As investors seek to take advantage of attractive yields in fixed income, one area of the market is often overlooked: securitized products. This space contains several different types of products, each typically created from a pool of assets. These include mortgage-backed securities, loan-backed securities, commercial mortgage-backed securities, and asset-backed securities. For example, his high-quality CLOs can earn yields of over 6%. Nick Travarino, lead portfolio manager for multi-sector fixed income strategies and head of the securitized products team at Nuveen, said investors are often under-allocated to “real opportunities” across sectors. Ta. Nuveen manages $75 billion in securitized assets. Investors often focus only on agency mortgage-backed securities, which are high quality and part of the core fixed income market, he added. “This is not the best opportunity we’ve seen across securitized products,” Travarino said. “You’re missing out on opportunities in CMBS, ABS and mortgage lending.” There may also be what he calls a misperception of the complexity of the asset, he said. Nuveen’s Strategic Income Fund’s 51% allocation to securitized credits generated 64% of the fund’s revenue in the first quarter, the company said. John Kirshner, head of U.S. securitized products and portfolio manager at Janus Henderson Investors, said securitized products generally look relatively cheap at the moment. “If you look at historical spreads, today’s spreads on structured products are wide and relative to corporate credit, they’re at near historical lows,” he said. “Add to this the fact that the yield curve is inverted, which means that by investing at the shorter end of the curve, you get higher yields. To address this need, Janus launched the Securitized Income ETF (JSI) in November, which invests across the securitization space. The 30-day SEC yield is 6.71% and the net expense ratio is 0.50%, according to Morningstar. JSI YTD Mountain Janus Henderson Securitized Income ETF Loan-Backed Securities Another of his funds that Kirshner manages is the Janus Henderson AAA CLO ETF. The company focuses on high-quality collateralized loan debt, which is a securitized pool of floating rate loans for businesses. The ETF has grown by more than $3.6 billion so far this year, bringing total assets to about $9.48 billion, the company said. The 30-day SEC yield is 6.72% and the net expense ratio is 0.21%. Bank of America, which recently began covering CLO ETFs, named JAAA his top-rated CLO fund. Kirshner believes AAA CLOs have a role to play because they are variable rate loans and interest rates are expected to remain high for some time. He said it could also provide some protection against moves towards higher interest rates. “You’ve got something that gives you security with a high yield and essentially zero interest rate risk, and that’s going to suit the vast majority of people,” he said. Meanwhile, Rick Rieder, BlackRock’s chief investment officer for global fixed income, is also bullish on CLOs, citing the fact that CLO spreads remain fairly wide. He also said the yield was attractive at around 6.3% or 6.5%. “Think of the ability to achieve compound returns of roughly 6.5% on triple-A assets,” he said. “I’ve been doing this for over 30 years. That doesn’t happen,” said Rieder, who recently added exposure to high-quality CLOs to the BlackRock Flexible Income ETF. The fund has a 30-day SEC yield of 5.96%, a net expense ratio of 0.40%, and held approximately 11.42% of CLO securities as of May 16th. The firm also owns the 6.76x BlackRock AAA CLO ETF. The 30-day SEC yield is % and the expense ratio is 0.20%. Another part of the commercial mortgage-backed securities market is his CMBS, which has gotten a bad reputation due to the office vacancies that have plagued the sector since COVID-19. Office loan delinquency rates rose to 6.4% in April, the highest level since June 2018, according to a recent Moody’s report. Although Rieder plans to stay away from the office, he said there are other areas of CMBS that are very attractive. “The advantage of commercial real estate and commercial mortgages today is that there aren’t many potential buyers or lenders, many banks,” he said. Furthermore, “the office market is highly fragmented, so multifamily, logistics, warehousing, [and] One way investors can gain broad exposure to CMBS through BlackRock’s iShares CMBS ETF. CMBS Year-to-date Mountain iShares CMBS ETF Year-to-date However, Janus’ Kirshner pointed out that not all office work will go away. “It’s very expensive,” he said, “so there’s a lot of opportunity in that market for really nice buildings where sponsors are putting a lot of effort into the building and putting a lot of capital investment into the building. ” he said. Americans continue to travel, data centers will be boosted by artificial intelligence, but they are simply very selective when it comes to CMBS, including offices. “We still have a long way to go from the uptick and underperformance that we’ve had over the last two to three years. There’s still an opportunity,” he said, adding that, for example, in 2014 or 2015, there is still a chance. The loan taken against the building was purchased. He said it could be sold at lower prices than in 2020 and even lower in 2024. Those holders have the power to negotiate to extend existing terms when the loan matures, he said. “It’s a win-win scenario for everyone. We think there is value in the market mispricing,” he said. Another focus for him is single-asset, single-borrower loans, as opposed to deals involving many buildings in different parts of the country. That could mean a significant number of occupants being trapped for 10 years in a particular building in a high-growth area, he said. They also may have very good credit profiles, which he and his team said can be augmented with more localized economic research to identify truly attractive opportunities. Mr. Travaglino, a mortgage lender, also likes credit risk transfer securities from Fannie Mae and Freddie Mac, which issue high-quality loans. “If you then issue structurally low investment grade issues from high credit quality borrowers to sub-investment grade issues (from triple-B to single-B paper), I think that’s a very attractive combination.” said. Although mortgage credit spreads are narrowing, Kirshner believes there is still room for improvement. “People don’t want to sell their homes. They don’t want to give up their 3%, 3.5% mortgages,” he said. We haven’t built enough shelter in this country, especially at the single-family level. ” Correction: The Janus Henderson AAA CLO ETF has a 30-day SEC yield of 6.72%. A previous version of the table contained incorrect numbers.
Why some investors are bullish on this asset class yielding over 6%
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