Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

If you’re an investor, you’re in luck. A gazillion firms are vying to take your money and do something with it. Well, not really a gazillion, but you get the point.

You’re in even greater luck if you want to invest in risky stuff like junk debt. More and more financial firms are expanding into these areas, especially those that are limited in how much of their own money they can use to buy such securities.

MetLife, for example, is joining a party that’s already populated by Wall Street’s biggest firms, which all have asset-management arms. The biggest U.S. life insurer is expanding its investment unit to include strategies focused on high-yield debt and structured finance, reports Katherine Chiglinsky of Bloomberg News. The goal is to earn extra fees as it struggles during a time of suppressed yields and risk-curbing banking regulations.

What do they have to lose? MetLife, which is fighting designation as a systemically important financial institution, is seeking to manage money for others as it faces limits on what it can do on its own. It’s unclear how much of its own money is on the line in this unit. And the $500 billion insurer has deep expertise managing money.

Branching Out
MetLife wants to manage money
Source: Bloomberg

Insurance companies have already plowed their own cash deep into less-traded assets and speculative-grade debt. They’re increasingly lending directly to companies and financing commercial properties. TIAA-CREF is investing in timber. But that’s not always enough to offset yields on investment-grade bonds that are way below long-term averages.

The expansion of MetLife’s asset-management unit underscores a desperation felt across all big financial firms as they face something of a paradox: how to increase income while continuing to reduce risk.

The result is everyone wants investors to take more risk as long as they can earn a fee helping them do so. There’s a catch, of course. Given the swelling competition among asset managers, fees have come down. And then there’s the exchange-traded fund industry, which is in a race to drive down costs that’s reaching kind of amazing levels. BlackRock, the world’s biggest publicly traded asset manager, reduced its fees on seven of these funds this week, one to just 0.03 percent. A whole 3 basis points! That’s enough to buy you a couple pair of shoes after handling a few million dollars.

 And these investment units don’t always work out. It’s a peculiar time to be expanding in high-yield debt, considering that the credit cycle has passed its peak and the default rate is starting to rise. Principal Financial Group said last month that it would close the hedge fund Liongate Capital Management, in which it had a majority stake, and return assets to investors after losing clients.

That said, regulated financial firms don’t have that many options to generate real income right now. Ultimately, that should be a victory for investors, who may eventually have to pay managers low fees. But it will also make the asset-management business less attractive in the long run.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net