The Case for Asset-Backed Securities (ABS)
Given the nature of the underlying collateral, the European ABS sector offers access to different consumer-driven and ‘real economy’ risks, diversifying from corporate credit.
2 minute read
Key takeaways:
- The ABS or securitisation universe represents a diverse opportunity set, offering investors varied risk and return
characteristics, alongside high-quality income and resilient returns. - It can offer diversification to fixed income portfolios, while the amortising structures and shorter durations can help reduce overall credit and interest rate risks.
- Investing in ABS requires not only a unique and broad insight into the dynamics of securitisation markets, but also an ability to understand and analyse the risks in different types of securitisation transaction.
Although known by numerous names based on the type of assets that back them, asset-backed securities (“ABS”) or securitisations are ultimately all securities made up of discrete pools of common assets.
Securitisation structures can be thought of as analogous to a “mini bank” that makes only one type of loan. Like a bank it funds these loans via a mixture of different classes of debt and equity (each with different risk and return profiles). However, securitisation has a number of positive distinguishing features versus a typical bank:
- Less complexity and governance risk – Investors enjoy greater transparency on the loans being made and tight controls over how those loans can change over time.
- Matched funding of assets and liabilities – Securitised debt usually does not need to be repaid before the assets repay.
- Limited interest rate risk – Generally securitisations just pass through the income they earn on the loan portfolio to pay the securitised debt interest. If there is any mismatch between say a fixed rate loan portfolio returns and variable rate securitised debt interest, this will be hedged via swaps embedded within the structure.
In this Case for ABS, we take a deep dive into the sector and evaluate each of its distinguishing features that enable the asset class to be combined successfully with other fixed income in diversified portfolios.
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.
Marketing Communication.
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
2 minute read
Key takeaways:
- The ABS or securitisation universe represents a diverse opportunity set, offering investors varied risk and return
characteristics, alongside high-quality income and resilient returns. - It can offer diversification to fixed income portfolios, while the amortising structures and shorter durations can help reduce overall credit and interest rate risks.
- Investing in ABS requires not only a unique and broad insight into the dynamics of securitisation markets, but also an ability to understand and analyse the risks in different types of securitisation transaction.
