An introduction to ABS: Achieving positive returns in a rising rate environment

Aegon Asset Management is a leading provider of European asset backed securities (ABS). These are securities backed by specific collateral. Investing in asset backed securities offers investors the opportunity to enhance the yield and risk diversification in their fixed income portfolio. • European asset backed securities (ABS) offer a higher risk-adjusted yield than most other fixed income asset classes: Our high investment grade rated ABS strategy currently has a robust performance above the euro swap rate. Practically all ABS bonds have a floating rate coupon, offering protection against rising interest rates, thereby providing a positive total return in a rising rate environment. • ABS offer significant risk diversification benefits in a portfolio context: ABS offer exposure to direct consumer risk which is complementary to sovereign and corporate exposure, both of which tend to be well-represented in most investors’ portfolios already. ABS have a low, or even negative, correlation with traditional asset classes. Contrary to their reputation, default rates on European ABS during the financial crisis were significantly lower compared to similarly rated corporate bonds. Aggressive subprime mortgage lending practices and synthetic securitizations that led to large losses in the US were far less common in Europe. Aegon Asset Management’s European ABS expertise: - ABS is a core capability of Aegon Asset Management. Aegon Asset Management started investing in European ABS in 2001 and has had dedicated European ABS vehicles since 2004. Globally we manage approximately EUR 16 billion in ABS, approximately EUR 4.5 billion of which is invested in Europe. Our ABS strategy is an actively managed investment grade strategy with broad sector allocation. - We have successfully managed ABS strategies through the financial crisis, and outperformed our benchmark both in bull and bear markets. Our strategy outperformed the benchmark in each year of the crisis.