This is a sponsored article from HSBC Asset Management.

For Professional Investors only.

HSBC Asset Management, a manager with a specialised approach to securitised credit investment, has launched a flexible solution for private banks and their fixed income investors in Hong Kong.

The first half of 2025 has been far from easy for private wealth fixed income investors. Buffeted by the vicissitudes of persistent market volatility, stubborn inflation, and the after-effects of an April economic shock that sent spreads wider across the credit spectrum, their hopes of finding both income and yield while mitigating risk have often been frustratingly, if unsurprisingly, elusive.

Help, fortunately, is at hand. HSBC Asset Management has recently launched a flexible securitised credit bond strategy for Hong Kong private banks. With it came the opportunity for investors to access a differentiated, diversified income and capital appreciation potential. Managed by a seasoned team that, as of 30 April 2025, oversaw some US$9.1 billion in the global securitised credit space.

Enhanced yields with inbuilt diversification

Paul Mitchell, senior investment specialist of global, securitised and sterling fixed income at HSBC Asset Management, spelt out the strategy’s key attractions: “Securitised credit offers three distinct characteristics which are advantageous. First, it offers yield enhancement versus corporate bonds – the coupons of securitised credit securities offer an additional spread on top of the floating rate. Second, there are complexity/illiquidity premiums. Securitised credit is an over-the-counter offering, requiring in-depth credit research and expertise. It is also less liquid than traditional fixed income. Finally, it offers diversification. Being a low duration, floating rate credit product, the asset class moves differently to traditional duration-based asset classes.”

What does this mean for private bank investors in a nutshell? “The asset class provides income potential, a low correlation to traditional fixed income and therefore attractive risk-adjusted returns versus fixed income,” said Mitchell.

While securitised credit is an asset class more traditionally associated with and invested in by institutional investors, HSBC Asset Management has played a pioneering role in its democratisation for wholesale markets and private wealth clients. Many private banks in Hong Kong are already familiar with the house’s prowess in the securitised credit space, for instance, via their three-year access to its investment grade securitised credit strategy. The US$1 billion raised for the latter in the past year¹, driven in part by healthy private wealth demand, was indeed a strong reason behind the launch of its global securitised credit bond sister.

Flexibility across geography, sector and credit

The new strategy is substantially differentiated. Mitchell elaborated: “Flexibility is key amid the uncertain market. Our new strategy is enabled to access ideas across both investment grade and high yield tranches, meaning investors can harvest the opportunities within the entire global securitised credit universe from AAA to B. They can also potentially generate higher income through higher coupons from the BBB/BB tranches. And they can gain higher capital appreciation potential through spread tightening. We believe all these would be beneficial for our private bank clients.”

The strategy is also well diversified both by geography and by sector. Around 58% of its current allocation, for example, is in the United States – the largest and most liquid market – with 38% in Europe and the United Kingdom, and 4% in Australia¹. Similarly, by sector, it is currently roughly market weight in collateralised loan obligations, has been reducing its allocation to commercial mortgage-backed securities and is increasing its allocation to residential mortgage-backed securities (RMBS) where possible.

The distributed securitised credit market has grown rapidly to its current worldwide size of US$4 trillion². Very few asset management companies can claim to have the depth and breadth of coverage and credit research capabilities to offer a global strategy that invests across all sectors, credits and geographies.

With a dedicated team of 11 securitised credit specialists, HSBC Asset Management has one of the largest and most experienced teams in the industry. The investment forum of its new strategy, for example, has a combined 34 years of experience in global securitised credit.

A specialised approach to securitised credit investment

More than this, it is a securitised credit manager that truly takes a global dynamic relative-value approach to the asset class, making its approach completely specialised. It also believes this approach gives it an unparalleled ability to capture opportunities in a constantly changing marketplace.

Mitchell explained: “Securitised credit moves differently to traditional asset classes and offers a less liquid but broader opportunity set than corporate bonds. Our ability to reallocate resources efficiently across sectors and regions allows us to enhance returns and exploit market inefficiencies. While European managers focus on Europe/the UK and US managers on domestic issuances, such as legacy non-agency RMBS, HSBC Asset Management differentiates itself by providing diversified, superior global securitised credit portfolios.

“We also have the ability to move up and down the capital structure to take advantage of changing market conditions. As a result, we provide a low correlation to traditional fixed income and equities and offer clear diversification benefits,” Mitchell added.

This information shouldn’t be considered as a recommendation to invest in the specific countries, products and the sectors mentioned. Diversification does not ensure a profit or protect against loss. The views expressed above were held at the time of preparation and are subject to change without notice.

Shelter from the storm

Securitised credit has proven its resilience throughout numerous economic cycles and in the face of profound market dislocations. Mitchell noted that, since its inception, the flexible securitised credit bond strategy has not had any issues with regard to meeting redemptions, despite enduring periods of intense market stress. He cited the UK liability-driven investment (LDI) crisis as an interesting case in point. This was the short-lived but severe event triggered by then-Prime Minister Liz Truss’s September 2022 “mini-budget” and the sharp rise in gilt yields to which it gave rise.

He elaborated: “In fact, the LDI crisis in September 2022 saw pension schemes selling their most liquid assets to meet urgent collateral calls, and the securitised market provided liquidity to those that needed it.”

He also stressed that in-built protections in the form of credit enhancement add reassurance to investors. “This strategy offers substantial credit enhancement in the senior tranches and good credit enhancement in the mezzanine tranches,” he said. “Thus, the strategy can withstand all but the harshest of economic recessions. Furthermore, previous credit spread widening provides opportunities to invest in high-quality securities at an attractive price, resulting in outperformance over the longer term. However, given the market uncertainty, we continue to allocate with caution.”

His emphasis on caution in markets that continue to be unpredictable is eminently sensible. Mitchell is also keen to alert investors to the twin risks relating to credit and illiquidity that attend any securitised credit strategy. “Securitised credit is a credit product and, in the case of a market sell-off, spreads would widen,” he noted. “There is very little duration protection within these strategies as this is a predominantly floating rate asset class and, therefore, we would receive no duration performance offset.”

There is also a liquidity risk to consider. Securitised credit as an asset class has somewhat lower liquidity compared to traditional fixed income. “That said,” said Mitchell, “there is more liquidity at the higher credit quality rating and less liquidity at the lower credit quality ratings. Prices of bonds can be volatile at these lower levels during risk-off periods – but this can be offset by investing in all the credit qualities, regions and sectors globally.”

Mitchell’s views on rates and their knock-on effect for securitised credit for the remainder of 2025 suggest continuing upside despite prevailing volatility. “The global macroeconomic outlook for the remainder of 2025 is likely to mirror the first quarter of 2025, meaning it will be changeable in nature,” he said. “Consequently, this will likely make it difficult for central banks, particularly the Fed, to cut interest rates. This higher-for-longer scenario is a positive for the asset class, which is floating rate and will continue to generate high levels of income.

“Interestingly,” he added, “recent spread widening has meant spreads are now wider than they were prior to 2025, meaning there is potential for spread tightening in high-quality securities.”

The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way.
 

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Footnotes
¹ This information shouldn’t be considered as a recommendation to invest in the specific countries, products and the sectors mentioned. Diversification does not ensure a profit or protect against loss. The views expressed above were held at the time of preparation and are subject to change without notice.
Source: HSBC Asset Management, as of 30 April 2025.
² Sources: HSBC Asset Management; Australian Statistics Bureau; Reserve Bank of Australia, JPMorgan, BAML, Barclays; data as of 30 April 2025.

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This is a sponsored article from HSBC Asset Management.