A strong core: How Asset-Backed Securities can improve fixed income strength
Asset-backed securities (ABS) are a valuable, but often overlooked diversifier of fixed income portfolios. The Janus Henderson Portfolio Construction and Strategy (PCS) Team explore how ABS has performed through different market scenarios and the potential benefits of an allocation.
8 minute read
Key takeaways:
- ABS are a very diverse and liquid market, offering real economic exposures, with underlying asset pools consisting of the likes of residential mortgages or car loans. However, they are often overlooked by investors in fixed income allocations.
- Investing in ABS can provide access to high quality income, diversification and resilient returns through different market environments.
- Including ABS in a fixed income portfolio has been shown to enhance returns and reduce risks over time.
ABS offer a relatively higher yield versus other similarly rated corporate bonds along with a relatively low-interest rate duration and shorter average spread duration (reducing the price sensitivity to interest rate and credit spread moves in the market). All of which makes ABS a helpful, yet relatively underutilised, diversifier to corporate bonds in fixed income portfolios. Despite their strong benefits and a global ABS opportunity set of more than US$800 billion1 , ABS are often overlooked as part of a diversified fixed income portfolio.
1 Source: Janus Henderson Investors, as at 31 March 2025, based on EU/UK regs compliant universe.
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These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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Important information
Please read the following important information regarding funds related to this article.
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
8 minute read
Key takeaways:
- ABS are a very diverse and liquid market, offering real economic exposures, with underlying asset pools consisting of the likes of residential mortgages or car loans. However, they are often overlooked by investors in fixed income allocations.
- Investing in ABS can provide access to high quality income, diversification and resilient returns through different market environments.
- Including ABS in a fixed income portfolio has been shown to enhance returns and reduce risks over time.