Introduction to secured finance

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Secured finance assets are fixed income investments secured by high-quality collateral.

Watch our video to hear Shaheer Gurguis, Head of Secured Finance introduce the strategy.

The market covers a wide range of credit instruments. The three largest collateral types that we focus on are:

  • Residential and consumer, e.g. residential mortgage and credit card pools.
  • Commercial real estate, e.g. commercial mortgage loans and infrastructure.
  • Secured corporates, e.g. collaterised loan obligations and corporate loan pools.

These assets can be found in both public and private debt assets. Public securities are tradeable assets typically with a number of investors, whom each have relatively little influence on the debt structure of the security. Private markets have fewer participants and often require investors to deal directly with a borrower to negotiate terms and debt structures on a bilateral basis.

Three types of secured finance

The lower supply of credit by banks is primarily driven by regulation. Increasing regulatory capital requirements since the 2008 financial crisis means that banks are less willing to lend to consumers, corporations and other borrowers.

By accepting some illiquidity, and successfully navigating the extra complexity associated with secured finance investments, there is an opportunity for long-term investors to fill the void left by banks.

Download a full introduction to Secured Finance

Secured finance has become of increasing interest to institutional investors due to the risk-adjusted yields on offer as a result of the complexity premium and the ability to achieve greater certainty of cash flows by investing in high quality debt structures.

Many non-bank investors do not enter the secured finance market because accessing the market requires specialist skills needed to deal with the extra complexity relative to traditional credit markets.

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Important information

The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance.

Derivatives may be used to generate returns as well as to reduce costs and/or the overall risk of the portfolio. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.

The investment manager may invest in instruments which can be difficult to sell when markets are stressed.

Investments in bonds are affected by interest rates and inflation trends which may affect the value of the portfolio.

A credit default swap (CDS) provides a measure of protection against defaults of debt issuers but there is no assurance their use will be effective or will have the desired result.

Where leverage is used through the use of swaps and other derivative instruments, this can increase the overall volatility. Any event that adversely affects the value of an investment would be magnified if leverage is employed by the portfolio and losses would be greater than if leverage were not employed.

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