the yield pressure. Sarfraz Thind reports
As chief investment officer (CIO) of the world's tenth biggest insurer, in charge of a $516bn portfolio of assets, Steve Goulart is a busy man. During his six years in the role, Goulart has overseen a rapid expansion into risky assets as the insurer looked to get its portfolio in order to deal with the turbulent market conditions ahead.
Added to that he is the brainchild behind MetLife Investment Management, the company's third-party asset management business, which has raised $21bn in third-party assets in only four years. Now he is preparing the company for the next phase of the macro environment – one which offers a possibility of greater stability and potentially increasing interest rates.
Alternative experience
It helps, perhaps, that Goulart's path to CIO has been somewhat unorthodox. His background is neither actuarial nor in investment. Goulart spent 22 years on Wall Street – for the first six he worked at Merrill Lynch structuring bonds, the rest of the time in traditional corporate finance giving merger and acquisition (M&A) advice and raising capital mainly for insurers and asset managers. It provided him with knowledge of the industry, albeit in a roundabout way.
"To the uninitiated, I may not appear to be a career investment professional, I don't have a CFA, for example," he says. "But my other professional experiences have helped to inform my thinking and broaden my view of the markets. I think this positions me better to question why we do things a certain way and to encourage innovative, outside-the-box thinking."
"My other professional experiences have helped to inform my thinking and broaden my view of the markets."
Goulart joined MetLife in 2006 as head of the M&A division, where he spearheaded the $16.2bn acquisition of American Life Insurance Co. (Alico) in 2010, the biggest acquisition in MetLife's history before moving to the portfolio management unit in 2010 – "where the sausages are made," he says.
"It's where we look at what products we are selling and structuring and how we price them and how that relates to managing liabilities on the asset side. We develop the asset strategy from that."
He was appointed CIO in 2011, taking over the role from Steven Kandarian, who moved up to the chief executive position. Goulart did not waste any time stamping his authority on the role. His first major task as CIO was to re-risk the portfolio three years after the collapse of Lehman Brothers.
Risk expansion
"Between 2011 and 2014 we embarked on a process of risk expansion—we moved more vigorously into commercial mortgage loans, residential mortgage loans, agricultural loans, BBB and below rated debt and enhanced the real estate equity portfolio. We took the portfolio risk profile back to where it was pre-crisis. I took a view we needed to get back to higher yielding assets because the market was more stable."
And it has been some expansion. The insurer currently has one of the most diversified insurance portfolios in the US, with a range of assets from credit to mortgages, private placements to loan origination. The largest segment of the portfolio – 32% – is in investment grade corporate debt, split 64% to 36% between domestic and foreign bonds.
Next is a $60bn to $70bn allocation – 13% to 14% – in each of mortgage loans, structured finance, US treasuries and foreign government debt. There is a further $12.5bn allocation to infrastructure and $18bn in below-investment grade credit, as well as $14bn in real estate equity. Goulart says the insurer is in "all parts of the fixed income world." Equities remains a minority interest with a $10bn – 2% – allocation.
The relationship with Kandarian is a close one, helped by the fact that the now chief executive previously worked as CIO. Strategy is set with Kandarian and meetings with six direct divisional heads who report to Goulart. In total, there are 800 investment professionals under him located in 40 countries.
Goulart, who is based in the company headquarters in Morristown, New Jersey, says that he makes frequent visits to the company's different regional offices in London, Santiago and Hong Kong to keep in touch with the portfolio management teams.
New frontiers
The increase in portfolio risk has seen several new business lines being added to MetLife's asset work in recent years. Loan origination is one of the areas that Goulart has encouraged development of. The insurer is currently one of the two biggest originators in the US insurance business. A lot of the opportunities have also come in Europe.
"We are differentiated from many insurers because we have an origination business too," he says. "We have seen greater opportunities in Europe for our origination business since banks pulled out of this. In the US banks have been slower to come back to commercial mortgages after the financial crisis but they have come back in. That is not the case in Europe."
MetLife has also built a strong residential mortgage loan business in the past three years, growing the portfolio from nothing to $8bn.
"We have seen greater opportunities in Europe for our origination business since banks pulled out of this."
"We got in early," says Goulart. "It has stood us well from a relative value perspective."
Unlike in Europe, US insurers hold far fewer domestic government bonds in their portfolio. But having a decent sized treasury allocation is important for MetLife's liquidity management. At present, treasuries make up about 10% to 15% of MetLife's portfolio. While treasuries provide some yield—unlike cash—they are also used as collateral for derivatives and securities lending. Goulart says the company has faced up to the market-wide liquidity squeeze in other ways over the past few years.
"We do worry about counterparty and dealer capacity," he says. "We expanded the number of street firms we work with. We still work with the top eight to 10 but have expanded to another 15 below them from five previously."
Pruning
The expansion into risk was slowed down in 2015, which was when Goulart launched the second phase of his portfolio management mission – pruning. He says that the time had come to take risk off and focus on capital, part of a drive by Kandarian to make MetLife's business more capital efficient.
"It reached a point where we were comfortable with the portfolio composition and didn't want to add risk," says Goulart. "But in 2015, there were things in the market that were a concern. For example, we decreased our investments in energy, metals and mining and reallocated these positions to higher quality and privately sourced assets."
In total, the company sold $5bn of higher risk assets in 2015 and 2016, including $2.5bn of real estate equity, high yield and $1bn of alternatives, which helped to free up $2bn of capital.
Cutting back alternatives – hedge funds – in particular was a major theme last year. Goulart says that the company decided that it was unlikely to witness returns in hedge funds that had been seen historically – many of the returns had been volatile and the sector lacked in capital efficiency – so it decided to hack off that investment altogether.
Roll-off risk
But despite the careful expansion of the portfolio MetLife still faces issues on the asset side. Roll-off reinvestment risk – the decline in new asset yields as older investments mature and roll-off – is a major concern.
"You have to reinvest as the portfolios mature for long liability portfolios," he says. "Over five years of having the low rate period means that unfortunately we are still in a position where the reinvestment yield is 100bps to 150 bps lower than the roll-off yield."
One factor likely to help is a projected rise in interest rates, already currently underway in the US. Then, of course, there is the Trump effect. Goulart believes that the Trump administration's economic policies are, in all likelihood, going to have a positive effect on the domestic economy. This might help ease some of the burden on US insurers. It is a new macro environment that the industry has to think about for the next few years at least – one where careful delineation of assets – pruning those with less value – becomes more important than a wholesale move to risk-on or risk-off.
There is another mission keeping Goulart busy right now. His creation of MetLife Investment Management (MetLife IM) in 2011 was one of the most significant steps the company has taken to expand the asset business in some years. MetLife IM specialises in commercial mortgages, private placements, corporate and infrastructure debt as well as creating customised indices for its clients. Along with the $21bn in third-party assets, MetLife IM manages a further $26bn for its parent company. Goulart says that the company was looking to draw on its strengths when creating MetLife IM.
"It fits in with the general expansion plan," he says. "It is low capital and we thought we had an expertise in this area."
The business continues to add new assets, including emerging market debt structured finance and high yield. It has also been successfully expanding into Europe, where it is not only competing against European insurance asset management arms, but investing for them too. So what is the next challenge? Chief executive? Perhaps in time – after all there is a precedent.