Introducing ABS - Achieving positive results in a rising rate environment

Attractive yields, diversification opportunities and limited risk: Aegon Asset Management’s Frank Meijer talks about the uniqueness of ABS.

Speaking to an international trade audience in the Investment and Pensions Europe webcast series Frank explained the three reasons why European ABS is an interesting option for those institutional and wholesale investors looking to diversify their portfolios and attain higher yields.

Toxic no more

Attitudes towards ABS are different from a few years ago when ABS were demonized and labelled toxic, in fact European ABS have performed very differently than the US ABS we remember from the crisis. Actually even in the US, defaults were concentrated in a few ABS sectors and one did not see many defaults in the other sectors, such as prime mortgages, car loans or credit card debt. Because of the diverse types of collateral we can invest in, toxicity is not a factor here.” says Frank Meijer, Co-Head of Fixed Income for Aegon Asset Management NL.

Unique opportunity in rising interest rate environment

ABS is unique, it is an underinvested asset class with yields that are substantially higher than any fixed income option and is one of the only floating rate asset classes available.

Our longest running ABS strategy has offered an annual return of 5.85% since 2004, which is 2.58 percentage points more than the benchmark.

AAM analysts foresee an interest rate hike in the near future as bond yields are historically low and the economy has passed the turning point and the labor market is starting to gather steam too. Given this scenario, it is more likely that interest rates will move upwards than downwards. “If rates rise, fixed income investments will suffer with a negative return, however ABS would give positive returns,” according to the AAM Co-Head of Fixed Income.  

Diversification is the Golden Rule

One of the characteristics of ABS is that it offers exposure to consumer risk where investors are traditionally mainly exposed to corporate and government risk. This is because ABS is not an easily accessible strategy. Frank pointed out that, “To do it right a dedicated and professional team of investors is a must, you need to be able to fully understand this complex strategy and know issuers in detail. That is where our advantage shows - our parent company Aegon is one of the top 3 insurers in the Netherlands and is a significant originator of mortgages and other consumer loan products.”

ABS have between 25-30 various collateral types to select from, allowing the Aegon Asset Management team of almost 20 professionals to pick and choose loans not only on collateral type but also on unique geographical consumer trends.

Ticking all the right boxes

Whether you are looking for risk diversification, higher yields or the advantages of shorter term investments ABS are ticking all the right boxes at the moment. 

Listen to the webcast by Frank Meijer on ABS »