The reputation of secured credit investments was badly bruised by the United States sub-prime mortgage fiasco, but an international investment manager is emphasising that the problem was due to that country’s unique non-recourse borrowings.
Threadneedle Investments Secured Credit Fund managers Steven Fleming and Ashley Burtenshaw said the fund invested almost exclusively in prime mortgages in Europe (including the United Kingdom) and Australia.
Fleming and Burtenshaw had been talking with asset consultants Russell and Frontier and said later that one of the main challenges in Australia was educating the market about the differences between US lending practices, and the practices in Europe and Australia, where lenders had recourse to borrowers.
Fleming said the selling point of secured credit was “capital preservation and income”.
“For investors looking for robust capital preservation while avoiding exposure to long duration risk, secured credit investments can provide significant upside,” he said.
However, because rates were floating and not fixed, asset consultants and superannuation funds tended to put secured credit in the alternatives’ bucket, thus reducing the pool of money that could be put in the asset class.
The secured credit portfolio was typically made up of over 90 per cent of AAA-rated assets, with the rest AA-rated.
The underlying credits were prime residential mortgage loans “that have sufficient credit enhancement to ride out any downturn in the market”, Burtenshaw said.
“We avoid American mortgages where non-recourse loans are common, as well as highly-leveraged consumers, where the risk of default is much higher,” he said.
Losses on pools of prime residential mortgages had historically been very low, he said, and “this should give additional comfort to investors”.
“In fact, losses have averaged around 0.06 per cent a year over the past 10 years,” he said.
