The case for asset-backed securities | Insight Investment

Our belief in the strategic value of asset-backed securities (ABS) is based on five key characteristics.

1. Robust credit quality: The asset class boasts an excellent historical track record on defaults, driven by several unique features, including security for underlying loans and structural protections.
2. Attractive yield premium: Since the global financial crisis, there has been a steady and observable yield premium available in ABS markets when compared to corporate bonds of similar credit quality, even in the most vanilla and liquid sectors of the market. There are several factors which explain this premium: we would highlight regulatory considerations, complexity and negative sentiment as factors which reduce demand and thereby drive a yield premium in ABS.
3. Limited spread and duration risk: ABS, especially outside the US, tend to be short-dated, and therefore exposure to interest rate and credit risk (spread duration or weighted average life) is limited. The asset class can therefore be an effective complement to a corporate-bond portfolio with longer spread duration.
4. Increased diversification: Asset-based instruments are secured on and repaid by the cashflows that derive from specific assets, which are highly diverse and granular, with hundreds to tens of thousands of different obligors backing each individual transaction.
5. Potential for illiquidity premium: The inclusion of less liquid ABS, in the form of asset-based finance, can introduce further benefits to a fixed income portfolio. Along with other features, they can introduce enhanced potential for returns and lower return volatility than public markets.