Public Fixed Income

From Diversification to ESG: The Evolving Opportunity in ABS

April 2021 – 8 min read
Asset-backed securities can offer a number of benefits as part of a broader fixed income mandate—particularly given the strong structural protections, diversification benefits and advancements in ESG.

Asset-backed securities (ABS) have attracted increasing interest in recent years as the market has continued to evolve and expand, and as yields across most fixed income markets have trended lower. More recently, through the pandemic-induced volatility and economic slowdown, ABS has proven to be resilient—but in some cases has lagged in its recovery relative to corporate credit, suggesting that now may be a good time for investors to dig in on ABS to understand where the true opportunities lie. In this piece, we provide a brief overview of the securitized universe and discuss why adding or increasing exposure to ABS can be beneficial as part of a broader fixed income allocation.
 

Why Securitized?

The securitized market has experienced tremendous growth over the last decade, with over $9 trillion in outstanding securitizations across:

  • ABS
  • Mortgage backed securities (MBS)
  • Commercial mortgage backed securities (CMBS)
  • Residential mortgage-backed securities (RMBS)
  • Collateralized loan obligations (CLOs)
     

At roughly $750 billion, ABS is sizeable in and of itself. Like the broader securitized universe, ABS has evolved significantly as a number of new issuers—many of which are already active in the corporate bond markets—have come to the market seeking financing. Dealer participation has also increased in both the primary and secondary markets, and as follows, more investors have entered the space as well.

Liquidity, by extension, has also improved. While the securitized market is generally perceived to be less liquid than investment grade corporates, liquidity can vary based on factors like sector and position in the capital structure. For instance, higher-rated AAA and AA securities—particularly those in on-the-run ABS sectors like credit cards and autos—tend to be fairly liquid, in many cases on par with corporate credit. Lower-rated BBB and BB securities tend to be less liquid, as do certain asset classes like CMBS, where issuance and trading can be limited given the longer-dated nature of the securities and large institutional (buy-and-hold) buyer base.
 

Diversification & Unique Exposures

Coming off of a year marked by extreme volatility, one of the most compelling reasons for considering securitized assets is their potential for diversification. Unlike corporate bonds, ABS are collateralized, or backed, by pools of underlying assets such as student loans or aircraft leases. They are issued by special entities that own the underlying assets, and that are separate from the sponsoring companies or originators of those assets. In this capacity, securitized assets represent one of the most effective ways for investors to diversify away from idiosyncratic corporate risk and gain direct exposure to unique parts of the economy, such as the consumer and housing sectors.

Want to read the full article?

View PDF

Yulia Alekseeva, CFA

Head of Consumer ABS & CMBS

Douglas Trevallion II, CFA

Head of Global Securitized & Liquid Products

The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.

Related Viewpoints