Fund view: M&G sees value in unloved asset-backed securities
LONDON (Reuters) - UK fund manager M&G is targeting asset-backed securities (ABS) such as UK and Dutch mortgage backed debt for pension portfolios, as they offer returns on a par with A-rated corporate bonds, with better security.
This approach bucks a trend amongst bond investors who are chasing popular investment grade and high-yield corporate credit, but mostly shunning ABS, still stigmatised by the sub-prime housing sector meltdown that triggered the global financial crisis in 2007.
Some investors are concerned that shrinking returns on high yield debt now offer little margin for safety given the sovereign debt crisis, with over-eager investors taking on extra risk for little extra return.
M&G, which is owned by insurer Prudential (PRU.L), believes it is better to look for value in less-favoured areas of the market, especially where investments are secured by real assets like property.
"Bonds backed by assets are still very cheap. Triple A-rated residential mortgage-backed securities (RMBS) are currently offering the same spread as A-rated corporate bonds," said Richard Ryan, senior fund manager for pension fund and sovereign wealth fund clients at M&G Investments.
M&G manages some 107 billion pounds in fixed income assets.
BULL MARKET BEHAVIOUR
In tough economic times, buying secured rather than unsecured bonds seems sensible, especially if you get paid the same to do so, Ryan said.
He added that triple A-rated commercial mortgage-backed securities (CMBS), backed by supermarkets, offices and industrial estates for example, are currently paying more than or the same as BB or B-rated corporate bonds.
"There is a massive disconnect here in terms of where the market thinks it will get its returns," said Ryan.
He said it was possible to buy RMBS, CMBS, auto loans, and credit card ABS at the top of the capital structure, and get paid more than M&G would by buying bank paper.
"We recently looked at a portfolio of Dutch prime mortgages from 2007, which had 1 basis point of losses across the entire portfolio, so none of the tranches are taking a hit, and every bondholder is being paid," he said.
Ryan said M&G liked both Dutch and UK prime RMBS because of the strong legal and structural frameworks around them but he was not keen on French CMBS, which are subject to the "sauvegarde" restructuring process aimed at protecting the lowest tranche of the capital structure in times of distress.
He is also uneasy about some aspects of the bond market, where he sees evidence of bull market behaviour.
He pointed to complex utility company hybrid bonds, such as that from RWE (RWEG.DE), which has traded down 4.5 percent since issuance. "At no point has it tightened in comparison to the senior bond -- you would have been better off in that," he said.
David Lloyd, head of M&G institutional portfolio management, said he was targeting top-rated MBS issued by European banks.
"You shouldn't be able to get more money for additional security but ABS and MBS were in the very teeth of the financial crisis, and values were driven down by massive forced selling."
(Editing by Sinead Cruise and Jane Merriman)
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