Asset-backed securities in favour for floating-rate yield
As we enter a post-Covid world, interest rates remain at all-time lows with seemingly no immediate respite. To compound matters, the Reserve Bank of Australia (RBA) has given “a very low probability” to the current surge in inflation triggering an early increase in official rates. Inflation has risen somewhat, but in underlying terms the rate is still low at 2.1 per cent. If inflation stays between 2-3 per cent, rates aren’t going anywhere.
And that means that yield-hungry investors will need to move up the risk curve to receive the same yield. But there is another way. Bentham Asset Management recently highlighted that it has been able to maintain consistent income returns despite growing fixed-income market volatility through the use of a higher proportion of floating-rate securities.
This has been a key focus on the Bentham Asset Backed Securities fund, which gives yield-oriented investors a steady source of income. A primary feature of the fund is its low volatility, with a one-year standard deviation of 0.7 per cent. In other words, the fund is designed to produce steady income while preserving capital.
Bentham says: “Investments such as asset-backed securities (ABS) are priced at a margin over a benchmark rate, and as the benchmark rate rises, so does the yield on the securities. The ABS asset class includes a variety of securitised finance receivables, from residential mortgages to credit cards and commercial aircraft leases.”
And the team at Bentham has the experience and track record to make it happen. For example, the Bentham Asset Backed Securities Fund has returned an average 3.07% a year net of fees for the last five years, which compares with the return from Cash (1.2% p.a.), Australian bonds (2.6% p.a.) and international bonds (2.7% p.a.) over the same 5-year period. Over a one-year period to October 2021, the fund has produced a total return of 3.06% net of fees. In comparison Australian and international bonds have returned -5.3% and -2.4% over the past year.
Bentham principal and CIO, Richard Quin, says, “Floating-rate markets have the potential to benefit from rising interest rates and higher inflation, should it continue. The global asset-backed securities market is very large and well-established. AAA and AA tranches of ABS issuance offer investors a high credit quality, higher-yielding, secured alternative to investment-grade corporate and government bonds, with low interest-rate risk.”
All in all, asset-backed securities give investors “exposure to US securities, and therefore US economic growth, providing an opportunity for investors looking to diversify their credit exposure away from the Australian market. The fund’s exposures include close to one-third in US collateralised loan obligations (CLOs), and also one-quarter in European CLOs, plus UK residential mortgage-based securities (RMBS), Australian RMBS and aircraft ABS,” says Quin.