Unlock Diversified Income Potential with Securitized Assets
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Text on screen: Prerna Gupta, Portfolio Strategist
Gupta: Securitized assets are of course a very important component of our income strategy. Can you start off by just explaining what they are and what our current view is?
Text on screen: Josh Anderson, Portfolio Manager, Asset-Backed Securities
Anderson: Thank you Prerna! Securitized credit are securities that are secured by a diverse pool of granular individual loans
Text on screen: Securitized credit is backed by diverse pools of individual loans and assets
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such as autos, credit cards, consumer, commercial, senior secured bank loans, among others. Generally they're defensive in nature given the diversification of the pool. They offer portfolio diversification.
However, to invest in these securities, you have to have a level of sophistication such as a one that a PIMCO can provide. Because you need deep analyst expertise as well as a broad analytical resource or platform.
Gupta: Given there is an additional level of complexity over a generic sovereign or corporate bond, what makes this asset class so attractive to us? I know the income strategy has increased its allocation to securitized assets over the last couple of years. Would love if you could go through a little bit of yours and the team's thinking around it.
Anderson: When you invest in structured credit securities, you generally earn what we call a complexity premium where you're between a bullet IG corporate bond, which has effectively just credit risk, and an agency MBS.
Text on screen: Structured credit offers compensation for credit risk and negative convexity
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In structured credit, you get paid for both a little bit of credit risk and a little bit of negative convexity. And in our opinion, you are adequately or even attractively compensated for these securities. And we think they are some of the more attractive, shorter duration securities in the, in the market today.
Not only that, because of the grander nature diversified pool of loans, you are less exposed to idiosyncratic risk. So you may have less market volatility, which can dampen your portfolio volatility over time. And that's correct, we've been adding to the sector pretty meaningfully over the last several years or so. One is because you've got attractive risk adjusted return potential relative to some other credit beta, including corporates. And two, the challenges of the
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regional bank sector has led to them pulling back or in fact being net sellers. So firms such as PIMCO have been able to step in and you know, increase the, our participation relative to what they would've done in the past.
Gupta: We've covered the factors that have led to securitized asset allocations to date in the income strategy. How are we thinking about the asset class going forward?
Anderson: Well, thus far this year they proved pretty resilient, and they've actually have maintained their liquidity. We expect to continue to maintain our exposure and probably continue to add to it. And as many people know the income strategies have, has a high quality portion of the portfolio and also a higher yielding portion of the portfolio.
Text on screen: Structured credit and agency MBS anchors portfolio's high-quality, attractive relative value.
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And we expect structured credit and agency MBS to continue to anchor that higher quality parts of portfolio given their attractive relative value.
In addition, we think structured products could be a good area of dry powder for the portfolio because if we were to
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see geopolitical or economic uncertainty in the second half of the year, we could potentially sell some of our structured credit, which has proven to be relatively liquid and invest in areas that are more dislocated, you know, if, should we see that, you know, later this year.
Gupta: Great thank you so much. When investing in securitized products, the income team benefits from PIMCO's extensive research and analytical capabilities. The income strategy has emphasized securitized products in recent years due to attractive valuations and the defensive nature of many assets in the sector. And lastly, we will continue to evaluate the relative attractiveness of these holdings versus other areas of the fixed income opportunity set.
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