Indices used to represent asset classes: ABS (Bloomberg U.S. Note: Monthly correlations for the 10-year period ended 31 October 2023. Source: Bloomberg, as of 31 October 2023. Securitized sectors have exhibited lower correlation to U.S. All else being equal, adding assets with lower correlations should increase overall portfolio diversification, and may lead to better risk-adjusted returns in the long run.Įxhibit 2: Correlation to the S&P 500 ® (2013-2023) Indeed, as shown in Exhibit 2, for the decade ended 31 October 2023, securitized sectors have exhibited lower correlations to U.S. To the extent that many securitized markets are backed by loans made to consumers (not corporations), they should offer some diversification from the risks that drive equities and corporate bonds, and this should be reflected in their correlations. How much exposure does a bond portfolio have to changes in interest rates? To the corporate credit cycle? To the consumer’s creditworthiness? In a higher interest-rate environment, we encourage investors to think less in terms of asset class diversification and more in terms of risk-factor diversification. Securitized sectors may help improve portfolio diversification. Note: Securitized category includes ABS, CMBS, CLOs, and CMOs. Source: Bloomberg, SIFMA, as of 31 December 2021. In our view, investors may need to actively manage these weight discrepancies to ensure they have sufficient exposure to the securitized market.Įxhibit 1: Securitized sectors are typically under-represented in Agg-based portfolios Conversely, securitized sectors are meaningfully underrepresented in the hypothetical portfolio. Aggregate Bond Index (Agg) and 10% high yield results in a significant overweight to corporate bonds relative to the total market. That said, gaining adequate exposure to securitized sectors through passive benchmarks can be challenging, as the composition of benchmark indexes often differs materially from the universe itself.Īs shown in Exhibit 1, a hypothetical portfolio of 90% Bloomberg U.S. Securitized sectors are under-represented in the Agg.Īt over $5 trillion, the non-agency securitized market 1 represents almost 10% of the U.S. What does that look like for fixed income allocations? In our opinion, investors should aim to strengthen both the offensive and defensive characteristics of their bond portfolios, and an allocation to securitized assets may help on both fronts.īelow we highlight our top five reasons to add securitized assets to bond portfolios in the current environment. Therefore, we think rates are likely to stay elevated for a longer period, and investors would do well to position their portfolios accordingly. Until we see some meaningful softening in these areas, it is unlikely the Fed will make any significant cuts to interest rates. The challenge the central bank faces is that the economy and the labor market have held up fairly well, despite the rate hikes. While gains have been made on the inflation front, we are still a fair way off the Fed’s 2% target. Now that it appears the Federal Reserve (Fed) is done raising rates, the question on investors’ minds will be: Where do we go from here? Following 525 basis points in rate hikes over a period of 16 months, fixed income investors find themselves in a very different world than the zero-percent regime that ensued after the Global Financial Crisis (GFC).
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