Key takeaways:
- The securitised universe represents a diverse opportunity set, offering investors varied risk and return characteristics, alongside high-quality income and resilient returns.
- It can offer diversification to fixed income portfolios, while the amortising structures and shorter durations can help reduce overall credit and interest rate risks.
- Investing in securitisations requires not only a unique and broad insight into the dynamics of securitisation markets, but also an ability to understand and analyse the risks in different types of securitisation transaction.
Investors benefit from securitised due to its defensive nature and a broad opportunity set as well as attractive relative value. Securitised offers better spreads compared to similarly-rated corporate bonds, historically lower default rates, and more attractive risk-adjusted returns (higherSharpe ratios). It is a misunderstood asset class, but misconceptions should not deter investment.
Securitisations serve as a valuable diversifier, reducing risks in core fixed income portfolios due to their amortising structures, shorter durations and exposure to ‘real economy’ and consumer-driven risks. European securitised has performed well, offering strong risk-adjusted returns compared to investment grade corporate bonds without liquidity concerns, even during market stress.
Specialist expertise can help navigate the nuances of the market. It enables investors to effectively evaluate risk against opportunity, adhere to regulatory standards, integrate ESG considerations effectively, and ultimately achieve long-term stability and diversification of returns. In other words, maximise the benefits of securitised.
In this Case for Securitised, we take a deep dive into the sector and evaluate each of its distinguishing features that enable the asset class to be combined successfully with other fixed income in diversified portfolios.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
- The risks of investing in collateralised loan obligations (CLOs), include both the economic risks of the underlying loans combined with the risks associated with the CLO structure governing the priority of payments. The degree of such risk will generally correspond to the specific tranche in which the Fund is invested. Ratings do not constitute a guarantee, may be downgraded, and in stressed market environments it is possible that even AAA-rated CLO tranches could experience realised or mark to market losses due to actual underlying loan default losses, erosion of the subordinated/equity tranches that support the AAA-rated notes due to such losses, market anticipation of future defaults, as well as negative market sentiment with respect to CLO securities as an asset class. The Fund’s portfolio management may not be able to accurately predict how specific CLOs or the portfolio of underlying loans for such CLOs will react to changes or stresses in the market. The most common risks associated with investing in CLOs are liquidity risk, interest rate risk, credit risk, and prepayment, extension or call risk, amongst others.
- After a specified period of time, it is typical that repayments from the underlying loans will be used to repay the CLO securities that the Fund invests into. The speed at which such repayments happen is uncertain and can create material variability as to the expected average maturity of a CLO investment and may mean a Fund may then have to reinvest proceeds into lower yielding securities, which may thus result in a decline in the Fund’s income. It may also result in earlier than expected prepayment of a security that is trading above par resulting in a mark to market loss being realised by the Fund. Conversely it may result in a CLO security repaying more slowly than expected, extending the maturity and potentially leading to a mark to market loss. A Fund may invest into callable fixed income securities that are subject to call risk. The issuer may decide to "call" or repay the security at par prior to its expected maturity. CLOs are typically structured such that, after a specified period of time, equity holders can call (i.e., redeem) the securities issued by the CLO in full. The Fund may not be able to accurately predict when or which of its CLO investments may be called, resulting in a Fund having to reinvest the proceeds in unfavourable circumstances, which in turn could cause in a decline in the Fund’s income. The Fund may then have to reinvest such proceeds into lower yielding securities, which may thus result in a decline in the Fund’s income. An issuer may also decide to call a security that is trading above par resulting in a mark to market loss being realised by the Fund.
- The performance of the Fund’s investments in CLOs will depend in part upon the performance and operational effectiveness of the managers of the CLOs. The Fund will invest in CLOs which are subject to management and performance fees charged by the managers of the CLOs. These are in addition to the fees charged to the sub-fund.
- The value of your investment may go down as well as up and you may not get back the amount you invested.
- Lower liquidity means there are insufficient buyers or sellers to allow the Fund to sell or buy investments readily.
Specific risks
- The risks of investing in collateralised loan obligations (CLOs), include both the economic risks of the underlying loans combined with the risks associated with the CLO structure governing the priority of payments. The degree of such risk will generally correspond to the specific tranche in which the Fund is invested. Ratings do not constitute a guarantee, may be downgraded, and in stressed market environments it is possible that even AAA-rated CLO tranches could experience realised or mark to market losses due to actual underlying loan default losses, erosion of the subordinated/equity tranches that support the AAA-rated notes due to such losses, market anticipation of future defaults, as well as negative market sentiment with respect to CLO securities as an asset class. The Fund’s portfolio management may not be able to accurately predict how specific CLOs or the portfolio of underlying loans for such CLOs will react to changes or stresses in the market. The most common risks associated with investing in CLOs are liquidity risk, interest rate risk, credit risk, and prepayment, extension or call risk, amongst others.
- After a specified period of time, it is typical that repayments from the underlying loans will be used to repay the CLO securities that the Fund invests into. The speed at which such repayments happen is uncertain and can create material variability as to the expected average maturity of a CLO investment and may mean a Fund may then have to reinvest proceeds into lower yielding securities, which may thus result in a decline in the Fund’s income. It may also result in earlier than expected prepayment of a security that is trading above par resulting in a mark to market loss being realised by the Fund. Conversely it may result in a CLO security repaying more slowly than expected, extending the maturity and potentially leading to a mark to market loss. A Fund may invest into callable fixed income securities that are subject to call risk. The issuer may decide to "call" or repay the security at par prior to its expected maturity. CLOs are typically structured such that, after a specified period of time, equity holders can call (i.e., redeem) the securities issued by the CLO in full. The Fund may not be able to accurately predict when or which of its CLO investments may be called, resulting in a Fund having to reinvest the proceeds in unfavourable circumstances, which in turn could cause in a decline in the Fund’s income. The Fund may then have to reinvest such proceeds into lower yielding securities, which may thus result in a decline in the Fund’s income. An issuer may also decide to call a security that is trading above par resulting in a mark to market loss being realised by the Fund.
- The performance of the Fund’s investments in CLOs will depend in part upon the performance and operational effectiveness of the managers of the CLOs. The Fund will invest in CLOs which are subject to management and performance fees charged by the managers of the CLOs. These are in addition to the fees charged to the sub-fund.
- The value of your investment may go down as well as up and you may not get back the amount you invested.
- Lower liquidity means there are insufficient buyers or sellers to allow the Fund to sell or buy investments readily.