European fund managers say they are not interested in buying asset-backed bonds because single-A and triple-B rated corporate paper offers more upside. "If you're bullish on credit, it makes sense to buy lower-rated corporate paper which has more juice," says Davide Cataldo, Milan-based head of credit at Pioneer Investments. Even though ABS paper has become more liquid, Cataldo says he would rather buy riskier, more liquid corporate paper that allows for better trading flexibility. Lately, analysts have been warning investors to take a good look at ABS deals to see if companies are over-leveraging themselves, but investors are not interested in triple-A securitized paper.
"Now with accounting worries, the spotlight is on ABS deals," says Rajeev de Mello, portfolio manager at Pictet & Cie in Geneva, of plain vanilla ABS deals. He is less enthusiastic on the asset class anyway, because he believes that if investors have a positive view on the credit market, they might as well invest directly in single-A and triple-B names. "Credit spreads have widened out and it is a good time to play the economic recovery," he says, adding that he is looking at industrials in particular. de Mello says he does buy collateralized debt obligations, however, because these structures give him access to leveraged loans, U.S. high-yield and arbitrage opportunities.
David Roberts, head of credit at Britannic Asset Management in Glasgow, is also avoiding ABS issuance in light of his bullish view on corporate paper. "If you believe in a second half economic recovery, why buy triple-A structured paper? I'd rather go down the credit spectrum and buy single-A industrials," he says.