Mortgages play only a minor role in the portfolios of most pension funds, often accounting for less than two percent. Institutional investors who want to invest in mortgages need specialized processes and a deep understanding of credit assessment and risk evaluation. The regulatory requirements are complex, and it is necessary to ensure broad diversification within the mortgage portfolio. These requirements prevent many pension funds from investing in mortgages despite the stable income and diversification offered.

One solution to this problem is to invest in mortgages via an investment foundation. These foundations pool the capital of several investors and handle everything from credit checks and risk management to portfolio management. In this way, pension funds benefit from professional management and broad diversification without having to fulfill operational and regulatory requirements themselves. This significantly lowers the barriers to entry and also gives smaller pension funds access to this attractive asset class.

Another reservation concerns the limited liquidity of mortgages. Unlike listed securities, mortgages cannot be sold at any time. For many institutional investors who require a high level of liquidity in their portfolios, this appears problematic at first glance. However, investors receive an illiquidity premium to compensate for the limited tradability, which leads to additional returns in a diversified portfolio.

Compared to traditional bonds with comparable risks, a key advantage of mortgages is their high yield. While government and corporate bonds often deliver hardly any returns in periods of low interest rates and sometimes even have negative yields, mortgages offer more stable and higher returns. As a rule, they generate an additional return of around 80 to 100 basis points compared to bonds with a comparable credit rating and term.

While bond investors have to make do with minimal returns, mortgage investors benefit from a structural bonus that is additionally supported by the mortgage collateral.

Mortgages represent debt financing that is secured by mortgage liens. This enables a considerable reduction in the risk of default. The return is primarily determined by the interest income. Mortgages therefore offer a clearly calculable and steady return. If mortgages are valued at market value and based on current market interest rates, interest rate changes will also lead to corresponding fluctuations in the portfolio for mortgage investments. If the loan-to-value ratios are taken into account alongside other factors, this helps to determine the probability of a mortgage default and to calculate the risk.

Pension funds and insurance companies are significantly underrepresented in the overall mortgage market compared to banks. Banks traditionally claim the lion's share of the market volume. Institutional investors such as pension funds have so far only had a limited share of this market. This reluctance is due to historical reasons and can be attributed to aspects including the aforementioned barriers to entry and regulatory challenges. However, the mortgage market offers considerable growth potential for institutional investors. As banks are reducing some of their mortgage lending due to stricter capital requirements, pension funds and insurance companies can step into this gap and thus realize attractive returns. They benefit not only from the relative security and stability of the asset class, but also from the opportunity to strategically diversify their exposure.

Particularly in periods of low interest rates, when many bonds offer very low or even negative yields, mortgages offer not only an attractive return but also effective protection against negative interest rates. This advantage results from the stable cash flows guaranteed by the minimum interest rates for borrowers. In an environment where investors are increasingly having to pay for liquidity or highly liquid bonds, this protection remains a key factor in achieving attractive total returns. At the same time, mortgage collateralization offers a level of security that traditional bonds often do not achieve. If a borrower becomes insolvent, the value of the underlying property is retained. The risk of loss is therefore significantly reduced.

Mortgages can be considered an effective diversification alternative to bonds due to their stable cash flow, low volatility and high collateralization. The combination of security and potential returns opens up attractive opportunities for pension funds. By integrating mortgages into their investment strategy as an integral component, institutional investors benefit not only from stable returns but also from optimal protection for their portfolios against falling interest rates.

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