Chris Whitcombe, head of European and US ABS at Challenger Investment Management, answers SCI's questions

Q: Challenger IM recently launched its first securitisation-only investment fund – the Challenger IM Global ABS Fund (SCI 1 November). What makes now the right time?
A: At Challenger IM, we manage assets for leading global and Australian institutions. We have been actively investing in ABS since 2005, including the private ABS market for the last decade. So, although this fund is our first dedicated fund offering in this space, it’s very much on the back of having an established presence and experience in the ABS market.

As we’ve been actively investing for a long period, we’ve seen a lot of interest in the asset class from our distribution teams - who are regularly speaking with institutional investors, fund selectors and consultants. We started offering funds for institutional investors in 2017 with the launch of the Challenger IM Credit Income Fund and have built the product suite since then. Our new Global ABS Fund is a natural extension of this product suite and offers investors access to our first dedicated ABS fund offering.

Q: Interest in the securitisation market is on the up, despite macroeconomic uncertainty and distress. Where is this interest coming from?
A: The asset class has been interesting for a number of years. We’ve really liked ABS for its yield pick-up versus corporates for the same rating, and the different profile of risk it can offer because of the floating-rate nature and the shorter duration. This combination of factors can really give an even more diversified exposure to the wider portfolio against your traditional asset allocations.

Recent stress events - whether that’s Covid, the Russia-Ukraine war, inflationary pressures, interest rates rises, not to mention the range of other stress events noted over the last 10 years - have all really helped demonstrate the robustness of the underlying collateral and performance of the asset class. As well, the LDI crisis last year has also helped demonstrate some of the technical features of the asset class – like increased liquidity and a wider investor base - that may not traditionally have been associated with the ABS market.

Q: The new Global ABS Fund builds on the firm’s existing business. What can it offer institutional investors?
A: Institutional investors are always looking at ways to look at both alternative investments or investments they might not already have exposure to currently, which are additive to their portfolio. ABS fits that with its increased yield pick-up for similar ratings and diversification benefits against traditional asset classes.

What you need with ABS is an experienced team with the expertise and the skillset to be able to underwrite transactions properly, and make sure they fit the risk profile investors are looking for. It’s an asset class investors typically look to specialist asset managers, who have experience with it. This is one of the reasons we are launching this fund, as it offers a way for investors to directly access our ABS experience and be able to have the depth of the team and expertise to look at the asset class.

Q: What’s distinctive about Challenger IM and its offering to investors with the new fund?
A: Challenger IM has a very strong background in ABS and across private credit. We have 14 investment professionals out of the team looking specifically at the ABS asset class.

Across the team, we have a mix of very experienced professionals that lived and breathed the GFC, and have gone through credit cycles. We are able to look at the asset class with this institutional historical knowledge, and with the understanding of how and why it has evolved this way.

One thing that is really key is the development of institutional relationships with originators of assets, for example, in Australian institutions. So, not only do we have this depth of expertise across the global team, but we’ve got market relationships that have sometimes been decades in the making – giving us the background and the knowledge of different platforms and performance on that side.

Q: Why was it important to make the fund global and what are the benefits of that?
A: The key benefit of having a focus across global markets is that we can apply our relative value approach – not just between different jurisdictions, but across asset class and within the capital structure too.

It’s a strong benefit to the portfolio that we’re not segmented and looking at just one asset class or jurisdiction and therefore effectively only investing there. Instead, we can look at the best parts of where we’re seeing the best value across the global developed markets for securitisation, as well as adding in those diversification benefits.

Q: Are there any specific opportunities within the Australian, US or UK securitisation markets you are looking to capitalise on with the new fund?  
A: The key with pursuing any market opportunity is in understanding that market well – which isn’t just expertise, but also having an understanding developed over time about those markets. Securitisation fits developed markets well because of the strong reliance of the asset class on legal and regulatory frameworks.

We do see opportunities across both the public and private markets. We are always looking at the relative value between different opportunities.

Generally, the market backdrop of the underlying loan portfolios across consumer and mortgage ABS does look more challenged in terms of the inflationary pressures and higher interest rates and how that passes through into consumer behaviour. However, consumer performance has held up well, so far – which, in itself, started from a strong baseline with a very low level of delinquencies and arrears.

The structural features and the ABS bond performance outlook we also see as being strong, which has been driven by the more defensive capital structures put in place since the GFC – meaning a better alignment of interests between the asset originators and the bond investors, and more structural protection for the bonds themselves. So, even with the headwinds on the underlying loan pools, we are focused on the predominantly investment grade part of the universe in the Global ABS Fund and like the robust credit profile of those bonds.

Q: What edge does Challenger IM have to support it through any upcoming macro-uncertainty or difficulty in the market?
A: Where we’re focused in the market is driven by where we see the best risk/reward at the moment. So, especially in the fund context, we are focusing on the predominantly investment grade side of the market.

We really like that profile because its performance through the cycle is strong, and the structural protections within transactions can help protect that. That’s the big picture on where we’re active.

We add value with our experience across both corporates and ABS, both public and private markets, and we have experience across different jurisdictions as well. We can evaluate opportunities in the round. Not just look at a specific bond profile, but also really understand the underlying asset pool, the underlying issuer and have the various lenses required to evaluate the investment holistically.

Q: At present, what is the balance between interest in the public versus the private ABS markets?
A: Private markets have grown significantly over the last decade – which I think has led to asset-issuers and securitisation-issuers having more options available to them in how they look to finance their business and their assets. Often we see that issuers can look at different solutions – both public market and private market - and can often be more patient, and not necessarily need to access the public markets at a specific moment in time. This helps, as it means there’s more options for issuers to be able to refinance transactions as they reach expected maturity, which leads to a more stable investment profile for investors.

On the investor side, we do see specific opportunities with private warehouses of loan pools in Australia. We think there’s a good premium to public markets for the ability to take on a little bit more complexity in terms of the documentation, the structuring and the ongoing operational management of that position in exchange. But you really have to have that expertise and skillset to be able to execute those transactions and include that as part of your offering as an investor.

Q: What new opportunities do you see for the securitisation market going forward?
A: We do see the market evolving over time, and we’ve seen that in terms of both the public and private side of things. Being able to look at the different opportunities and see the various risks and opportunities each present is valuable.

And we see that all the time in terms of how the regulation evolves in Europe with Basel 4 round the corner, and with the evolution and entry of new managers in the CLO market and the middle market opening up more usage of CLOs in the US. It is an evolving landscape, which inevitably presents interesting opportunities over time.

Claudia Lewis