The ABCs of ABS: Identifying Opportunities in Asset-Backed Securities

In the search for yield, ABS offers an opportunity to generate higher returns through rigorous analysis, unaccompanied by additional credit or interest-rate risk.

As investors scour the fixed-income universe seeking yield, one sector is generally overlooked – asset-backed securities (“ABS”). ABS has many qualities investors want – shorter durations and yield premiums in excess of 200 basis points over comparable corporate bonds. Nevertheless, investors have largely eschewed ABS, which remains an investment enigma, overshadowed by the pall cast by the subprime mortgage crisis of 2008.

The lingering stigma surrounding ABS stems from the unprecedented losses suffered by mortgage-backed securities (“MBS”) during the housing downturn. However, the resilient performance of ABS demonstrates that not all structured finance is equal. Along with higher yields and favorable risk profiles, the sector’s lower vulnerability to rising interest rates provides diversification opportunities in core fixed-income portfolios – something that is particularly valuable with rates rising.

REPORT HIGHLIGHTS:

• Complex securities, such as ABS, have been largely overlooked by bond investors in favor of the simplicity and greater liquidity of corporate credit.

• Notwithstanding similarities in structure, ABS differs significantly from MBS, which was at the epicenter of the 2008 financial crisis.

• For investors with the resources to perform the requisite analysis across collateral, structure, and servicer, ABS can offer an opportunity to earn higher yields without assuming incremental risk.

•In addition to its attractiveness as a standalone investment strategy, ABS can also offer portfolio diversification for core fixed-income investors. The amortizing structures and shorter duration of ABS help to mute overall portfolio credit and interest-rate

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This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy.

Past performance of indices of asset classes does not represent actual returns or volatility of actual accounts or investment managers, and should not be viewed as indicative of future results. The benchmarks used are for purposes of comparison and should not be understood to mean that there will necessarily be a correlation between the portrayed returns herein and these benchmarks. Past performance is not indicative of comparable future results. Given the inherent volatility of the securities markets, it should not be assumed that investors will experience returns comparable to those shown here. Market and economic conditions may change in the future producing materially different results than those shown here. All investments have inherent risks. No representation or warranty is made to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or summaries contained herein for any specific purpose. © 2013 Guggenheim Partners LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners LLC.

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