Asset Backed Securities (or ABS) is the generic term we use to describe a range of financial instruments,notes or securities, backed by multiple underlying assets such as residential or commercial mortgages, financing (e.g. loans or leases) on cars, trucks or plant and equipment. Asset Backed Securities generally carry rights to repayment of a principal amount and rights to periodic interest payments.

These payments are passed through from the underlying borrowers. Scheduled principal repayments are received from the underlying borrowers but borrowers can overpay or underpay from time to time. Accordingly, the term of the securities is uncertain but statistically predictable.

Asset Backed Securities are often credit Rated by independent third party Rating Agencies. Asset Backed Securities are categorised as fixed interest assets and can be issued as either paying income as a coupon comprising a floating reference rate plus a fixed credit margin, or a fixed coupon.

Residential Mortgage Backed Securities (or RMBS), a major subset of ABS, is the term we use to describe higher yielding financial instruments, notes or securities, backed by multiple mortgages in turn backed by residential properties.

The Australian Asset Backed Security market is an over the counter debt securities market that dates back to the early 1990s. The majority of primary issuance over this time has been Residential Mortgage Backed Securities.

Residential Mortgage Backed Securities have been used by both bank and non-bank lenders to facilitate their funding requirements. Many Australian financial services companies have used securitisation to fund assets that they have owned. These include the four major Australian banks, many of the regional and smaller banks and also non-bank lenders such as Wizard, and Columbus Capital.

Asset Backed Securities other than Residential Mortgage Backed Securities can include a broad range of assets including motor vehicle leases and loans, commercial property mortgages and other types of receivables.

In 2007 approximately $50 billion of Australian Residential Mortgage Backed Securities were issued in a range of currencies. For the same year, the volume of Asset Backed Securities issued that were secured by assets other than residential mortgages was just over $7 billion. Since the global financial crisis this issuance has declined significantly as liquidity has dried up.

As a result of the global financial crisis, Asset Backed Securities are trading at prices below what the Investment Manager considers to be their fair value.