Based on your experience, what makes an investment in asset-backed securities lucrative?
The basic value in asset-backed securities, including collateralised debt obligations and collateralised
loan obligations, is derived from the ability to tranche the capital structure tranactions, from AAA to
“equity” classes. This allows for an efficient distribution of the underlying risk to investors with varying
risk profiles. As a result asset-backed securities achieve a higher yield at any given rating level than
traditional fixed income securities.
Skilled fund managers go a step further as they are capable of identifying and exploiting relative
value opportunities prevalent in the asset-backed security market. These can be very profitable and
are caused by: supply/demand imbalances, complexity premiums, rating agency inconsistencies, etc
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