With increasing demand for diversified fixed income portfolios, more investors are turning to asset-backed securities (ABS).
ABS transactions provide exposure to the income generated by large, diversified pools of high-quality assets such as mortgages, car finance agreements, and corporate loans. Investors can gain exposure to these regular cashflows via bonds that are backed by the asset pool.
ABS remains poorly understood in parts of the investment community, but we believe the attractive income and flexibility it offers could benefit a much broader audience. ABS has historically shown low or negative correlations to traditional asset classes, making it a valuable tool for diversifying a portfolio away from more mainstream fixed income markets such as corporate and government bonds.
"ABS is an under-used area of fixed income that can work for investors with a wide range of risk appetites."
Having launched the first UCITS fund focused solely on European ABS in 2009, TwentyFour is a recognised leader in this asset class.
We are also one of the few managers in Europe that invests across the full ABS risk spectrum, from senior investment grade bonds to more specialist transactions, which we find improves our access to opportunities across the board.
"We dedicate considerable resource to meeting ABS issuers all over Europe, and we are often alone in doing so.”
The defining characteristic of ABS is that the bonds are structured into layers, or “tranches,” each with a specific risk and return profile based on its position in the capital structure.
Also known as securitisations, the main difference between ABS transactions and conventional bonds is that ABS coupons are paid directly by the cashflows generated by the underlying asset pool, rather than by the bond issuer.
ABS transactions cover a range of asset types, with two of the largest markets being Residential Mortgage-Backed Securities (RMBS) and Collateralised Loan Obligations (CLOs).
In part due to its perceived complexity, ABS normally offers a higher yield for a given rating or maturity than more mainstream investments such as government or corporate bonds.
ABS in Europe are usually floating rate, with near-zero interest rate risk. Generally, less volatile than fixed rate bonds when inflation is high or when interest rates are rising.
ABS has something for every risk appetite. It is probably the most flexible part of the fixed income universe, with opportunities across ratings from triple-A to single-B and even unrated.
Issuers provide frequent reporting detailed enough to view the performance of each individual loan in the asset pool, enabling investors to forecast, stress test and have confidence in their performance.
ABS transactions are structured into layers of risk, with junior tranches absorbing losses for more senior ones. The assets sit in a separate legal entity, protected from external events such as a lender's failure.
ABS has historically demonstrated a very low default rate through economic cycles due to asset quality, bondholder protections, and protection building as loans pay down, making tranches more likely to experience upgrades.
"We have consistently viewed the yield available in CLOs as one of the most attractive opportunities in all of fixed income."
A specialist ABS investment team combining deep experience, disciplined due diligence and advanced modelling to uncover value across securitised credit markets.
To find out more about our range of ABS funds, you can contact one of the TwentyFour Asset Management sales team.
