UK - Investments in asset-backed securities would boost returns and help schemes to match their liabilities, Standard Life Investments claims.
The ABS market - where banks and other lending institutions securitise packages of loans such as mortgages and consumer debt - has grown by 30%over the past year.
SLI said that as schemes were increasingly searching for longer-term, higher-yielding investments, mortgage length bonds would enable them to match liabilities more effectively - despite the higher risk involved.
SLI head of treasury John Cummins said that asset-backed securities could provide a win-win situation for both investors and banks.
He explained: “Investors are attracted by the competitive yield available for each given level of risk, while on the sell-side these products have become particularly popular with banks, insurers and life assurance companies as a way to use their capital more effectively.”
But Cummins said that despite the potential upside of investing in ABS, schemes should be wary of pitfalls.
“The opaque nature of ABS structures means investors must take considerable stress testing before considering them as a potential investment and must be vigilant in scrutinising these securities after the initial purchase.”
Mercer senior investment consultant Ralph Frank agreed. “It is all about digging into the detail of each of the securities in the package - what are the assets backing it and what sort of security does it provide against the promised coupon and principle payments?
“There is no blanket good or bad investment - it is more about whether you are getting fair compensation for the risk you are taking on.”
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