Scott Minerd is betting big on Charlie Brown. The chief investment officer of Guggenheim Partners, which oversees some $200 billion, happens to be one of the world’s largest collectors of “Peanuts” art. And recently he spotted a chance to combine his passion for Charles Schulz with a moneymaking opportunity for clients. Minerd bought $375 million worth of newly issued bonds — yielding 4% to 6% — that are collateralized in part by “Peanuts” royalties from comics, commercials, and more.
Beyond the fact that Snoopy and the gang have a timeless appeal, the existence of the “Peanuts” bonds is the latest data point in a growing trend: the return of asset-backed securities (ABS). The market for the products, which can be packaged out of virtually any steady stream of cash flow (from billboards to airplane leases to lottery winnings), was growing fast until 2008. That’s when a crash in mortgage-backed securities — still the biggest branch of the ABS family, with $1.95 trillion in assets — blew up the economy. In the wake of the financial crisis, the market for ABS cratered. But lately demand has come roaring back, especially for products not linked to mortgages. In 2013 issuance of non-mortgage ABS totaled more than $186 billion, up from $106 billion in 2010, according to the Securities Industry and Financial Markets Association. Fixed-income funds have 4% of assets allocated to ABS, on average — the highest level since February 2008, according to Morningstar.
The stigma attached to asset-backed securities, however, means that they remain undervalued, in the view of some investors. “There’s this irrational fear that these particular securities are some sort of mystery meat,” says Minerd, who has filled as much as half of some portfolios with the bonds. His Guggenheim Total Return Bond, which has outperformed 96% of its peers over the past two years, has also owned bonds backed by franchise fees from Domino’s Pizza and Carl’s Jr. fast-food restaurants.
Unlike Treasuries and muni bonds, asset-backed securities are off-limits to retail investors, except through bond-focused mutual funds. In addition to Guggenheim, top-ranked funds investing in ABS include the $9.8 billion Loomis Sayles Investment Grade Bond and TCW’s $26 billion Metropolitan West Total Return Bond. Alessandro Pagani, head of securitized research for Loomis Sayles, has recently moved into bonds backed by shipping containers, time shares, and rental-car fleets. Those ABS “were considered esoteric and off-the-run three years ago, and they’re becoming more and more mainstream,” he says, noting that rental-fleet bonds yielded 10% following the ’08 crisis but now earn just 1.5% to 2.5%.
Prices may be rising, but we’re not in another ABS bubble — yet. “The new issuance machine that existed before the credit crisis that was scouring the globe for anything to securitize and sell — it’s just not the behemoth it once was,” says Bryan Whalen, who co-manages $84 billion for TCW, including the Metropolitan West fund. “But that’s not necessarily a bad thing.” Indeed. It’s better that way, Charlie Brown.
This story is from the April 7, 2014 issue of Fortune.
