Key takeaways
The large, USD4 trillion dollar-plus securitized credit landscape offers a variety of solutions for investors seeking alternatives to traditional carry with structural safeguards.
These solutions can range from liquid cash solutions to investment grade securitized credit to illiquid alternatives.
In a market environment with spreads on the tighter end, periods of volatility and rising single name stress, strategies that are diversified, active and offer potential attractive income are resonating with investors.
Low correlation to other risk assets
We are seeing increasing interest from investors looking for alternative asset classes that offer lower correlation to more traditional fixed income and equities exposure. Securitized credit provides exposure to alternative sources of risk, such as consumer risk, alongside having low interest rate duration which makes it a good complement to traditional assets. In our view, investors are seeking predictable and alternative sources of carry with structural safeguards from defaults.
Accessing alternative sources of risk
In the liquid high grade space – investing only in the most senior parts of the capital structure, primarily focusing on AAA-rated bonds with a range of collateral types – strategies can play a key role as cash enhancement vehicles offering the potential for an attractive spread pick-up, very high credit quality, and low drawdowns.
Securitized credit can offer a compelling solution from a liquidity perspective, given the attractive spread pick-up even in the very liquid, high quality part of the capital structure.
Secondly, investment grade securitized can provide an attractive complement to traditional investment grade corporates, with diversified strategies potentially offering shorter spread duration, floating rate exposure, an attractive spread pick-up, and safeguards from single name stress alongside high credit quality.
Accessing the illiquidity premium
At the illiquid end of the spectrum, strategies investing in capital call loans are gaining traction as a diversifier to corporate risk factors. Here exposure to more highly rated sponsors can provide quality risk with an attractive spread pick-up versus IG assets driven by the illiquidity premium. As a large market that has traditionally been accessible only by banks, the increase in strategies offering this is very compelling for institutional investors as an alternative source of potential income in very high quality assets that are not linked to broader credit and equity markets.
Some investors are willing to have lower liquidity allocations and, in some cases, lock up capital, but the demand for an appropriate spread pick-up has increased. In areas like direct lending for example, we have seen a trend of spread compression versus the public broadly syndicated loan market, which suggests the illiquidity premium is not as compelling.
There is demand for high quality assets that offer a spread pick-up and some investors are willing to move into illiquid assets to access the premium. This is where capital call loan strategies can provide compelling solutions.
Beneficial in all market environments
In our experience, investors are looking for asset classes that can complement their existing asset allocations, offer lower correlations, and provide an alternative source of income.
Uncertainty is likely to remain high this year, however our outlook for securitized credit for 2026 is positive. Ultimately the asset class will be driven by broader macro moves, but its compelling characteristics such as short spread duration, strong collateral and structures, safeguards from single name credit events and natural de-leveraging offer compelling benefits versus traditional credit.