Hunting value: The case for an international approach to ABS

Looking beyond domestic markets helps expand the ABS opportunity set, strengthen diversification and gives investors greater freedom to allocate where prospective returns most compellingly reward the risks.

Why international ABS?

When considering an allocation to asset backed securities (ABS), investors face an important choice: should they concentrate on a familiar domestic market or invest internationally across a broader international opportunity set? A domestic approach may offer greater familiarity, simpler implementation and fewer currency, legal and operational considerations. However, it also restricts the range of issuers, collateral types and market structures available, and can leave portfolios more exposed to a single economic cycle, regulatory regime and source of demand.

An international approach is more demanding. It requires specialist resources to assess differences in underwriting, consumer behaviour, legal frameworks, transaction structures and regulation, while currency exposure must be managed appropriately. Yet these differences are also the source of the opportunity.

By comparing markets rather than accepting the terms available in one jurisdiction, an active manager can allocate selectively to the regions, sectors and individual securities where spreads provide the most attractive compensation for the underlying credit and structural risks.

We therefore believe that investing internationally can provide a broader range of potential portfolio benefits than a domestically constrained approach, including more diversified sources of cash flow and greater scope to exploit differences in valuation, structure and investor protections across the international opportunity set. This is not an argument for allocating indiscriminately across every region. It is an argument for maintaining the freedom to invest only where the prospective return justifies the risk, and to step away from markets where it does not.

Periods of market volatility often expose the difference between headline yield and value. In ABS, deal-specific factors can matter more than broad market direction: securities that appear similar can behave differently if underwriting standards weaken, structural protections are less robust or valuations fail to reflect the risks embedded in a transaction. This complexity can create persistent inefficiencies, particularly across regions where some investors lack the resources or experience to analyse individual deals in depth. Our assessment of relative value has therefore led us to favour opportunities outside the US.

ABS also remains widely misunderstood. Perceptions are often shaped by a narrow subset of the market, particularly legacy US subprime securitisations. In reality, much of today’s ABS market is backed by granular pools of assets held in bankruptcy-remote special purpose vehicles, with credit enhancement designed to absorb losses before they reach more senior investors.

The case for looking beyond the US

In our view, US ABS spreads do not adequately compensate for the underlying credit and structural risks. Valuations have compressed to levels that leave limited margin for error, particularly in sectors exposed to evolving borrower behaviour and higher funding costs. The depth of domestic US demand also means issuers have less need to offer pricing that appeals to non-US investors. Parts of the US market appear to be pricing for a continuation of benign conditions, with limited recognition of potential downside risk.

Alignment between issuers and investors also influences our regional allocation. This is one reason we favour the UK and European ABS markets, where regulatory risk-retention frameworks require issuers to maintain an economic interest in a transaction’s performance. While many US issuers voluntarily retain exposure, the absence of a uniform market-wide requirement creates greater variability in alignment standards, which can be particularly relevant when credit conditions become more challenging.

Why Europe also offers value

Beyond risk retention, European ABS also benefits from generally conservative underwriting standards, strong structural protections and robust disclosure requirements. Importantly, spreads in parts of the European market remain more reflective of underlying risk, providing what we believe is a more attractive balance between risk and return.

Why Australia stands out

Australia represents a significant and increasingly important part of the international ABS opportunity set. The market has continued to grow in both size and maturity, with total outstanding securitisation volume now above A$200 billion and issuance already exceeding A$90 billion by late September[1]. This follows several years of strong growth, supported by deepening offshore demand and increased issuance from non-bank lenders, while bank issuance has remained relatively steady.

RMBS remains the largest part of the Australian securitisation market, although ABS and CMBS have increased as a share of total issuance.

International participation is already well established, with offshore investors accounting for more than half of demand on recent transactions.

This reflects both the scale of the market and its relevance to investors who are already familiar with UK and European housing finance structures.

For European investors, Australian securitisation can also offer attractive relative value. Spreads widened from historically tight levels earlier in the year and have only partly retraced, with longer weighted-average life (WAL) senior tranches lagging the recovery seen in shorter WAL and mezzanine bonds. This has left parts of the market offering attractive compensation relative to wider credit markets and to comparable senior bank paper.

Collateral performance remains stable. At a market level, arrears in prime RMBS, non-conforming RMBS and auto ABS remain within recent ranges, while prepayment behaviour has also been broadly steady. There are early signs of modest arrears increases at some issuers, but these do not yet appear material. Higher interest rates, tax changes and softer housing-market conditions remain factors to monitor, but housing demand continues to exceed supply and new loan origination remains close to recent highs.

Australian RMBS also benefits from borrower and legal features that will be familiar to UK and European investors. Like the UK, Australia is generally a recourse mortgage market, meaning lenders may have claim beyond the property itself where borrowers default. This can support borrower incentives and is an important structural distinction between jurisdictions when assessing collateral behaviour under stress.

Disciplined selection across an international opportunity set

The value of an international opportunity set lies in the ability to compare regions and individual transactions, rather than allocate broadly across markets. Our approach is therefore selective rather than benchmark-led, with capital allocated only where prospective returns justify the risks.

The structural features of ABS do not remove credit risk, and securities with similar ratings can still perform differently under stress. Detailed analysis of collateral, structure and transaction-specific protections is therefore essential.

Used in this way, international ABS can broaden the fixed income opportunity set without requiring investors to accept the prevailing terms in any single market.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

[1] Source: National Australia Bank, 24 September 2026.