Mark Holman, managing partner of Twenty Four, which offers the RMBS focused Monument Bond fund says investors should see this type of security as solid.
"We estimate the economic climate would have to worsen to the point that the UK's sovereign credit rating fell by several notches before there was an impact on AAA tranches. The bad deals made before the credit crunch have done so much damage to their reputation that there are now real value opportunities to be had."
Holman sees RMBS as a good asset class for investors looking for income, due to the higher returns than can be achieved from cash deposits and for lower risk levels than can be found in corporate bonds.
He adds: "The main risk in RMBS is default risk and we feel this is the most predictable form of risk we can take on; it is our favourite source of Alpha. The fact that most RMBS are floating rate means they also have some protection against rising inflation and interest rates which is most likely the next trend."
Funds investing in RMBS
| Fund |
Sector |
1-yr total return (TR) 11/05/2010 |
3-yr total return (TR) 11/05/2010 |
| Baillie Gifford Investment Grade Bond |
Sterling Corporate Bond |
31.02 |
-4.12 |
| Schroder Monthly High Income |
Sterling High Yield |
32.98 | 16.72 |
| Fidelity Money Builder Income |
Sterling Corporate Bond |
20.33 | 14.5 |
| Insight Investment Sterling Corporate Bond |
Sterling Corporate Bond |
26.37 | 2.09 |
| TwentyFour Monument Bond |
Sterling Corporate Bond |
- | - |
Source: Financial Express Analytics
Despite these positive comments, negativity still surrounds this asset class and at worst conjures up images of the very worst excesses of the credit bubble.
RMBS are in essence a share of a pool of mortgages, with investors receiving the interest and capital repayments. This simple idea was developed as a way for banks to reduce the cost of financing home loans, and went on to form the basis of the many highly leveraged synthetic products such as the impossibly complex deals that have resulting in investment bank Goldman Sachs recently being called up
before the US Congress.
"It was US sub-prime mortgage backed securities which kicked off the recent crisis – and they were of very poor quality," says Chris Ames, asset backed securities portfolio manager overseeing segregated funds for Schroders as head of ABS/MBS.
"European RMBS, though, are plain vanilla, and mainstream, a safer investment. RMBS are cheap for the risk they incur, so it makes sense to invest in them now. That's not to say all funds should move into the asset class. We have seen how liquidity can disappear in RMBS, so it wouldn’t make sense for money market funds, for example."
Holman too is keen to stress the differences between the European markets and their US counterparts, and points out they avoid many of the pitfalls associated with the asset class.
"The structure of the UK and European mortgage markets promote stability and act to limit losses. As anyone who has bought a house will know, walking away from a mortgage is not an easy thing to do. Unlike in the US, a borrower is still liable for their debt even after their house has been repossessed making the recovery of bad loans much easier."
Another safeguard comes from the issuing banks, which provide a buffer for investors in the event of losses; first by sacrificing the money they were expecting to make on the deal, and then losing their own money they have in the products that acts as a reserve. The fact that they include much of their own money in mortgage loans makes them far more cautious about who they lend money to and European mortgage securities have far less exposure to subprime mortgages.