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Our views 22 March 2019

How active investors can benefit from inefficient markets

Martin Foden, Head of Credit Research and Carleigh Young, Credit Analyst

5 min read

An introduction to the Asset Backed Securities sector and Income Contingent Student Loans. At RLAM, we believe in adding value through the active management of sterling credit bonds within our bond and cash portfolios.

We have a clear investment philosophy and process that exploit the persistent inefficiencies embedded in credit markets: clunky rating agency methodologies, over-reliance on bond indices and an over-valuation of fluid, and often transitory, bond liquidity. By thinking differently, we can lend to companies in the most secure way possible, while earning returns in excess of what is achievable from more vanilla, but typically unsecured, corporate bonds.

We have been buying asset backed securities (ABS) in credit and enhanced cash portfolios for many years – a natural evolution from the early days of secured mortgage debentures, through to the more modern, and potentially more complex, securitisation market. However, what is common across all the ABS iterations is that there is no substitute for high-quality, bottom-up credit analysis that allows investors to embrace and exploit the sheer idiosyncrasy of this asset class.

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