Securitised Credit is a predominantly floating rate asset class that offers investors diversification, yield enhancement and exposure to high quality credit. The asset class can offer alternative sources of risk-adjusted returns, pay more than traditional fixed income, and provide potential for spread compression as an additional layer of return. Taking a global and dynamic investment approach allows investors to unlock the complexity and illiquidity premiums on offer within this asset class.
Allocating to Securitised Credit
Securitised Credit has a low correlation to traditional fixed income. Over a 14-year period to December 2024, the HSBC Global Investment Grade Securitised Credit Composite had a 0.46 correlation to the Bloomberg Barclays Global Aggregate Corporate Index. This makes sense, given its distinctive return, volatility, and duration profile. For a multi-asset allocator, this makes a compelling diversification case.
Securitised Credit has had higher returns than fixed income corporates and government bonds over the longer term. It has also had a lower volatility and thus higher Sharpe ratios over the past 14 years.
On top of having low correlations to traditional fixed income, Securitised Credit also benefits from a complexity premium, as it is an over-the-counter (OTC) hand traded market, which requires deep credit research resources to unlock value. There is also an illiquidity premium, as the asset class is slightly less liquid than corporate bonds across the rating stack. Although, this is less pronounced for higher rated securities than the lower rated ones.
As a result of this, even during periods where interest rates are low and coupons are lower, spreads will likely remain above that of traditional fixed income, making an allocation to high quality Securitised Credit an interesting option for investors in 2025.
Moving on from the 60/40 portfolio
Traditional fixed income has historically been viewed as a diversifier to equities and we are all well versed with the “60–40” portfolio.
However, the “lower-for-longer” interest rate environment, the “Great Fixed Income Reset” and now a potential “higher-for-longer” scenario, have forced investors to reconsider their asset allocations.
Not only does Securities Credit have a low correlation to traditional fixed income, it also has a lower correlation to US equities than corporate bonds, making it a key consideration for multi-asset investors. Comparing traditional High Yield corporate bonds to the S&P 500, the correlation is as high as 0.8. However, when comparing Securitised Credit against the S&P 500, we see correlations as low as 0.29 across major sectors within this asset class.
The demand is there
Another key consideration for institutional investors is the returns, regulatory and operational benefits that a Securitised Credit allocation can provide. For insurance companies, subject to the underlying applied regulatory environment, it offers higher returns than traditional fixed income across all credit ratings with similar credit charges. For pension funds, and particularly LDI strategies, Securitised Credit can provide balance to their collateral waterfall, and it can provide liquidity when it is so desperately needed. Other pension schemes have previously allocated to illiquid private debt, with the trend now being a reversal into more liquid Securitised Credit.
Other than pension and insurance firms, multi-asset allocators like the low correlation and diversification benefits whilst Private Banks and Family Offices like the income generation. Furthermore, Corporate Treasurers, looking for an alternative to cash, have been allocating to Securitised Credit within their strategic cash bucket.
Securitised Credit serves a variety of purposes across varying investor profiles. Thus, it should come as no surprise that this clientele will most likely continue to allocate to the sector.
2025’s path for Securitised Credit
Securitised Credit has and is expected to continue to benefit from the current macroeconomic environment. High interest rates have meant that the asset class is generating high levels of income.
The future direction for interest rates is likely to be downwards. Although we don’t know the size and speed of cuts, the destination is unlikely to be zero. Interest rates are more likely to move to a more neutral rate. As Securitised Credit generated positive returns when interest rates were zero, it is likely the asset class will continue to make money as interest rates fall.
Interest rate cuts will be beneficial for the asset class, as this will make servicing the underlying debt more manageable (hence reducing loan defaults and delinquencies) whilst income generation on the floating rate bonds remains significant. This would also lead to potential spread tightening, allowing investors to benefit from a capital gain.
For a strategic asset allocator, the unique return profile, low correlations to traditional asset classes and superior Sharpe ratios make it an important consideration.
Source: HSBC Asset Management as at 31/01/25.
