Securitized credit can offer a number of key benefits for investors:
• Attractive income generation: Securitized credit typically offers a higher yield relative to other comparably rated traditional fixed income investments.
• Structural protection: these features create multiple sequential layers of loss absorption, protecting senior bondholders even in a scenario in which a meaningful proportion of the underlying collateral defaults.
• Diversification benefits: securitized credit offers greater diversification across borrowers, sectors and geographies in the underlying asset pool, reducing single-issuer concentration risk relative to traditional credit. More consumer-oriented collateral also introduces risk factors that are structurally distinct from corporate credit risk, broadening overall portfolio diversification.
• Lower duration than traditional credit exposures: the predominantly floating-rate structure of securitized bonds, and often shorter effective maturities, results in a lower sensitivity to interest rate movements compared to traditional fixed income credit exposures.
• An active opportunity: the nuances between the sub-asset classes, together with market inefficiencies can create opportunities for active managers with specialist knowledge and deep resources to add value. This can include investing across sub-asset classes to capture potential opportunities, and adding greater diversification.
The exact risk and return profile will vary depending on the underlying collateral generating the cash flows for the securities.
