An evolving macro environment coupled with positive market fundamentals make securitized credit investments an attractive option for pension funds looking to diversify their fixed-income portfolios.
“I think in this macro environment, there are definitely some implications for the credit side of a fixed-income portfolio,” said Dave Goodson, who is head of securitized credit at Voya Investment Management, which managed $17.2 billion in securitized credit as of March 31, 2019. “And I think a big takeaway is that securitized credit offers a very nice diversifying alternative to the risks that support a corporate credit allocation.”
According to Goodson, securitized credit, which includes asset-backed, commercial and residential mortgage-backed securities, and collateralized loan obligations, makes a lot of sense to help promote diversification of risks in a fixed-income portfolio, especially against the current backdrop in which more risks could be brewing.
“A low-rate regime is definitively back in place, at least in our minds, and is supported by what you see in the shape of the yield curve,” Goodson said. “And if you were to look at forward curves of what the market’s pricing in for changes in the federal funds rate, it would suggest we’re in for a relatively long period of suppressed rates.”
Such an environment can benefit securitized credit investments because it increases the ability to refinance a larger portion of loans that collateralize the strategy’s transactions, according to Goodson. And while that can also increase prepayments, which can hurt portfolio returns, “for a large portion of this universe, those prepayments actually represent good guys — cash flows that will deleverage your structure, which the market, over time, perceives as increased creditworthiness.”