Securitised Assets

Most securitised assets, particularly outside of the US, are floating-rate instruments, with coupons that usually reset monthly or quarterly in line with risk-free rates. As a result, they tend to have lower interest-rate sensitivity and limited duration risk.

Returns are driven by pools of consumer and other secured collateral rather than by corporate balance sheets. Historically, the asset class has also shown low default rates and resilience across multiple economic cycles.

Securitisation is the process of pooling loans with similar characteristics (for example, mortgages, auto loans or credit card receivables) and converting them into bonds that can be sold to investors.

In practice, the pooled assets are transferred into a dedicated Special Purpose Vehicle (SPV) which then issues bonds backed by the cash flows from the underlying pool of loans.

Borrower interest and principal payments flow into the structure and are distributed to investors according to a predefined payment order (often described as a “waterfall”).

An SPV is a bankruptcy-remote legal entity used to separate the underlying assets from the originator. This means investors’ claims are tied to the cash flows of the asset pool rather than to the originator’s balance sheet.

Securitised assets can play a useful role in fixed income portfolios by providing both income and diversification, with returns driven by underlying consumer or secured collateral rather than corporate earnings.

They can also enhance yield and, because much of the market is floating-rate, help limit interest-rate sensitivity while providing access to areas that may be underrepresented in traditional fixed income indices.

A typical securitisation issues multiple layers of bonds, known as tranches, that sit in a set order of priority. Senior tranches are paid first and are designed to absorb losses last, while junior tranches are paid later and take losses earlier, so they typically offer higher yields to compensate for the additional risk.

Credit enhancement refers to the protections that help support the senior tranches. These can include subordination, where junior tranches act as a buffer for senior tranches, over-collateralisation, where assets exceed liabilities, and reserve or cash accounts that can help cover shortfalls.

Like any investment, securitised assets carry risks. Key risks include credit risk if underlying borrowers default, prepayment and extension risk, which can change the timing and size of cash flows, and liquidity risk, as some tranches or market conditions can make securities harder to sell or value.

Securitised assets are also exposed to broader fixed income risks, including changes in interest rates. Sensitivity to these moves can vary by structure and coupon type. While the asset class can be perceived as complex, regulatory reforms since 2008 have improved transparency across securitised markets.

Securitised assets are often associated with the Global Financial Crisis, but the most significant problems were concentrated in a narrow part of the market marked by weak underwriting, excessive leverage and overly complex structures.

Since then, securitised markets have improved materially and undergone significant regulatory reform, including tighter lending standards, greater transparency, mandatory risk retention by issuers and simpler, more robust structures. As a result, today’s market is more regulated, more transparent and structurally stronger than in the past.

Securitised assets are generally better suited to investors who are comfortable with the additional features and risks of structured products, such as changing cash flows from prepayments or varying liquidity across the market. For those who want exposure without selecting individual securities, regulated vehicles such as funds and ETFs can offer a simpler way to access the market.

As with any investment, it is important to consider objectives, time horizon and risk tolerance, and to review the relevant product documentation before investing.