With income generation being a top priority for Asia’s ultra/high net worth individuals (U/HNWIs), HSBC Asset Management (HSBC AM) believes securitised credit can play a role in diversifying client bond portfolios with higher returns amid a volatile market.

However, being an asset class traditionally focused on the institutional channel, how are private wealth clients taking to it?

According to Charles Li, who heads the firm’s wholesale business in Asia, HSBC AM began engaging private clients on securitised credit about two years ago to help them better understand the intricacies of the asset class, which is now attracting more interest.

“We successfully built the profile for it (securitised credit) as one of our key fixed income strategies in the region,” he told Asian Private Banker in a recent interview.

Charles Li, HSBC Asset Management

Securitised credit utilises underlying cash-generating assets, such as residential mortgage loans, commercial mortgage loans, and leveraged loans, for securitisation. These illiquid cash-generating assets are purchased and restructured into various tranches of securitised assets. The securitised credit market was estimated to amount to US$3.8 billion as of March 2025, according to HSBC AM.

The senior tranche receives the allocation of the loan’s cash flows first and typically has a triple-A rating if the underlying assets meet stringent credit quality standards. The senior tranche is the last to be affected in the event of any loss on the loan portfolios. This credit enhancement makes it resilient against an economic downturn, according to Andrew Jackson, head of portfolio management for the securitised credit investments team at HSBC AM.

The size of the US market overshadows Europe and others. (Source: HSBC Asset Management; AFME, SIFMA (data updated in March 2025 using the latest available SIFMA data as at 28 February 2025); Australian Statistics Bureau; Reserve Bank of Australia and JPMorgan.)

“One of the really attractive features of securitised credit is that at every different rating, compared to regular fixed income, the yield is higher when measured by credit spread,” Jackson told APB. He added that many of the bonds are floating rate and effectively pay the secured overnight financing rate (SOFR) plus the elevated spreads.

Li believes the strategy can work in tandem with private market investments for some clients. “If the clientele prefers something more liquid, I think securitised credit is something they should really look into. It’s a great way to complement the liquidity cycle of the private market,” he told APB.

The firm is considering a hybrid private-public solution in the future, according to Li. As of the end of June 2025, HSBC AM managed US$808 billion globally.

Gaining access

Li pointed out that private clients’ fixed income portfolios in Asia are usually skewed towards global bond funds or core bond funds. “It’s time for them to get more diversification for the portfolio,” he said, adding securitised credit has a relatively low correlation to these asset classes.

Meanwhile, he highlighted that the securitised credit market is more for established institutional players, and even U/HNWIs find it difficult to access. “We actually are helping them gain this institutional market exposure in the portfolio. I think it’s a new perspective for them to look at,” Li said.

Investors receive higher returns in the securitised credit space than in a regular corporate bond, as the unwinding of the structure that converts loans into bonds is challenging, and they must access the market with great care, according to Jackson.

“We’re often able to ask the investment bank to structure it in a certain way. We put our thoughts down and make it more beneficial for us with what we want to achieve. That comes down to reputation and being known by all of the market participants,” he said.

Difficult economic environment

Whilst there should be some short-term interest rate cuts, the market will not be returning to a very low interest rate environment, according to Jackson. “It’s going to be higher for longer, as we are floating rate, that is direct income to us,” he said.

The firm also anticipates that the economic situation will become more difficult in general, meaning that securitised loans may default. “However, if you are in the six A’s and in those highly credit-enhanced tranches, it’s actually very resilient,” Jackson said, adding that credit spreads will likely not contract any further.

Andrew Jackson, HSBC Asset Management

HSBC AM predominantly invests in the senior tranches of securitised credit. The firm also makes certain it is at the top end in terms of loan quality. For instance, it avoids secondary properties in commercial mortgage-backed securities (CMBS) and subprime.

“We do think in the current environment, the weakest in society are going to suffer most […] That can apply in the corporate scene as well, and you need to make certain that your loan portfolio is to stronger and bigger companies. We don’t do smaller company loans,” he said.

The firm currently has a market weight in collateral loan obligations (CLOs), the largest sector of securitised credit. Meanwhile, Jackson said the Australian residential mortgage market is an interesting area of good relative value. For commercial mortgages, the firm had reduced exposures over the last two years.

“It’s very vital to be secured on a prime property, whether that’s an office or a shopping mall or a hotel, because secondary properties are suffering at the moment,” Jackson said.

He also observed that a number of investors are concerned about the money rushing into private credit, and they’re looking to allocate back to the public space. “They want liquidity and transparency. That’s what we offer. We believe some of our end clients are using us as the liquid element to balance their private credit portfolios,” he told APB.