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This $200 billion manager says he’s seeing value in bonds again

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(Bloomberg) — Ron Joelson, chief investment officer at Northwestern Mutual Life Insurance Co., said that higher yields on corporate debt relative to benchmark securities are making it more attractive to add bonds in the insurer’s $203 billion portfolio.

“There has been some widening in credit spreads, they’ve recently come back a little bit,” Joelson said Tuesday in a phone interview. “We’re starting to feel like we’re getting well paid for taking credit risk again, so we like markets where you have to roll up your sleeves and do your homework in order to figure out what to buy, because that plays to our strengths.”

Northwestern Mutual, the second-largest U.S. seller of life insurance in 2015 by premiums, has been adding bets on less liquid securities such as real estate loans and private placements to boost yields. Low interest rates have squeezed returns on the insurer’s bond holdings, which account for more than 60 percent of its portfolio. The company has also been looking beyond fixed income to weather market swings, Joelson said.

“Our allocation strategy, as a result of the volatility, has been to focus more on private equity,” he said. “We think there’s less volatility there.”

Spreads Widen

Spreads on corporate debt relative to government securities widened to more than 200 basis points in early February from as low as 131 basis points in April, according to the Bank of America Merrill Lynch U.S. Corporate Index. A basis point is 0.01 percentage point. The insurer, which isn’t publicly traded, boosted its bond holdings about 4.2 percent to $133.4 billion in 2015 from a year earlier, while increasing its mortgage loans 9.9 percent to $32.2 billion.

Joelson joined Milwaukee-based Northwestern from Genworth Financial Inc. in 2012. While the investment manager prefers to jump in on commercial real estate deals before the mortgages are packaged into bonds, he said other securitized assets are starting to look attractive.

“We think some of the non-mortgage securitization areas bring an interesting opportunity — things where they’re securitizing rail-car leases or other unusual things,” he said, noting that the insurer hasn’t yet invested in rail-car deals. “If the homework is done properly, they provide interesting returns relative to risk.”