RLAM's Vaid bets on rise of asset backed securities

Asset backed securities (ABS) are presently the most attractive section of the corporate bond market, according to Royal London's Sajiv Vaid.

The manager of the £384m Corporate Bond fund says these bonds have suffered fewer defaults than expected and offer plenty of scope for price appreciation.

"During the credit crunch the sector was seen as toxic. 
People did not like ABS because of its association with sub prime," he says.

"What we are seeing now is a rehabilitation of the sector."

Vaid says his fund's increased exposure to ABS has contributed to its recent strong performance.

It delivered 7.4% over the six months to 8 June, compared to the IMA Corporate Bond sector average of 3.8%.

"I like ABS because they provide the same returns as some corporates, but with extra security," he says.

"This part of the market has also been less volatile as investors realise they have non-cyclical cashflow and the security that comes from the underlying assets."

Vaid has been increasing his fund's exposure to the sector in recent months, taking it to 24%, compared to a benchmark weighting of 10%.

"Our holdings are plan vanilla issues related to private finance initiatives, utilities and 
AAA-rated residential mortgage backed securities (RMBS)," 
he says.

"In RMBS we hold issues from Lloyds, Alliance & Leicester and Nationwide.

"They are still trading at around Libor + 180bp, but we think fair value is more around Libor + 70bp or + 80bp."

The fund also has 17.5% in unrated bonds, which Vaid says offer extra security.