Potential of asset-backed securities for private investors

Table of content

1 Introduction
1.1 Background
1.2 Previous research in the field of asset securitization
1.3 ABS - a suitable investment product?
1.4 Problem statement
1.5 Objective of the study
1.6 Detailed research questions
1.7 Scope and limitations of the study
1.8 Outline

2 Theoretical framework
2.1 Asset-backed securities – concepts and structure
2.2 Classification of asset-backed securities
2.3 Risks and credit enhancement
2.4 Investor perspective on ABS
2.5 The magic triangle – basis of investment decisions
2.6 Marketing context of the study
2.7 Consumer segmentation
2.8 Investor segmentation
2.9 Summary

3 Methodology
3.1 Research purpose
3.2 Research approach
3.3 Research strategy
3.4 Data collection
3.5 Data analysis
3.6 Reliability and validity
3.6.1 Construct validity
3.6.2 Internal validity
3.6.3 External validity
3.6.4 Reliability

4 Empirical findings
4.1 Market overview
4.2 Expert dialogs
4.2.1 Interview H. Wellmann, Director of funding advisory, Dresdner Kleinwort Wasserstein
4.2.2 Interview D. Graf Droste zu Vischering, ABS & CDO, HSBC Trinkaus & Burkardt
4.2.3 Interview H. Erasmus, financial advisor at Commerzbank AG
4.2.4 Summary
4.3 Case studies
4.3.1 PROVIDE-A 2001-1 PLC: German RMBS with a credit default swap
4.3.2 PROMISE-I 2000-1 Plc: German CLO of Mittelstand (SME) loans
4.3.3 Free Mobility No. 1 Limited: ABS of auto mobile loans
4.3.4 CAST 1999-1: Synthetic German Corporate Loan Credit-linked Notes
4.4 Summary

5 Data analysis
5.1 Comparison and evaluation of case studies
5.2 Comparison and evaluation of expert dialogs
5.3 Choice of target customer segments
5.4 Suggestions for the marketing implementation

6 Conclusions

Index of figures

Figure 1: Public ABS transactions

Figure 2: Process of asset securitization

Figure 3: Classification of ABS

Figure 4: The magic triangle

Figure 5: Consumer segmentation criteria

Figure 6: VALS 2 lifestyle segmentation

Figure 7: Investor segments

Figure 8: Research model

Figure 9: European ABS by asset type

Figure 10: European ABS by country of collateral

Figure 11: Transaction overview PROVIDE-A

Figure 12: Transaction overview PROMISE-I

Figure 13: Transaction overview Free Mobility

Figure 14: Transaction overview CAST 1999-1

Index of tables

Table 1: Overview classes PROVIDE-A

Table 2: Overview classes PROMISE-I

Table 3: Overview classes Free Mobility

Table 4:Overview classes CAST 1999-1

Table 5: Categorization of case study characteristics

Table 6: Categorization of interview statements

Index of abbreviations

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1 Introduction

1.1 Background

In a broader sense, securitization was a keyword for a trend in the 1980s, transferring financing from the credit market to capital markets, substituting classic corporate credits by the issuance of securities and avoiding the direct intermediation of a credit institution, which has become known as disintermediation. Securitization in a narrower sense, meaning asset securitization, can be explained as the “pooling of homogenous^[1], financial, cash flow producing, illiquid assets and issuing claims on those assets in the form of marketable securities.” (Gangwani, 1998:2). Industrial firms and financial institutions use this instrument to refinance themselves by selling those assets on the capital markets. It has become an interesting alternative to the classic credit financing and a means of balance sheet shortening by transferring company assets to off-balance-sheet positions. Bär (1997:35) defines asset-backed securities as

- a (mostly) diversified pool of financial, cash flow generating assets on the balance sheet of a company (originator), which are hived off, - transferred to a special purpose vehicle (SPV) becoming legally and economically independent from the origination company
- and are refinanced by issuing securities on the international money and capital markets for which they are used as a collateral.

The market for asset-backed securities has its beginning in the USA in the 1970s, when the first mortgage-backed obligations (MBO) were issued, securitizing mortgage receivables. Over the last two decades other asset forms such as leasing receivables, credit card receivables and car loans have been securitized and tied up in different security types (commercial papers, obligations, etc.). In Europe this financing model has not had any significant market share until the early 1990s. The first two major issues were launched in 1990, one by Citibank, securitizing credit card receivables with a volume of 2 billion $, and one by Chrysler, securitizing car loans with a volume of 0,65 billion $ (Paul, 1994). They were placed in the USD segment of the European stock market. Since then asset-backed securities have gained market significance compared to other finance forms. Large corporations in particular have discovered them, since those were able to provide the necessary volume of assets to gain a cost advantage compared to other financing forms. The main investors on the market so far are institutional investors, such as pension funds or insurance companies. The following figure provides an overview on the development of public ABS issues in Europe.

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figure 1: public ABS transactions

source: Asset-Backed Finanzierungen für Firmenkunden, Bayrische Landesbank (2001)

Although the growth of new issuances of European securities slowed down in the first half of 2002, the outlook for the segment is very optimistic. The total issue volume in 2002 added up to 153 billion Euros. For 2003 a volume of 173 billion Euros is forecasted by the European Securitization Forum, which would represent an increase of 13,1 % (ESF Market Outlook, January 2003).

1.2 Previous research in the field of asset securitization

Asset-backed securities have drawn researcher’s attention due to their increasing significance on capital markets. ABS have been scrutinized from different angles, trying to shed light on their rather complex construct and the implications for capital markets, banking and corporate financing.

Several authors have questioned the innovative character of ABS. Bartelt (1998) discusses several approaches to identify and classify financial innovations. Ohl (1994), Paul (1994) and Obay (2000) use the classification of the Bank for International Settlement to categorize financial innovations according to the four functions of intermediation: risk-transferring, liquidity-enhancing, credit-generating and equity-generating. They come to the conclusion, that asset-backed securities are not an entirely new instrument, but a restructuring of known elements, which fulfill one or more of the above-mentioned functions. Therefore, they can be considered a financial innovation.

Numerous authors examine asset-backed securities from the angle of the originator, who needs a financing instrument. They analyze advantages of ABS compared to other financing instruments, and scrutinize the prerequisites of the underlying assets. Norton, Dupler and Spellman (1995: 11) identify ABS as an “additional, reliable source of funding”, which improves balance sheet ratios and reduces costs of capital by maximizing the assets’ potential. Ohl (1994) also views asset-backed financing as an alternative for German companies, who are not yet fully aware of its advantages.

The most scrutinized aspects of asset-backed securities are their challenges and opportunities for the commercial banking sector. The role of banks as originators of ABS is widely discussed. Bund (2000) describes the legal and tax aspects for originating banks and the special purpose vehicle (SPV), as well as the suitability of the credit portfolio, which is to be securitized. Bär (1997) gives a detailed overview on asset-securitization in general, and provides an overview of possible roles for banks in the securitization process, focusing then on the advantages for banks as originators. Barnes and Warman (1999) discuss ABS as a balance sheet tool for the originator. Bartelt (1998), Paul (1994) and Obay (2000) equally discuss asset securitization as a potential instrument for commercial banks, bringing in the aspect of disintermediation. This process takes place in two steps: Currently, the commercial banks are more and more replaced by investment banks, caused by the securitization development which eliminates the need for an intermediary in savings and credit business. The securitization can either be the substitution of credit receivables or the transfer of existing receivables into securities. After this first level, a complete cutting out of the intermediaries is forecasted, in this case also including investment banks. Instead direct relationships between economic parties with surpluses and deficits will be established.

1.3 ABS - a suitable retail investment product?

The increasing competition between commercial banks, investment banks and other financial institutions forces commercial banks to adapt quickly to new developments on the financial markets, such as the current disintermediation process (Paul, 1994) by means of securitization. Therefore, commercial banks need to consider asset-backed securities as a market segment with potential and include it in their product range. This has so far only comprised originating asset-backed securities, which has been thoroughly discussed in literature. It is a possibility to increase revenues, and a funding source by moving loan receivables off the balance sheet. Another possibility is the placement of ABS on the capital markets by accompanying new issues to primary investors and their following performance on the secondary markets. As stated earlier, most investors are institutions, which purchase asset-backed securities as part of their portfolio either through private or public placement. However, some banks have discovered the potential of private, individual investors in this market segment to broaden the investor group and promote market growth. By means of ABS, banks can reach investors, which have not yet placed funds at their disposal, or have only placed a restricted amount. More individual investors in the market would enhance the liquidity of the securities and consequently their attractiveness. With a larger group of potential investors the sources of funding for banks and non-financial companies become greater and cheaper. ABS are a competitive investment to government bonds and industry obligations. Due to their ratings of mostly AAA, they are considered to be a very safe investment, comparable to the German “Pfandbriefe” or government securities. Although ABS do not carry a higher risk, their return has proven to be slightly higher. Compared to the Euribor (European Interbank Offered Rate) car loan ABS with a 3-year term on average generated a higher return of 0,3 percentage points, whereas the traditional “Pfandbriefe” were just barely higher than the Euribor (Herrmann, 2002). According to Deutsche Bank analysts private investors can profit from the favorable risk – return proportion and the growing liquidity of the market segment (ibid). Currently, some banks offer the indirect investment via investment funds to private investors. By adjusting the design of ABS the direct investment of private banking customers could be facilitated in the future. This would open opportunities for commercial banks to market ABS to private investors, and react to the process of disintermediation in order to stay competitive on the market. Therefore, the potential roles of private investors in this market segment and the attractiveness of ABS as an investment alternative merit closer examination.^[2] This study addresses researchers in the field of finance, with focus on financial innovations, as well as practitioners who work with capital markets, and investment products in particular. A basic knowledge of financial markets and mechanisms is considered to be a prerequisite.

1.4 Problem statement

Having recognized the interest in asset-backed securities for commercial banks in Europe, the leading question for this research will be:

In how far does the market segment of asset-backed securities contain potential for private investors as an interesting investment alternative?

An evaluation of this potential enables commercial banks to act consequently by broadening their involvement in the ABS market from being an originator to offering those securities to private investors as part of a diversification strategy for investment portfolios. They could profit from being one of the first to launch this innovation in private investment and being ahead of the competition on the commercial banking market.

1.5 Objective of the study

Considering the above raised research question, the objective of this research is to explore the potential of the ABS market segment for private investors with respect to the interest for commercial banks. I intend to assess the current market situation, strengths and weaknesses of the product and its potential for private investor segments in order to generate a strategical recommendation for banks in the field of asset-backed investments for private customers. With regards to the disintermediation process and increasing competition in the banking sector, this can be a crucial aspect of differentiation and adaptation.

1.6 Detailed research questions

The focal issue of this study entails a number of sub-questions, which are interlinked to form a complete picture of the potential of this specific market segment. Breaking down the main research question helps to encompass all the following crucial aspects to be covered.

Potential interest:

In how far are asset-backed securities an interesting investment alternative for private investors?

Accessibility:

Is the market segment accessible for private investors, or are there existing entry barriers of constructive or legal nature?

Construct:

Is the complexity of the ABS construct hindering private investors to enter the market?

Banking product range:

Is it of interest for commercial banks to use asset-backed securities to broaden their range of investment products in order stay competitive?

Marketing:

Could asset-backed securities be made understandable and marketed to private investors, and which investment channels could be used?

1.7 Scope and limitations of the study

The study will be restricted to the European market, which is in an early stage of development. An evaluation of the German ABS market and its implications for German commercial banks is the focus of this research.

The study will concentrate only on those ABS with a bond structure, issues of shares will be neglected. Asset-backed commercial papers are excluded as a direct investment opportunity, since this market segment is not accessible for private investors due to the extremely large denominations. With regards to the current stock market development, the bond market is of particular interest for portfolio diversification in low-risk investments.

Due to the large variety of asset-backed securities and their individual design, the study will focus on some of the most common constructions and asset groups. They will be explained in more detail, whereas others will be left out of the market analysis.

Tax issues and legal issues of asset securitization will only be dealt with briefly in case of relevance to this subject. These issues are so detailed and diversified across countries, so that going into depth would exceed the scope of the study.

The focus on specific aspects of the study and the choice of data included are the subjective choice of the author as to what is relevant for this research. Further limitations will be included in the theoretical and methodological part as they are explained better in the specific context.

1.8 Outline

Chapter one introduced the context of the study, the current standing in scientific research in the field of asset-backed securities, the problem statement, objective and scope of the research to be carried out.

Chapter two established the necessary theoretical framework. Firstly, the structure, characteristics and other relevant basics about ABS are presented. Then the magic triangle as an evaluation tool for investment alternatives is introduced. Finally, the necessary marketing background, customer segmentation in particular is introduced.

Chapter three depicts the methodological path followed in this research. Since the nature of the research is exploratory, qualitative data, obtained through case study analysis, expert dialogs and complementary data reports are used to collect evidence for the problem at stake.

Chapter four presents the empirical data, beginning with a general overview of the current market situation in the ABS segment. Subsequently, the summaries of the expert interviews are given, followed by the selected case studies in a brief outline of the most important features.

Chapter five enters the analysis of the collected data. Comparative key characteristics of the case studies are presented in a table overview and then thoroughly analyzed. The data from the interviews is also categorized in a table overview and correspondences and differences are interpreted. The customer segmentation models are applied to find the suitable target segments for an ABS segment. Finally, suggestions for entering the retail ABS business and marketing the new product are made.

Chapter six sums up the overall conclusions drawn from this study, drawing a wide arc over the whole work and answering to the research questions introduced in the beginning of the study.

Theoretical framework

The following theoretical aspects are considered to be of major relevance for the subject of this study, and provide the necessary knowledge as a prerequisite for the empirical research and analysis. Firstly, the structure, transaction and particularities of asset-backed securities are presented. Furthermore, a short description of the magic triangle as a basic tool for investment decisions is displayed, followed by the marketing context of the study, which focuses then on models of consumer segmentation and investor segmentation. Interlinked, these issues build the ground for the upcoming data analysis and discussion.

2.1 Asset-backed securities – concepts and structure

The definition of asset-backed securities used in this study will be the narrow one as stated in the introduction, leaving aside securitization as a substitution of classic credit financing and equally those securitization processes, where assets are bundled and transformed into securities, but are not transferred to an intermediary vehicle.^[3] One can define three constituent features of asset securitization (Bär, 1997):

- The assets need to be explicitly identified and isolated from the business risk of the originator
- The assets are used as a collateral for the securities to be issued by cession and pledge to the benefit of the investors
- The cash flow is used to pay interest and principal of the asset-backed securities (direct cash flow link).

Since the design of asset-backed securities has a large number of variations and several basic forms of securities are used, the important elements of the ABS structure and transaction are presented in the model below (figure 2).

The process of asset securitization begins with the originating company, which bundles cash-flow-producing assets to refinance them separately on the capital markets by shifting them off the balance sheet and selling them as a collateral for securities (Bär, 1997). These assets are usually receivables, such as credit card receivables, leasing receivables, mortgage receivables, automobile loans etc. However, there are only a few limitations to the type of assets used for ABS. Essential characteristics for these assets are, that they need to have a direct cash flow which is predictable on the basis of past data. Furthermore, they need to be separable from the originator accounts. What favors their use as a collateral is a sufficient volume (ca. 100 million USD in a single seller transaction), a diversified portfolio concerning sector and region of the receivables, and a homogenous asset group concerning the credit criteria for the choice of debtors.^[4]

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figure 2: process of asset securitization, own illustration^[5]

Once the asset pool is defined, the pool is sold to the special purpose vehicle (SPV). The sale needs to separate the assets legally and economically from the originating company (true sale^[6] ) and is usually carried out by silent cession, which enables the originator to continue the bookkeeping of customer receivables. The SPV is a legally independent entity, founded by a sponsor, either being the originator or a third party. It needs to be free of any business risk of the originator. Its only purpose is the issuing of securities with the assets as a collateral. The SPV can have the legal form of a trust or a corporation (Paul, 1994). The latter, in the form of a “Limited Purpose Finance Corporation” is preferred on the European market.

Before the securities can be issued, the risk for the investors needs to be minimized in order to receive a good credit rating and to keep interest costs as low as possible. Credit enhancement can either lie in the construction of the ABS or can be taken over by an external credit enhancer. Risks and enhancement techniques will be dealt with later in this chapter. Subsequently, a rating agency such as Moody’s or Standard & Poor’s, the two largest on the market, will scrutinize the potential risk remaining for the investor and distribute a rating. Nearly all asset-backed securities have received a AAA or AA rating in the past, which represent the two highest quality classes. They are therefore placed in the same category with government bonds and first-class corporate bonds.

In a next step the SPV issues the asset-backed securities with the assistance of a banking syndicate, placing the securities on the market. For a commission fee, the syndicate prepares the issuance, finds potential investors and handles the necessary transactions. The placement of the securities can be either a private or a public placement. In a private placement only a few large investors are addressed directly and the issue is not accessible for the public. In a public issue, the papers are placed on the stock market and every potential investor can subscribe. The public issue reaches a larger group of potential investors and higher market liquidity, but includes higher costs for publishing investor information and issue brochures.

The service agent for the ABS handles the accounting for the underlying assets, including the obligor accounts, overdue notifications and collecting payments. Commonly, the originator fulfills this function, being hired as a subcontractor to facilitate the administrative work and maintain the relationship to his customers. The cash flows are then forwarded to the trustee, who represents the interests of the investors. He administrates and manages the incoming cash flows and functions as a paying-office for the investors. In case that the cash flow for interest and repayment does not occur as predicted, the assets are liquidated in order to repay the investors. Both service agent and trustee receive a commission out of the spread between cash flow and interest payable to the investors.

2.2 Classification of asset-backed securities

There are several criteria according to which asset-backed securities can be classified. Some common ones are the nature of the underlying assets and of the security issued, and the cash flow management. Concerning the asset types, one firstly needs to distinguish between mortgage-backed securities (MBS) and non-mortgage-backed securities (NMBS), commonly referred to as asset-backed securities, although this term implies all types of collateral. Figure 3 provides the most common examples of both groups, which are further distinguished by security type. This classification does not fully match the classifications given by the interview partners throughout the empirical part of the work. This is due to the large variety of ABS structures and the different criteria to distinguish them. However, the classification below represents the most common classification in literature on this subject.

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Abbildung in dieser Leseprobe nicht enthalten figure 3: classification of ABS, own illustration^[7]

As a second classification one needs to distinguish between pass-through and pay-through structures. Investors in pass-through structures hold a percentage of a joint ownership as in a mutual fund, and the SPV has the form of a trust. The cash flow is passed on directly by the trustee without further management (Bär, 1997). The investors carry the risk of unpredictable prepayments. Pay-through structures are similar to a bond structure where the investor has a debtor claim against the issuer. An internal cash-flow management of interest and principal can guarantee predictable payment dates. The SPV is founded as a bankruptcy-remote corporation in most cases. In this study the focus will be on the pay-through structures, since they contain lower risk and higher predictability for investors.

2.3 Risks and credit enhancement

ABS collateral is transferred to a legally sovereign entity for the purpose of investor protection from bankruptcy of the originator. However, the investors depend on the credit standing of the asset pool and there are numerous risks present, which are solely covered by the cash flow of the collateral. Stefan Paul (1994) refers to three risk groups. A first cause for insecurity is the credit risk. It is the risk, that the debtors of the receivables are not able to fulfill their payments so the SPV and thereby the investors are confronted with losses. A second insecurity is the liquidity risk, meaning that the receivables cannot be paid on time, but with a delay due to liquidity shortage of the debtors. A third source of risk is the structural risk, being the endangerment of the promised cash flow by bankruptcy of the sponsor or SPV. Bär (1997) on the other hand classifies the risk into collateral risks and securitization risks. The group of collateral risks refers directly to the quality of the assets, therefore mainly being the credit risk, the prepayment risk and the liquidity risk. The group of securitization risks is caused by the nature of the transaction process and construct. It consists of the structural risks for the involved parties and the legal risk of the regulations made in such a transaction. Several parties carry their share of the overall risks of the transaction. These parties are mainly the originator in a first step, a third party credit enhancer as a second security net, and finally the investors who carry the remaining risk. Commonly, the originator provides a first loss protection, which is in most cases the regular risk of non-payment of the debtors. The credit enhancer protects the transaction from catastrophe risk and unforeseeable economic and political development as a worst-case scenario risk. Therefore, the risk left to the investors is marginal, due to the in-depth analysis of prior risk coverage by rating agencies. Since the existence of ABS no transaction has generated losses due to non-interest payment or non-repayment until 1997 according to Deutsche Bundesbank Monthly Report (July 1997). For the time period since 1997 no failure or bankruptcy could be detected during this research. As the evaluation of risks is highly complex and not always transparent for the investors, they rely on the external credit enhancers and the rating agencies’ recommendations.

The large variety of credit enhancement techniques is commonly used in a combination of several instruments. Those can be classified into internal instruments, which lie in the nature of the construction itself, and external instruments, which are provided by third parties.^[8] Overcollateralization as an internal instrument means that the nominal value of the asset pool used as collateral is higher than the nominal value of the issued securities (Paul, 1994:155). In case of payment deficiencies the excess cash flows cover the interest and principal for those receivables in default. The disadvantage of this solution is the relatively high cost through bound capital. A second internal instrument is the subordination with a senior/junior structure. The issue is divided into several tranches, where the junior tranches (B, C...) cover for the senior tranche (A). In case of deficiency of receivables the lowest junior tranche takes the first losses (first loss piece), whereas the senior tranche remains unaffected until further serious losses (Investor’s guide to asset-backed securities, 1998). The senior tranche is commonly rated AAA, while the junior tranches receive a lower rating. It is desirable to have the largest possible percentage of assets in the senior tranche (more than 90 %) with a AAA rating to keep the interest costs as low as possible (Gangwani, 1998). The junior tranche is either taken over by the originator or put in a private market placement. Subordination is the most common instrument for credit enhancement.

Two common external enhancements are the letter of credit (LOC) and the financial guarantee insurance (FGI). The LOC is an “abstract, irrevocable promise to pay by a bank in order to secure the cash flows either to a full extent or partially” (Bär, 1997:219). It covers both the default risk and the liquidity risk of the ABS. In an FGI, a first class insurance company covers the ABS with a guarantee for the payment of interest and principal, normally up to 100%. This guarantee provides the originator with the reputation and credit standing necessary to market the securities and receive a good rating. It is common to combine several internal and external enhancement techniques instead of relying on one instrument, which minimizes the remaining risk for the investors.

2.4 Investor perspective on ABS

Investors scrutinize potential investments under the aspects of profitability, liquidity and security. Some of these aspects concerning asset-backed securities will be presented here showing some of their general merits for investors. Institutional investors chose asset-backed securities to “further the risk diversification within their bond portfolio [...]” (Kendall &Fishman, 1996:105) without an increase of overall risk. As we have learned before, ABS are considered to be an investment with minimal risk. Therefore, they broaden the range of low-risk investments in a portfolio horizontally. By asset securitization companies with no access to the capital markets due to market restrictions (company size, credit standing, legal barriers...) can now be placed on the market. ABS have a greater level of protection from downgrading than traditional bonds, because their quality is not affected by changes in the management environment, restructuring and strategic company turnarounds (Obay, 2000). This broadens the choice of investment alternatives for investors who seek diversification and offers interesting yields in combination with a clear risk profile through rating at low information costs (Bär, 1997). The key argument for investing in ABS “lies mainly in the security of the investment and the fact that the yield of ABS tends to be higher than that of other debt instruments while carrying out roughly the same risk.” (Deutsche Bundesbank Monthly Report, 1997:56). This concerns institutional as well as individual investors. However, one needs to say that according to Bartelt (1998) the direct investment in ABS is only of interest for a small portion of private investors as the experience on the American market has shown. Since ABS are relatively new on the European market, the level of investor knowledge is still fairly low. For banks and other financial intermediaries a relatively large investment volume is necessary to compensate the effort of informing the investor thoroughly (ibid).

Preliminary assumption derived from the theoretical background on ABS: The potential of the private investor segment in what direct investment in ABS is concerned will probably concentrate on investors with a rather large financial portfolio and more sophisticated background knowledge on capital markets. The second alternative to be examined is the indirect investment through mutual funds, where more general investor information can be sufficient and the retail segment could be reached.

2.5 The magic triangle – basis of investment decisions

“The magic triangle is an important concept in the finance business and describes the conflict between security, liquidity and profitability of an investment” Raiffeisenbank Austria, 2003). It is common knowledge for financial advisors and is the basis for every investment decision. The conflict consists of competing aims or expectations, which cannot be fulfilled entirely at the same time. A high profitability of an investment usually is accompanied by a relatively low security, whereas constant availability of cash from the investment lowers the profitability. An investor needs to find a compromise between the three aims putting emphasis on the one most important to him.

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figure 4: the magic triangle, source: Raiffeisenbank Austria (2003)

This concept will be of assistance in the analysis part in order to evaluate the key features of the exemplary ABS issues according to the three investment criteria.

2.6 Marketing context of the study

The research problem can be seen as a subject of financial marketing. The question focuses on the market potential of ABS for individual investors, which implies a market analysis as well as a customer analysis and segmentation. This can be placed in the theoretical framework of strategic marketing planning, as for example described by Kotler and Bliemel (2001). Within the marketing process, the first steps to be undertaken are an analysis of the current market situation and market opportunities as well as potential customers.

What implication does this have for my research? The application of a complete marketing plan is not necessary in order to answer my research questions. However, scrutinizing the ABS market development and examining potential customer groups for this security type is a first step of a strategic plan for marketing asset-backed securities and needs to be looked upon in this context. As follows, the theoretical concept of consumer segmentation and investor segmentation in particular are introduced.

2.7 Consumer segmentation

Peter and Olson (1996:484) define market segmentation as “the process of dividing a market into groups of similar consumers and selecting the most appropriate group(s) and individuals for the firm to serve”. The investor market can be roughly divided into institutional and individual investors, institutional investors being for example insurance companies, pension funds, mutual funds, banks etc. This study focuses on individual investors, which need to be segmented further into subgroups. In consumer markets, several groups of criteria are used for customer segmentation (Becker, 2001). These criteria are systematized in the following scheme:

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figure 5: customer segmentation criteria

Source: compare Becker (2001:251)

Concerning the socio-demographic criteria as the simplest form of segmenting consumer groups, one can either concentrate on one aspect or combine several criteria in a more complex approach, which will generate a further fragmentation of segments. The psychographic segmenting is a more modern approach, based on the experience that consumers from the same socio-demographic group do not necessarily have the same consumption patterns. It focuses on personality segmentation, lifestyle segmentation and attitude or preference segmentation. The behavioral segmentation has its roots in observed consumer behavior. This way of segmentation is closely connected to the actual purchase of goods and analyzes buying decision making processes. Since the formal statistical segmentation of demographic criteria is not informative enough to reveal patterns of consumption, and the behavioral approach cannot be tested practically, because asset-backed securities are not yet being sold to individual investors, this study will concentrate on the psychographic segmentation of potential ABS investors, when analyzing the fitness of asset-backed structures for private investors.

A well-known psychographic segmentation of American consumer markets was established by a national survey called VALS 2TM, carried out by the SRI International in California (Riche in: Peter and Olson, 1996). This study can be transferred since general consumer behavior is very much alike between Northern American and European consumers. When investment behavior is concerned, there are of course substantial differences between the two continents, which leads to a specifically European segmentation model when it comes to investor types. According to the survey results, consumer were clustered into eight distinct consumer groups, and then placed on a matrix with two dimensions. The vertical dimension shows available resources (financial, educational, health, intelligence, etc.) whereas the horizontal dimension represents three different types of self-orientation following different guidelines, the principle-oriented consumers (how the world is or ought to be), the status-oriented consumer (actions and opinions of others) and the action-oriented consumer (desire for activity and risk taking) (ibid, 1996: 492). Figure 8 displays the positioning of these consumer clusters.

VALS 2TM Eight American lifestyles

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figure 6: VALS 2 life style segmentation

source: Peter and Olson (1996: 492)

A short description of each consumer type distinguishes the most striking differences: (Riche in: Peter and Olson, 1996)

- Actualizers: highest income group, high self-esteem, abundant resources, image is important as expression of taste, independence and character, up market consumer choices
- Fulfilleds: high, principal-oriented resource group, mature, responsible, well-educated, home-centered, well-informed, open-minded, practical consumers
- Believers: low, principle-oriented, resource group, conservative, predictable, brand conscious, values of family, church, community and nation, modest incomes
- Achievers: high status-oriented resource group, successful, work-oriented, politically conservative, respect authority, favor established products, show off success
- Strivers: low status-oriented resource group, values as achievers but lower resources, style is important
- Experiencers: high action-oriented resource group, youngest group, average 25, lot of energy, active life, heavy consumer spending, emphasis on new products
- Makers: low action-oriented resource group, practical, self-sufficient, focus on family, work and sports, consume practical and functional products
- Strugglers: lowest income group, no consumer self-orientation, oldest group, average 61, brand-loyal within limited resources

The implications of these consumer characteristics for their investment behavior will be carried out in the analysis of potential investors in ABS. Not all consumer types will be used in the analytical part, the focus will be on those that are considered to be target groups for an investment in asset-backed securities.

2.8 Investor segmentation

German studies on investor segmentation carried out by the psychonomics GmbH & Capital (in: Wärneryd, 2001) sampled interviews with 3500 households and questioned them about their financial mentality according to six psychological variables: need for control of financial matters, fun in dealing with finance, readiness to take risk, preference for simple investments, need for liquidity and the preference for expert advice. Again, those investor types that are considered to fit the characteristics of an ABS investment will be stressed in the analysis. Short summaries describe the seven different investor types that were discovered in the study (in: Warner, 2001: 272):

- The professional: 9,2 %, familiar with finance, high income, willing to take risks, stresses returns, self-confident, independent
- The choosy: 17,1 %, knowledgeable, delegates to experts but controls, risk averse, prefers real estate and fixed income securities, high demands
- The player: 12,9 %, risk taker, restricted resources, no expert but refuses advice, fun-oriented, purchases rather stocks than real estate, finance through credit
- The holder-back: 13,4 %, rather high income, suspicious investor, high risk aversion, rejects advice, fixed income-securities and real estate
- The regular saver: 13,1 %, under average income, puts money aside, high wealth compared to income through saving, appreciates advice, simple investments, very risk averse, rather savings products than securities of any kind
- The constrained: 17,9 %, not enough cash to invest, shortage of liquidity, no investing, but would be interested if more resources
- The resigned: 16,4 %, poor financial situation, does not think about investing money, concerned with immediate liquidity

Abbildung in dieser Leseprobe nicht enthalten

figure 7: Investor segments, own illustration

2.9 Summary

The first part of the theoretical background establishes the necessary knowledge about asset-backed securities relevant to this research question. It is not exhaustive, but covers the most crucial aspects of necessary investor knowledge. This first part is not so much a theoretical model to be applied, but rather lays the foundation for the empirical research in this field. The magic triangle is a well-known concept for every investor, establishing the link between the competing goals of every investment decision. It will be applied by scrutinizing ABS as to what extent they fulfill those competing goals. The research is built on a marketing background as well as a finance background. Therefore, the aspects of strategic marketing planning presented above are considered to be relevant. The theories of customer segmentation are crucial to the study, since potential segments of private investors need to be discovered and targeted. Applying a complete marketing plan would be too far-reaching at this point in ABS research.

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^[1] Homogenous referring to the type of assets used as colateral. Within this homogenous pool, the obligors should be diversified geographically and by industry.

^[2] B. Dorendorf (2003) considers this question to be of current interest in a recent article “Keine echte Alternative für Privatanleger” in: Frankfurter Allgemeine Zeitung, 2003-04-24

^[3] Compare Bär (1997) and Paul (1994) for further demarcations of securitization

^[4] For further reading on demands for underlying assets refer to Bartelt (1998: 140), Bär (1997: 165) and Paul (1994: 186)

^[5] Compare to Paul (1994), Bär (1997) and Bartelt (1998) for other reference models

^[6] This is the original transaction type. Today the German market is dominated by derivative, synthetic structures. This particularity will be dealt with in the empirical part of the study.

^[7] CMO = „a multi-class pay-through security representing a debt-obligation of the issuer supported by either whole loans or, more typically pass-through securities“ (Obay, 2000:77).

CDOs are backed up by either consumer or business loans, and can be subdivided into collateralized bond obligations (CBO) and collateralized loan obligations (CLO). For further explanations and detailed classifications refer to Paul (1994), Bär (1997) and Obay (2000)

^[8] Only the most common techniques will be presented here. For an exhaustive overview refer to Bär (1997: 207 following)