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.
• 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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