There are much more innovative ways to play the US housing market recovery than homebuilders in equity and MBS in debt, according to Citywire + rated John Taylor.
Taylor is investigating collateralised mortgage obligations (CMOs) as an alternative fixed income security that uses mortgage-backed securities as collateral.
Rather than traditional MBS, Taylor said this new type of securitised debt is coming to the forefront in fixed income investors’ portfolios.
Taylor currently has 4.07% of the €812.22 million (£724.55 million) AB Diversified Yield Plus fund allocated to the security.
'All our CMO exposure is linked to the US housing market,' he said. 'We think the fundamentals are extremely strong and valuations are pretty attractive for the types of credit quality that we are invested in, which ranges from A to BB.
'We obviously went through a big downturn in the US housing market back in the financial crisis but the situation today is very very different. There are no signs of oversupply in the housing market, the employment picture is pretty strong in the US.
'We think that the strong fundamental picture that we have now is likely to be there for a few years yet, so buying any security that is linked to that story is attractive to us.'
Over the three years to the end of September 2017, the AB Diversified Yield Plus fund returned 9.46% in pound sterling terms.