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Don't ditch the product, look to the asset quality
01 September 2007
In the present credit market turmoil, asset-backed securities – and structured products in general - have come in for plenty of unfavourable comment. But Gareth Quantrill says the innovative products themselves are not the problem. In fact they remain a useful tool for institutional investors.
As ever in financial markets, once uncertainty and fear are paramount there will be attractive investment opportunities for the experienced investor. Not too long ago, pension funds invested their fixed income assets exclusively in gilts. During the 1990s, corporate bonds grew in popularity because performance was good, with many years of high single-digit returns.
But as this performance has come to look increasingly unsustainable, pension fund trustees started to look for alternative means of generating superior returns. Asset-backed securities (ABS'), are among those alternatives.
ABSs bring together a pool of financial assets that investors would find hard to acquire and manage, such as credit card receivables. Bonds backed by these assets give the holder the right to future cash flows from the assets in order of seniority of the bond. A significant advantage of many ABS transactions is the high level of diversification. A typical credit card deal will be...
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