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. Investors globally are faced with difficult choices when searching for return in traditional asset classes.
Securitized credit provides investors 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 plans seeking return face several challenges
Level of return
Credit cycle timing
Compensation for risk
Pension plans continue to need a safe and liquid credit allocation while maintaining income
Securitized 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
Securitized credit offers a diverse range of cash flows, ranging from monthly income to amortization. This distribution of income is crucial for pension plans who require higher, and predictable, levels of income to meet their liabilities.
In an unstable rate environment, securitized credit provides floating-rate exposure. This offer pension plans potential attractive return with limited exposure to rising rates.
Securitized credit provides capital to inefficient and less crowded markets which, in term, can offer attractive risk-adjusted opportunities. The diverse nature of securitized credit means there is an opportunity for higher returns at each level of risk.
Securitized credit offers pension plans 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.
Schroders is a world-class asset manager operating from 37 locations across Europe, the Americas, Asia and the Middle East.