These fixed-income assets can provide some cushion from AI-driven market swings
Investors who want to protect against artificial intelligence disruption may want to consider securitized products, including asset-backed securities, according to Nuveen’s Nicholas Travaglino. AI fears, along with rising oil prices and the Iran war , have rattled the market this year. While fixed-income investors haven’t necessarily looked for a refuge from the AI threat , Travaglino believes they should consider it. “The equity side of the market has been focused on businesses with moats and heavy asset type businesses,” he said. “Securitized fits that narrative very well. People still need a place to live. There is still going to be a need for commercial property. … You’re still going to have need for automobiles. You’re still going to have need for consumer credit.” Travaglino, Nuveen’s head of securitized credit, specifically likes asset-backed securities and commercial mortgage-backed securities. So-called ABS and CMBS also give investors additional yield versus other fixed-income asset classes, he said. For instance, the Nuveen Securitized Income ETF (NSCI) has a 5.19% 30-day SEC yield and a 0.38% expense ratio. NSCI YTD mountain Nuveen Securitized Income ETF year to date Asset-backed securities are backed by a pool of income-generating assets such as car loans and credit card receivables, as well as data center or cell tower loans. Commercial MBS are backed by pools of loans on commercial properties, including offices, retail spaces, apartment complexes and even data centers. The products also aren’t being flooded by new issues tied to new AI buildouts like in the corporate bond market . A recent survey of high-credit investors by Bank of America found that they expect $285 billion in hyperscaler bond issuance this year. “Most people are calling for about $50 billion of data center issuance in ABS and CMBS, much, much less than the corporate credit market,” said John Kerschner, global head of securitized products at Janus Henderson Investors. “In general, we’re still looking at the AI transition and thinking that securitized products are probably a good place to hide out.” AI beneficiary ABS also stands to benefit from the artificial-intelligence revolution, Travaglino said. He called it the “most attractive play” for AI-adjacent investments within fixed income. The sector has new issues coming out on data centers that are already built and plugged into the power grid, he said. “They’re generating compute and they have contracts with consumers of that compute. That is generating cash flow. That’s a known quantity, and those payments are able to pay the bonds in [the] ABS space,” Travaglino said. “That’s a really attractive risk for a growing sector.” JABS YTD mountain Janus Henderson Asset-Backed Securities ETF year to date ‘Significant value’ in CMBS Travaglino also sees “significant value” in CMBS, which he said still has some of the most attractive yield opportunities. Lower interest rates means more favorable lending terms from banks, and there have been significant opportunities in acquiring new properties, he said. For instance, industrial properties are going to see continued demand, he noted. “[The sector] has a good moat around it in terms of creating physical goods and machines and refining chemicals and doing things that we need that can’t be replicated by zeros and ones,” Travaglino said. “That’s important, it has staying power.” Kerschner believes CMBS will largely be unaffected by AI and could benefit as the technology increases productivity. Each deal requires due diligence, with geography, underlying tenants and the operator all important, he said. “It’s right sponsor, right building, right asset type at the right level,” he said. “We still see a lot of opportunities there, and I really don’t think AI is going to affect it that much.” CMBS YTD mountain iShares CMBS ETF year to date That said, the office space has been long unloved by investors, first due to pandemic-driven hybrid work and higher interest rates. Then in February, commercial real estate broker stocks and real estate investment trusts tumbled on concerns over AI disrupting white-collar jobs. “I don’t buy that,” Kerschner said of the AI job fears. “If there is a trend, it’s very slow moving. And quite frankly, just the opposite is true right now.” There has been “incredible strength” in New York offices, particularly in the top-tier buildings, he noted. He also sees opportunities in multi-family, industrial and hospitality. Still, it is early stages in AI, so investors should assess the impact of the technology on the overall market and economy, as well as individual companies and asset classes, said Travaglino. “There’s going to be winners and losers,” he said. “It’s too early to tell who those winners and losers are going to be, but there are going to be ones that emerge as better businesses.”
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