The Investment Podcast: An Introduction to Significant Risk Transfer

18 min listen 16 Aug 23

The Significant Risk Transfer (SRT) market currently offers a compelling alternative to traditional asset classes given high levels of inflation, according to James King, Head of Structured Credit at M&G Investments. SRT transactions involve a high element of risk but coupons that have the potential to range up to the high teens provide significant compensation, whilst the floating-rate nature of the asset class has typically delivered increased levels of income as interest rates adjust higher.

Buy-and-hold investors are taking advantage and could enjoy these attractive returns for the next 5 to 8 years as the market continues to expand rapidly, offering a broader range of investment opportunities, in our view. We believe this market is still relatively under-invested, which is one of the reasons why spreads remain so attractive. We think that inevitably over time this premium will be eroded as more investors come into the asset class.

Ultimately, SRTs are issued as credit instruments, with returns derived from the underlying loan pool. Therefore, the risks of losses on these loans are the primary concern of investors. However, investors can seek to mitigate these risks by focusing on diversified pools with lower individual borrower concentrations; partnering with large banks that have lending track records that pre-date the global financial crisis; and meticulously stress testing portfolios to facilitate a high probability of withstanding prolonged periods of economic weakness.

Speaker: James King, Head of Structured Credit, M&G Investments
Host: Romil Patel, Global Managing Editor

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

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