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| Patricia Wilson |
Wilson is a senior managing director and oversees $65-70 billion in assets, almost all of which is in fixed income. She has been at Allstate for 19 years and currently works in Northbrook, Ill.
What are your main asset allocations in fixed income?
Our biggest investment class is corporates at 30%. The next largest is whole loan commercial mortgages at 11-12% and then commercial mortgage-backed securities at 10%. Our assets in private placements are in the low 20% range. We also invest in asset-backed securities, high-yield bank loans, emerging market debt and collateralized loan obligations.
Our investments in governments are small and largely invested in long-dated STRIPS, which we bought a number of years ago when spreads on credit got very, very tight.
As an insurance company with assets and liabilities to match, how do you measure performance?
We look at performance in two ways. The first is on a relative risk-adjusted spread, where we take the spread of assets benchmarked against Treasuries and compare them to a customized Lehman Brothers index for spread. The problem with the index is you can't always buy what's there.
The other thing we do is compare our performance versus our aggregate total losses, such as from credit losses or CMBS losses from real estate deterioration. For that we use a combination of Moody's Investors Service on credit and the American Council of Life Insurance data.
We are looking hard at Merrill's bookmark product to address assets purchasing and holding. We only change indexes at the end of the year and in an organization of our size, when we change the benchmark it's a pretty big deal. Ultimately anything we do has to work for a trifecta: the clients, the investment committee and the employees. We think about our various constituencies and making them happy first and then we try to tie our incentive system to that.
What is your strategy for finding value in the market?
Keep in mind we're not a total return investor. To match our assets and liabilities, we need the right amount of credit duration. We only sell securities if it's attractive to do so. We have to manage to a spread product, so the idea of saying, 'I like CMBS and am going to put X percent there,' is like trying to move a battleship. A big move for us would be to move up 1% in one asset class. I'm not saying it can't happen, but we have to make sure we have a number of constituencies that are happy. Plus, the investment committee, the ratings agencies and the regulators put in their two cents. For example, insurance companies can only have 20% of assets in foreign-denominated companies.
We scan the marketplace and look at all major fixed-income asset types. We look at things from a buy-and-hold perspective and see what is more attractive in the marketplace given the credit risk.
We don't believe the smart thing is to run below investment grade on a spread basis because the price movement will kill you. We don't think below investment grade you're compensated for the none-too-reliable spread.
The average liability an insurance company sells is seven years, selling through fixed annuities, or life insurance. We need assets that are stable where yield will be on our books for a long time.
We think good things are happening in utilities and banking. There's been a lot of shakeout in the industry, it's much more diversified and there are bigger players. The earnings potential of banks has continued to improve and despite outlook for rates, we think credits at most of the banks are stable if not improving. But that's different from saying they're going to make a comeback. We can see the improvement in the manufacturing sector with the weakness of the dollar.
Do you use credit derivatives?
If we use derivatives it must either be for replication or risk reduction. Most of our derivative usage is limited to duration management so we can create a match between assets and liabilities. We use interest-rate futures, swaps and also a modest amount of credit default swaps.
We use CDS to buy credit; they just give us exposure to more names. If you look at CDS from a purely theoretical point of view, you're not going to see most insurance companies be too huge in [that sector] because of accounting for them. If you look at our total exposure, it's a very small fraction.
How do you manage cash?
If you're in a spread management business, cash isn't your friend. We try to keep cash as low as possible. We need to buy $200-300 million every week in fixed income. Over the course of putting that money to work, it's difficult to move numbers a lot. If we would just go cold and not buy anything in the investment-grade market, that would be disastrous. If you know the market well enough, you will find good things that work even if that market isn't in favor. If you are a participant in the marketplace and decide there's not enough relative value, you wouldn't go cold in the market.