GLOBAL - Worthwhile investment opportunities for pension funds in certain high quality mortgage backed securities (MBS) products could be being overlooked due to investor aversion to sub-prime MBS, experts have claimed.
Warren Davis, senior portfolio manager, Aberdeen Asset Management, told Global Pensions: "The crisis that began last summer is mostly due to a small number of rather risky products, such as sub-prime MBS and aggressively underwritten 'affordability products' such as high loan-to-value Alternative-A hybrid ARMS.
"Many of these aggressive loans were then further leveraged through CDO [collateralised debt obligation] structures, which further compounded the problem. Unfortunately, as a result, some investors hear 'mortgage' and dismiss the investment idea immediately."
Davis continued: "In fact, the MBS market can offer some good value if investors stick to prime, high quality products which are now trading significantly more cheaply than 12 months ago. There are even portions of the agency guaranteed MBS market that are trading significantly cheaper than they should be compared to the ultra-liquid TBA passthrough market.
"Previously, many lower quality MBS products were leveraged, but following the summer's crash, the investment banks which had been creating CDOs and MBS originators have not been originating risky loans as there is no market outlet for them, so there is less danger of the problems we experienced earlier."
However, he warned: "Investors need to do detailed credit analysis of existing non-agency MBS to ensure the bonds can endure the stress of ongoing home price depreciation in the US."
Davis concluded these products would be especially suitable for pension funds as long term investors: "Some products are now trading at as little as US$80 for LIBOR plus 300 to 500. Initially, investors may see losses of a couple of points, but with discounts we have been seeing of up to 20 points, it makes sense for many investors to buy and hold."
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