GLOBAL - Pension funds are slowly but steadily returning to the asset backed securities (ABS) market while worthwhile opportunities are becoming more difficult to grab, experts said.
Managers agree AAA-rated ABS - and more in general high quality floating rate securities - can still provide attractive returns to pension funds, but managers need to be particularly selective in picking the right assets.
M&G head of institutional portfolio management David Lloyd told GP: "The way these assets are priced now still make them attractive in comparison with government bonds, but the time of easy money is gone. To generate good performance you need well researched assumptions on which to base your picks."
But investors trying to get in now may have already missed the rally.
Lloyd said parts of the mortgage backed securities market, for example, was overpriced in the lead-up to the financial crisis. At the time, spreads were around 5 to 15 basis points. But M&G went into the market, using pension fund assets, in late 2008 when spreads "blew out north of 300 basis points". Spreads have now improved to between 100 basis points and 150 basis points.
Despite providing good investment opportunities, managers note ABS are unable to match pension funds liabilities unlike long duration government bonds or inflation-linked bonds.
M&G director of fixed interest Richard Ryan said: "These products were not designed for pension funds and do not represent a natural fit for them. They have an expected maturity of around seven years and they produce floating rates, therefore they do not naturally match pension funds liabilities, which need longer duration assets and stable rates."
Other managers experienced increased interest by pension funds in the AAA floating rate assets space. Opportunities grew in the last year due to distressed sellers going to the market to offload high quality assets.
Henderson director of fixed income Kevin Adams said opportunities grew in the ABS market due to "indiscriminate sales" by banks and other investors which needed to shore up their balance sheet.
In addition to ABS, Henderson sees attractive opportunities in leveraged loans, even though pension funds have historically shown more caution with this asset class.
Henderson deputy head of fixed income Mitesh Sheth said: "Only a small select group of pension funds bought into leveraged loans. In 2008 this market lost 47%. Opportunities arose in late 2008 and in 2009 and now schemes are showing increasing interest in those assets."
Johnson Controls International has appointed XPS Pensions as investment and actuarial adviser for two of its schemes, following a competitive tender process.
Merseyside Pension Fund has allocated an initial £400m of assets to a smart sustainability fund managed by State Street Global Advisors (SSGA).
This week's top stories included exclusive coverage of The Pensions Regulator's plans to require schemes to use professional trustees.
Buck has launched a solution to help pension schemes equalise guaranteed minimum pensions (GMPs) in a cost effective way with minimum hassle.