Dave S. Goodson
Head of Securitized
Voya Investment Management
It's late in the business cycle and the Fed is tightening. Equities have had an epic run. Investors have been chasing yield in the high-yield sector for years. So what's next? Where does one look for return?
“Securitized credit fits nicely into the patchwork of risks that investors are facing today,” said Dave S. Goodson, head of securitized fixed income and a senior portfolio manager for Voya Investment Management. “It's shorter duration, which may help mitigate some interest rate risk; it exhibits good fundamentals; and there's still spread premium in this space. It's not exactly cheap, but it's certainly not rich. So it's relatively high income, relatively high yield, with a diversity of risk profiles that can address a lot of different objectives.”
One reason he sees lots of life in securitized credit is that the U.S. consumer is in an earlier stage of the credit cycle compared with the corporate sector — asset-backed securities tie back to consumer loans, credit cards, student loans and other types of consumer credit; residential mortgage-backed securities are tied to a relatively healthy housing sector.
But there is much to be said about corporate-related sectors as well, according to Goodson. Collateralized loan obligations are just a structured form of bank loans, which many institutions have been favoring for their floating-rate structure and seniority. In fact, meaningful parts of the asset-backed securities market are also floating rate. In commercial mortgage-backed securities, Goodson is seeing strong demand in segments like industrial properties. (Think, Amazon's regional warehouses.)
“The most important thing to understand about securitized credit is the type of risk it gives access to, rather than getting caught up in all the acronyms,” said Goodson. “This is not some esoteric asset class that belongs in an 'opportunistic' or 'alternative' bucket. It's a bread-and-butter domestic fixed-income sector that provides exposure to a diversity of consumer and corporate risks.”
The opportunities in securitized credit, however, come with a few key caveats.
“Many investors think that they have sufficient exposure through multisector strategies like a core-plus” allocation, said Goodson. “We don't think that is sufficient. Core-plus strategies often make a benchmark allocation to securitized credit, but the benchmark excludes large swaths of securities — it includes only fixed-rate parts of the universe, only investment-grade credits, and entirely excludes nonagency residential mortgages. A benchmark allocation may allow you to check an allocation box, but it is not necessarily giving you access to the optimal parts of the universe.”
In addition, he argued, securitized credit is a unique, complex and inefficiently valued asset class, and optimizing one's exposure to all the diverse risk types may best be done by a specialist. Core-plus and other managers without direct expertise in this area may be taking unintended risks, over-allocating to poor risks, under-allocating to attractive risks and effectively “leaving money on the table” compared with a stand-alone strategy managed by an expert in securitized credit, said Goodson.
“It's a very real phenomenon that we encounter on a regular basis,” said Goodson, “where investors think they have the exposure they need with just a beta allocation within a core-plus strategy. But in our view, the benchmark opportunity set they're exposed to is only a fraction of what it should be.”
Ultimately, where Goodson sees the most resonance, and relevance, for securitized credit is for investors reallocating away from long-duration corporate credit.
“They want greater diversification away from the late-cycle parts of the market without sacrificing income,” he said. “They want a shorter-duration segment within fixed income. They are interested in floating-rate features as interest rates rise. Securitized credit can address a lot of these concerns, and because much of it is tied to early-cycle consumer debt, we believe there is more clear sailing ahead for much of this sector.” ■