New mortgage-backed bond sub-fund launched

Bond manager M&G Investments has added a new sub-fund investing in investment grade bonds backed by UK, German or Dutch mortgages to its asset-backed securities fund, The Lion Credit Opportunity Fund.

According to M&G, these bonds are highly secure assets, backed by pools of well-established prime mortgage loans. It said that should underlying loans default, losses are absorbed by up to three buffers in front of the bondholders: firstly, the mortgage borrower’s equity in the property and, in the case of residential mortgage-backed securities (RMBS), secondly there is a bank buffer, via excess loan margin (better known as excess spread) on the whole pool of mortgages, and the third buffer is an additional reserve fund.

In addition, M&G said that the pricing of prime RMBS remains robust, in spite of the on-going European sovereign debt crisis. Patrick Janssen, fund manager of M&G’s Lion Credit Opportunity Fund, said: “The big opportunity in asset-backed markets is now prime residential mortgage bonds from Northern Europe. These robust securities, which are based on thousands of prime credit homeowners repaying their mortgage loans on their primary residences, are once again being seen by investors as one of the most secure assets available.”