A Guide to Securitized Credit
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A Guide to Securitized Credit

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Dave Goodson

Dave Goodson

Head of Securitized

Brett Cornwell

Brett Cornwell, CFA

Co-Head of Client Portfolio Management, Fixed Income

rocks with a river flowing

The securitized credit market has evolved, through economic cycles and crises, into a popular fixed income allocation. However, its breadth, relative youth, and perceived complexities can be challenging for new investors, causing them to miss out on the asset class’s opportunities. Here’s what you need to know.

Executive summary

Large, liquid asset class: Securitized credit is a $3.3 trillion ecosystem of U.S. bonds repaid by cash flows from loans and other contractual agreements, with a structural dimension that prioritizes repayment across tranches of debt.1 

Natural source of alpha: Historically, securitized credit has offered a spread premium to similarly rated corporate bonds due to its securities’ structural complexity, while also being under-represented in major fixed income indexes. 

Distinctive credit exposures: Securitized credit offers unique, liquid forms of direct consumer, housing and commercial real estate exposure, with a scalable supply of floating-rate securities and a broad menu of credit ratings. 

Important diversifier: The wide range of sectors which make up securitized credit all have distinct credit cycles and low correlation to other fixed income assets, helping improve risk-adjusted returns in multisector/ multi-asset portfolios. 

Evergreen opportunities: Given the breadth of the asset class and its varied fundamental drivers, there are always attractive opportunities within it. As such, securitized credit should be a standard part of sophisticated fixed income portfolios. 

Recommended allocation: While portfolio goals and risk tolerance must be considered, our advanced modeling shows that allocating approximately 40- 55% of sophisticated investors’ non-core fixed income portfolio to securitized credit is optimal.

 

 

A note about risk: The principal risks are generally those attributable to bond investing. Holdings are subject to market, issuer, credit, prepayment, extension, and other risks, and their values may fluctuate. Market risk is the risk that securities may decline in value due to factors affecting the securities markets or particular industries. Issuer risk is the risk that the value of a security may decline for reasons specific to the issuer, such as changes in its financial condition. The strategy invests in mortgage-related securities, which can be paid off early if the borrowers on the underlying mortgages pay off their mortgages sooner than scheduled. If interest rates are falling, the strategy will be forced to reinvest this money at lower yields. Conversely, if interest rates are rising, the expected principal payments will slow, thereby locking in the coupon rate at below-market levels and extending the security’s life and duration while reducing its market value.

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Education Securitized Credit
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1 Market size estimate as at 12/31/24. Source: BofA, Voya IM.

Past performance does not guarantee future results. Diversification does not guarantee against a loss, and there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. This market insight has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain statements contained herein may represent future expectations or other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors. 

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