A unique set of global circumstances is leading to demand for alternatives. Global Quantitative Easing (QE) has simultaneously lowered global yields, and reduced the supply of safe and liquid investments. As a consequence of QE, corporate markets are reaching all-time-highs in leverage. UK pension schemes are faced with difficult choices when searching for return in traditional asset classes.
Securitised credit provides UK pension schemes with an opportunity to diversify credit risk by moving to an asset class that has not been as distorted by capital flows driven by QE, and focuses on collateral backed by consumer, housing or real estate related assets.
Pension schemes seeking return face several challenges
Level of return
Credit cycle timing
Compensation for risk
Pension schemes continue to need a safe and liquid credit allocation while maintaing income
Securitised credit strategies can help fill the gap
Avoid price volatility by decreasing sensitivity to interest rate fluctuations
Earn attractive income
Avoid markets impacted by QE
Securitised credit offers a diverse range of cash flows, ranging from monthly income to amortisation. This distribution of income is crucial for pension schemes who require higher, and predictable, levels of income to meet their liabilities.
In an unstable rate environment, securitised credit provides floating-rate exposure. This offer UK pension schemes potential attractive return with limited exposure to rising rates.
Securitised credit provides capital to inefficient and less crowded markets which, in term, can offer attractive risk-adjusted opportunities. The diverse nature of securitised credit means there is an opportunity for higher returns at each level of risk.
Securitised credit offers UK pension schemes diversified exposure to consumers, housing and real estate. There is also a low correlation to other high yielding fixed income and alternative fixed income asset classes.
Mortgage or asset-backed securities may not receive in full the amounts owed to them by underlying borrowers
When interest rates are very low or negative, the strategy's yield may be zero or negative, and you may not get back all of your investment
The counterparty to a derivative or other contractual agreement or synthetic financial product could become unable to honour its commitments to the strategy, potentially creating a partial or total loss for the strategy
A failure of a deposit institution or an issuer of a money market instrument could create losses
A decline in the financial health of an issuer could cause the value of its bonds to fall or become worthless
The strategy can be exposed to different currencies. Changes in foreign exchange rates could create losses
A derivative may not perform as expected, and may create losses greater than the cost of the derivative
High yield bonds (normally lower rated or unrated) generally carry greater market, credit and liquidity risk
A rise in interest rates generally causes bond prices to fall
The strategy uses derivatives for leverage, which makes it more sensitive to certain market or interest rate movements and may cause above-average volatility and risk of loss
In difficult market conditions, the strategy may not be able to sell a security for full value or at all. This could affect performance and could cause the strategy to defer or suspend redemptions of its shares
Failures at service providers could lead to disruptions of strategy operations or losses