Fund strategy: The real things

As securitized assets are unloaded by financial firms, opportunities abound.

As the great deleveraging of the past decade’s debt bubble continues to unfold, the securitized paper that was a defining feature of the credit binge is being shredded and tossed in the garbage. For fund managers who were smart enough to keep some cash on hand through the chaos, now might be the right time to pick up some of the real assets lying at the bottom of this paper heap.

It was only a couple years ago, of course, that securitization was all the rage. Assets were grouped and packaged into securities that married the stream of cash generated by these assets with the leverage facilitated by cheap credit. The result: juiced returns. But as the tide has turned and credit has become tighter, securitized paper is no longer au courant. In fact, commercial banks around the world are desperately selling this paper to shore up their Tier 1 capital ratios with cash. And so, many real assets (both physical assets and paper ones such as credit card receivables) underlying the securitizations are coming back to market. “Banks are selling off real assets to raise cash to put to their bottom line,” says Jeff Eaton, a senior vice-president at Connecticut-based C. P. Eaton Partners LLC, a fund placement agent that matches institutional investors with asset managers.

This is a good thing for funds that want to hold real assets such as railcars, pipelines, industrial-scale solar installations and timberlands. The hard cash that such assets generate adds up to a big bonus in a world where investors are wary of leveraged paper assets. “There is a definite move away from strategies that involve financial engineering,” says Eaton. “Investors like the current yield component on these real assets, which provide current cash flow. People like that right now.”

As well, the value of the underlying real assets will have to revert to pre-bubble levels. That’s created a buying opportunity. Issuance of securitized paper has plunged an amazing 90% in just one year, from $315 billion in 2007 to $28 billion in 2008. Investors can expect a wave of assets to come onto market through 2011 and 2012, as sellers are forced to refinance loans they used to buy paper during the bubble. Eaton’s firm calculates this forced selling will translate into a 20%–30% drop in the price of underlying assets.

And so as investors turn away from the financial origami of the past couple years, managers who were able to keep some powder dry — and that, admittedly, is a precious few, acknowledges Eaton — could be finding that this is a good time to buy. True, real assets provide mainlyan institutional play, but there are some real-asset mutual funds popping up out there; Oppenheimer and Pimco have both launched just such products. Concludes Eaton: “Some conservative managers who have managed to hold on to cash have a lot of opportunities.”