Asset-backed securities (ABS) are securities whose value and income payments come from, and are backed by, a specified pool of underlying assets. Similar to equities and corporate bonds, ABS can cover a wide range of underlying asset classes.
The case for European ABS
Since 2008, European ABS have consistently traded at higher spread levels than unsecured bank debt, while offering steady floating-rate returns and full security over a pool of identifiable and tangible assets.
This produces a market anomaly of being paid more to hold on to a more secure asset. This anomaly arises for a several reasons, but most importantly it stems from the non-standardisation of ABS bond structures. As a result, it requires significant expertise to thoroughly analyse ABS, and this limits the number of investors who can participate in the market.
UK and European ABS offer solid returns and have a very robust credit performance. Our ABS credit analysts have extensively modelled these bonds and believe that they can withstand a huge amount of microeconomic pain before the bonds suffer even a penny of credit losses.
Overall, we feel that ABS presents an attractive investment proposition with a strong performance track record and the flexibility to allow investors to tailor their portfolios to a specific risk or return appetite. They offer:
- A premium over other similarly rated fixed income asset classes
- Floating rate returns which protect against interest rate rises
- Security against ring-fenced assets
- A strong credit track record
The ability to tailor risk and return in ABS allows us to construct portfolios which can perform various roles in our investors’ asset allocation:
- A low risk portfolio (AAA / AA rated) yielding Libor + 0.5% - 2.0% as an alternative to Gilt or Investment Grade corporate bond mandates
- Or as medium risk portfolios (A / BBB) yielding Libor +3-5% dependent on risk appetite for a growth portfolio