The Greater London Authority (GLA) is set to use residential backed mortgage securities (RMBS) as a means of diversifying its investments.
Speaking at a joint GLA/CIPFA seminar in London earlier this week, Luke Webster, chief investment officer at the GLA, said the body is intending to use the instruments subject to London mayor Boris Johnson accepting the recommendation in the authority’s 2016-17 Treasury Strategy.
At the moment, there is relatively little direct investment in RMBS by local authority treasurers, but the GLA proposal looks set to change that.
Webster said: “Residential mortgage backed securities is an asset class that strikes us as a very attractive option with a credit risk profile distinct from the banks that represent about 93% of our current exposure.
“We are likely to have significant core balances in the medium term and to me, this represents one of the most defensive diversification options available to us.
“The GLA is certainly sold on the RMBS investment case. So, subject to the mayor’s approval, we will be investing in this asset class.”
In addition, Webster said that the GLA could extend its existing collective investment scheme (representing three other authorities in the GLA Group, plus the LPFA) to provide a conduit for local authorities to invest in the instrument.
He said: “If it works for RMBS we can use (the vehicle) for a range of other assets and broaden our potential shared service offering to others in London.”
The RMBS investments will be run by external managers following a procurement exercise. Credit specialist 24AM, which already has more than £3bn of asset backed securities under management, will be one of the contenders.
Rob Ford, founding portfolio manager at the firm, said: “Every bond you invest in is backed by a pool of individual mortgages. The coupon and the principal paid on that bond is generated purely by the mortgage payments in that segregated pool.
“A typical deal will have thousands and thousands of geographically diverse mortgages, spread right across the country.
“These are real people’s mortgages. I can look at every single mortgage, I can see where in the country it comes from, what the value of the property was, what the size of the mortgage is and what the owner is currently earning.”
Meanwhile, Chris Gaskarth, director at Institutional Investment Advisors, played down fears surrounding residential mortgage backed securities, which played a key role in sparking the global financial crisis in 2007/08.
He said that the problems stemmed from the United States’ RMBS market, and that the European market has proved rewarding and resilient throughout the period.
He said: “According to Fitch Ratings’ global finance loss study there have been zero losses between 2000 and 2014 for originally rated triple-A European residential mortgage backed securities.”
Delegates also heard from the Treasury department at Metrobank, who now uses these instruments as a core part of their own cash investments.
Photo (cropped): David Holt, Flickr.