Private assets
8 min read 18 Feb 25
In 2024, fundamental performance has been robust despite a challenging economic environment. The transition from an aggressive rate hiking cycle to the first tentative rate cuts from Central Banks, provides some relief for consumers and corporates alike.
While there are pockets of weakness, particularly for legacy pre-GFC collateral versus more recently originated loans, performance has largely stabilised with the market having managed to navigate the challenging environment with minimal negative ratings action. The resilience of mortgage borrowers, especially those transitioning from low fixed-rate deals has been a notable positive for the RMBS market, supported by a trend of low unemployment and robust wage growth.
Looking ahead to 2025, the broader easing cycle by central banks should support credit fundamentals in our opinion by reducing borrowing costs, although the cautious pace of rate cuts will keep borrowers exposed to higher rates for a longer period. One positive for future performance is that loans originated in the peak of the rate hiking cycle will have been underwritten with punitive affordability stresses that we believe should prove supportive to performance over the longer term.
At the tail end of 2023 the narrative from Central Banks surrounding the path of interest rates shifted from interest rate hikes to interest rate cuts. In response, investors increased allocations to traditional fixed income assets in order to lock in higher yields. This drove both government bond yields lower and credit spreads tighter leading into 2024. The result was very inverted yield curves where cash rates were (and still remain) higher than longer dated government bond yields that reflect market expectations of interest rate cuts. This technicality is beneficial for European ABS which is predominantly floating rate in nature and delivers returns above cash. Subsequently, all-in yields for European ABS reached percentile highs versus equivalently rated corporate bonds and the relative value opportunity attracted both existing and new market participants to increase exposure to the asset class. Naturally, increased demand saw a continued rally in spreads across ABS sectors during the year. Taking European AA CLOs for example:
The value of investments will fluctuate, which will cause prices to fall as well as rise. There is no guarantee the fund will achieve its objective, and you may not get back the original amount you invested. Where performance is mentioned, past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.
However, all-in yields for European ABS remain elevated and the relative value opportunity versus corporate bonds persists. From a credit risk premia perspective, regulatory and technical factors within the ABS market such as harsh capital treatment on these assets for banks and insurance companies, onerous regulatory requirements and complexity of the ABS asset class we believe results in a spread premium and this can be an exploitable, medium-term opportunity to earn excess returns.
European ABS market issuance has accelerated to €143 billion in 2024, setting a new post-Global Financial Crisis (GFC) record in the process, and expanding the outstanding European securitisation market to €597 billion in size. This achievement comes despite a challenging geopolitical environment, ever changing central bank rate expectations, and persistent, though diminishing inflation.
In our view, these elevated volumes represent a structural shift that will see higher issuance persist over the medium term, as banks in particular, pivot away from cheap central bank term funding schemes. The market has also been bolstered by the entry of a number of new issuers, across a range of asset classes and geographies. All of which contributes to a broader and more scalable investment universe going forward.
Looking ahead to 2025, publicly distributed ABS issuance is expected to keep pace with 2024 levels and potentially exceed them. This is driven by a number of trends including: European banks looking to diversify their funding sources, spread tightening has made the sector more attractive for issuers and lowered the volume of retained issuance considerably
CLOs have been a standout performer, with European CLO new issuance reaching a record €49 billion, an 85% increase compared to 2023. However higher redemption volumes, mean net issuance was a more modest €24 billion. CLO issuance momentum is projected to continue into 2025, with a very significant number of CLO warehouses in ramp up to enable managers to bring new transactions. While expectations of increased new money activity in the leveraged loan market, should prove supportive for CLO creation.
In response to spread tightening and changes in relative value within the ABS market during the year, M&G ABS portfolios have seen several sector allocation adjustments:
| 31 December 2024 | M&G Senior Asset Backed Credit Fund | M&G Investment Grade ABS Fund |
|---|---|---|
| Launch date | 28 August 2020 (Strategy May 2014) | 26 September 2024 |
| Fund Liquidity | Daily | Daily |
| Fund Structure | SICAV (UCITS) | SICAV (UCITS) |
| Fund Domicile | Luxembourg | Luxembourg |
| Fund Duration, years | 0.09 | 0.14 |
| Fund Average Rating | AAA | AA |
| Yield, EUR % | 4.05 | 4.95 |
| SFDR | Art. 8 | Art. 8 |
| Fund size | €976m | €271m |
Past performance is not a guide to future performance.
| 31 December 2024 | M&G Senior Asset Backed Credit Fund | 3m Euribor |
|---|---|---|
| 1 year, % | 5.66 | 3.57 |
| 3 years p.a., % | 3.50 | 2.44 |
| 2024, % | 5.66 | 3.57 |
| 2023, % | 6.36 | 3.43 |
| 2022, % | -1.29 | 0.33 |
| 2021, % | 0.73 | -0.55 |
| 2020, % | N/A | N/A |
| 2019, % | N/A | N/A |
Performance data does not take account of the commissions and costs that may incur on the issue and redemption of units.
While collateral performance has been extremely resilient, the returns relative to other fixed income assets has also been strong. The charts below illustrate outperformance of our IG ABS Fund range relative to corporate bonds over the past 3yrs.
2024 has proved to be a strong year for European ABS performance both in terms of underlying collateral and total returns delivered by the asset class. Spreads have rallied to historically tight levels across fixed income assets. However, structurally European ABS offers a yield premium relative to equivalently rated corporate bonds, comprised of additional spread compensation driven and high cash rates versus longer dated bonds. Furthermore, European ABS continues to offer diversification benefits and as such, we believe investors should consider an allocation to the European ABS to complement broader fixed income allocations.
The Fund aims to provide a higher total return (capital growth plus income) than that of the Benchmark over any three-year period, net of fees while applying ESG Criteria. The Fund invests in Asset-Backed Securities and other floating rate instruments that are Investment Grade and denominated in any currency. The Fund invests in securities that meet the ESG Criteria, applying an Exclusionary Approach as described in the precontractual annex. In usual market conditions, at least 70% of the portfolio will be invested in Asset-Backed Securities and at least 80% of the portfolio is expected to be subject to a credit rating of at least AA-; this is a credit rating which is above that included in the definition of “Investment Grade” in the Prospectus. The Fund may invest up to 10% of its assets in securities that are not rated by any recognised rating agency, in which case a comparable internal credit rating will be used. Issuers of these securities may be located in any country, including emerging markets. The Fund does not take currency views and aims to hedge any non-GBP assets back to GBP. The Fund may use derivatives to meet its investment objective, for efficient portfolio management and for the purposes of hedging. These instruments may include but are not limited to spot and forward contracts, options, exchange traded futures, credit default swaps, and interest rate swaps. The Fund may also invest in other funds and up to 30% in cash (meaning eligible deposits) and assets that can be turned quickly into cash. The fund’s recommended holding period is 3 years. The fund’s recommended holding period is 3 years. In normal market conditions, the fund’s expected average leverage will generally not exceed 400% of its net asset value.
The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.
The value of fund may fall if the issuer of a fixed income security held is unable to pay income payments or repay its debt (known as a default).
When interest rates rise, the value of fund is likely to fall.
The fund may use derivatives to profit from an expected rise or fall in the value of an asset. Should the asset’s value vary in an unexpected way, the fund will incur a loss. The fund use of derivatives may be extensive and exceed the value of its assets (leverage). This has the effect of magnifying the size of losses and gains, resulting in greater fluctuations in the value of the fund.
The assets backing mortgage and asset-backed securities may be repaid earlier than required, resulting in a lower return.
ESG information from third-party data providers may be incomplete, inaccurate or unavailable. There is a risk that the investment manager may incorrectly assess a security or issuer, resulting in the incorrect inclusion or exclusion of a security in the portfolio of the fund.
Please note, investing in this fund means acquiring units or shares in a fund, and not in a given underlying asset such as building or shares of a company, as these are only the underlying assets owned by the fund.
Further details of the risks that apply to the fund can be found in the Fund’s Prospectus.