Every day, households borrow money to buy homes, finance cars, pay for education, or fund everyday consumption. These mortgages, auto loans, consumer loans, and other receivables create large pools of cash flows that can also serve as an investable asset class. Asset-backed securities (ABS) provide investors with exposure to these underlying financial assets, offering an alternative source of return beyond traditional corporate and sovereign credit. While ABS has historically occupied a more specialized corner of alternative fixed income markets, investors can view the asset class as a source of diversification, short-duration exposure, and yield enhancement.

Dutch asset manager Aegon Asset Management (Aegon AM) has spent the better part of two decades building a broad ABS platform spanning traditional ABS strategies, more flexible mandates, and increasingly dedicated CLO solutions. The firm currently manages approximately €25 billion in ABS assets supported by a dedicated team of around 25 professionals, offering investors exposure across multiple risk-return profiles ranging from highly defensive cash-management solutions to more opportunistic ABS mandates.

The flagship investment-grade ABS strategy, launched in 2016 and now managing approximately €9 billion, focuses primarily on opportunities across European ABS markets. “The investment-grade strategy delivers Euribor plus 140 basis points with an average double-A rating,” explains Frank Meijer, Head of Alternative Fixed Income and ABS at Aegon AM.

At the more conservative end of the spectrum sits Aegon AM’s AAA ABS strategy, designed as an alternative to traditional money market solutions and lower-risk fixed income products. Despite investing exclusively in AAA-rated tranches, Meijer argues that investors can still achieve meaningful yield pickup compared with traditional cash alternatives. “The AAA strategy can still deliver Euribor plus 106 basis points or somewhat higher,” says Meijer. “For investors looking for safety and low volatility, this presents a strong alternative to traditional money market funds.”

At the opposite end of the risk spectrum, Aegon AM also manages an ABS Opportunities strategy investing primarily across BB and single-B ABS tranches and CLOs. According to Meijer, investors in this strategy should expect yields closer to seven or eight percent while benefiting from diversification away from traditional high-yield bonds or equity markets. Taken together, the strategies provide investors with exposure across multiple risk-return profiles depending on portfolio objectives and risk appetite.

Diversification Beyond Corporate Credit

One of the primary reasons investors allocate to ABS is that the underlying risk drivers differ materially from traditional fixed income markets. Rather than lending directly to corporates or governments, investors gain exposure to diversified pools of underlying financial assets. “Most ABS bonds are backed by pools of consumer credit: mortgages, auto loans, student loans, or unsecured consumer lending,” explains Meijer. “That’s fundamentally different from buying corporate bonds or equities, where you are taking corporate risk or government risk.” This distinction becomes particularly relevant from a portfolio construction perspective because the performance drivers behind household borrowing behavior differ significantly from corporate earnings, balance sheet strength, or sovereign fiscal conditions.

“Most ABS bonds are backed by pools of consumer credit: mortgages, auto loans, student loans, or unsecured consumer lending. That’s fundamentally different from buying corporate bonds or equities, where you are taking corporate risk or government risk.”

Frank Meijer, Head of Alternative Fixed Income and ABS at Aegon AM.

The diversification characteristics become even more apparent when considering the duration profile of European ABS markets. Unlike traditional fixed income, where investors often face substantial interest rate risk, much of the European ABS market consists of floating-rate securities. “The second important difference is duration,” explains Meijer. “European ABS is largely floating rate, meaning duration is extremely short. Traditional fixed income generally carries significantly more interest rate sensitivity.”

“European ABS is largely floating rate, meaning duration is extremely short. Traditional fixed income generally carries significantly more interest rate sensitivity.”

Frank Meijer, Head of Alternative Fixed Income and ABS at Aegon AM.

Combined with underlying exposure to consumer credit rather than corporate balance sheets, this creates an asset class that historically has displayed relatively low correlation with investment-grade credit, high-yield bonds, and equities. For investors seeking diversification within fixed income rather than simply increasing exposure to additional corporate risk, these characteristics make ABS increasingly attractive.

Why ABS Continues to Offer Yield Pickup

Beyond diversification and duration characteristics, ABS also offers a meaningful spread premium relative to similarly rated corporate bonds. According to Meijer, this premium persists because of several structural factors rather than because the underlying risk profile is fundamentally worse. One explanation relates to central bank intervention over the past decade. “The ECB bought enormous amounts of government bonds, corporate credit, and covered bonds, but they were much less active in ABS markets,” says Meijer. “When somebody buys a large part of the market, spreads compress. That simply happened less in ABS.”

Regulation provides another explanation. Insurance regulations historically favored traditional fixed income products such as government bonds or covered bonds through lower capital requirements, while ABS often faced less favorable treatment. According to Meijer, investor behavior itself also reinforces these spread premiums. “If ABS doesn’t provide more return within a Solvency II environment than corporate credit, investors simply move elsewhere,” he says. “The market structurally demands additional compensation.”

“There’s a perception that ABS is complex or a black box. But today we receive loan-level information on every underlying exposure. From a transparency perspective, this is arguably among the most transparent segments of fixed income.”

Frank Meijer, Head of Alternative Fixed Income and ABS at Aegon AM.

ABS continues to carry a reputation for complexity, something Meijer believes is increasingly outdated. Post-financial crisis regulation has significantly increased transparency requirements, giving investors access to detailed information about underlying collateral pools and individual loans. “There’s a perception that ABS is complex or a black box,” argues Meijer. “But today we receive loan-level information on every underlying exposure. From a transparency perspective, this is arguably among the most transparent segments of fixed income.” According to Meijer, investors today often have more visibility into the underlying assets within ABS markets than they do when buying traditional corporate bonds, where analysis typically relies primarily on company disclosures and financial statements.

CLOs Offer Attractive Relative Value

Within the broader ABS universe, Aegon AM currently sees particularly attractive opportunities within collateralized loan obligations, or CLOs. These securitizations, backed primarily by diversified pools of corporate loans, account for roughly one quarter of the broader ABS market and continue growing in importance. According to Meijer, many of the same structural factors that support spreads in ABS markets also apply to CLOs. Unlike traditional fixed income markets, CLOs have benefited less from years of central bank intervention and continue to offer significant spread premiums relative to their underlying risk profiles.

“For the last several years, CLOs have offered some of the strongest relative spread opportunities compared with risk,” argues Meijer. According to him, attractive opportunities currently exist across much of the rating spectrum. BBB CLO tranches currently offer spreads around cash plus three percent, while even highly rated AAA CLO tranches continue providing meaningful premiums over traditional fixed income instruments. “Across ratings, we continue to see attractive relative value.”

“For the last several years, CLOs have offered some of the strongest relative spread opportunities compared with risk. Across ratings, we continue to see attractive relative value.”

Frank Meijer, Head of Alternative Fixed Income and ABS at Aegon AM.

While Aegon AM’s existing ABS strategies already allocate to CLOs, the firm intends to further expand its dedicated product range with planned launches covering high-grade CLO portfolios focused primarily on AAA exposures, investment-grade solutions targeting single-A and BBB tranches, and more opportunistic products focused primarily on lower-rated securities. 

Risk management remains central to the investment thesis. A typical CLO portfolio contains roughly 150 underlying borrowers, creating substantial diversification at the underlying level. “A BBB CLO tranche can typically withstand around half of the underlying portfolio defaulting before becoming impaired,” explains Meijer. “There will always be defaults, but the level required before these structures become problematic is extremely high.”

With approximately €25 billion managed across ABS strategies and a dedicated investment team focused exclusively on ABS markets, Aegon AM believes it remains well positioned to capitalize on growing investor demand for alternatives to traditional fixed income. For investors navigating compressed spreads, uncertain interest rate trajectories, and elevated equity valuations, ABS and CLO markets increasingly offer a combination of characteristics that remain difficult to replicate elsewhere: floating-rate exposure, diversification benefits, short duration, and meaningful yield pickup.