The Evolution of Securitized Credit: From Tactical Trade to Strategic Allocation

• Bloomberg’s planned expansion of its suite of U.S. Securitized Fixed Income indexes and Morningstar’s launch of dedicated securitized fund categories constitute a long-overdue evolution in the way securitized credit markets can be measured and monitored.
• As securitized credit strategies become easier and more transparent to research, benchmark, and compare, the result is likely to be significant and durable increases in liquidity—and in investor participation.
• Fixed income investors should be looking at their portfolios now with an eye to enhancing passive securitized credit allocations and narrow tactical trades into a strategic allocation that will benefit more measurably from the ongoing evolution of the securitized market.

Securitized credit has long played a meaningful role in fixed income portfolios, but many investors have lower than optimal securitized credit allocations due to the asset class’s structural under-representation in benchmarks. 

This long-standing under-representation stems from the heterogenous, diverse nature of securitized credit, with its multi-dimensional risk factors spanning structural features, collateral types, duration and liquidity profiles. 

This has historically frustrated index construction and made it difficult to model or even define what “securitized credit beta” looked like—which in turn restricted efficient fixed income portfolio construction, benchmarking, and asset allocation frameworks.

These legacy constraints meant that even sophisticated investors who looked to securitized credit for alpha and for its differentiated risk premia may still have been under-allocating—not due to interest or conviction, but due to modeling and governance challenges. 

However, recent developments signal a distinct shift in securitized credit’s perception within the fixed income ecosystem: Bloomberg has announced plans to create a new securitized credit index, with expanded representation across securitized credit sectors, and Morningstar has launched two dedicated securitized fund categories. These developments significantly improve securitized credit’s position as a distinct, strategic asset class going forward.

Bloomberg: Indexing the “unindexable” 

Credit sectors make up an estimated 25% of the securitized universe, but they currently represent less than 5% of the Bloomberg U.S. Securitized Index—with only a narrow, less representative subset of the ABS and CMBS sectors included (Exhibit 1).

Exhibit 1: Securitized credit is a much larger asset class than its current index representation suggests

Bloomberg recognized this, and, with their considerable analytical capabilities and experience with securitized instruments, put in motion plans to address this gap. A recently announced strategic collaboration with the Structured Finance Association has added another layer of expertise and sponsorship as their plan is implemented.¹ 

The new index is scheduled to be created in phases, and is expected to encompass a much larger swath of the securitized credit universe, including SASB CMBS, 144a ABS, non-agency RMBS, and, eventually, CLOs. 

Phase one is already under way. At the conclusion of all phases, we anticipate the resulting size and breadth of included securitized credit bonds will be substantial enough for the index to serve as a suitable benchmark for credit focused managers. 

Importantly, Bloomberg is achieving this, not by forcing securitized credit into legacy fixed income frameworks unsuited for its heterogeneity, but by building a new framework with broader eligibility criteria that accommodates the breadth of the asset class and reflects it as it currently exists. 

The potential impact on fixed income allocators goes beyond the basic expansion of benchmark options into what the index represents: institutional validation, increased transparency, and a foundation for better asset allocation modeling and risk taking. 

Morningstar’s dedicated categories: A parallel signifier 

In December, Morningstar introduced two new fund categories: Securitized Bond-Diversified, and Securitized Bond-Focused.² These new fund categories together include 76 funds, totaling $103 billion in AUM, that had previously been scattered across 11 disparate fixed income categories (Exhibit 2). 

These new dedicated securitized fund categories make it much easier for financial advisors, home offices, and model providers to define the securitized credit opportunity set and construct portfolios that include top-tier managers.

Exhibit 2: $103 billion in securitized credit funds used to be hidden across Morningstar

Securitized credit has historically offered one of the best risk/return profiles in fixed income (Exhibit 3), but the inability to benchmark or compare managers has often resulted in investors under-allocating to the space. '

Together, Bloomberg’s and Morningstar’s actions allow for a more accessible and transparent approach to understanding, assessing and ultimately allocating to securitized credit. 

One could logically expect deeper liquidity and broader investor participation to follow, as securitized credit becomes better aligned with other markets in terms of a comprehensive benchmark and manager peer groups. 

This in turn can contribute to more efficiently priced risk and durable financing conditions, which helps facilitate a more resilient environment for extending credit—a key engine for consumption and ultimate economic growth and prosperity. 

The result is a virtuous circle of better infrastructure encouraging greater adoption, which in turn creates healthier market dynamics and longer-term demand—all aligned with a growing economic pie that benefits society.

Exhibit 3: Securitized credit has historically offered attractive returns with low volatility

The market’s direction is clear: Securitized credit is progressing in its evolution towards a core component of fixed income. Investor approaches should evolve, too. 

Historically, many institutional investors have treated securitized credit opportunistically, moving into the sector when spreads widen or volatility spikes. Others have high conviction in securitized credit as a strategic allocation, but remain underweight due to legacy constraints. 

In both cases, it’s time to re-examine portfolios’ existing securitized credit approaches and allocations. 

Voya is here to help. Not only do we have a lengthy history of modelling securitized credit, our large, well-regarded securitized credit team is consistently at the forefront of new developments in the asset class. We specialize in deep fundamental analysis into the sectors and bonds that make up the securitized credit universe— enabling our team to uncover attractive opportunities and deliver outperformance for our clients. Our long-standing product mix offers a range of options to add securitized credit to your portfolio today. 

We would welcome the opportunity to discuss how a strategic allocation to securitized credit could help you better achieve your investment goals.

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.