For decades, the traditional 60/40 portfolio strategy has guided investment managers in their quest to provide clients with a sensible balance between risk and returns. The onset of a global recession punctuated by a public health crisis may have permanently changed how portfolio managers approach the market.
It’s not to say that portfolio managers didn’t see it coming. Interest rates have been effectively zero-bound since the aftermath of the 2008 financial crisis. Bond portfolios comprised of government and corporate debt have faced what analysts call an “income famine” due to years of collapsing real yields. While no one is suggesting that bonds be abandoned completely, investors are increasingly turning to alternative asset classes to fill in the gap.
Alternatives encompass a broad category of assets that vary in terms of risk and duration. Private mortgages fall within this domain and provide a compelling opportunity for investors looking to add return potential to their portfolio without necessarily assuming additional risk. In Canada, one of the best ways to gain exposure to the private mortgage market is through a registered Mortgage Investment Corporation or MIC.
Mortgage Investment Corporations: A New Portfolio Strategy
MICs are registered investment funds that pool capital from investors and invest in private mortgages. They generate income by collecting interest and fees charged to borrowers. By placing money into a MIC, an investor becomes a preferred shareholder and receives regular dividend payments that can be withdrawn as cash or reinvested into the fund. Under the Income Tax Act, a MIC must pay 100% of its net income as dividends to its shareholders. As a qualified investment, a MIC can be purchased as part of an RRSP, RRIF, TFSA, RESP or RDSP.
While MICs account for a small fraction of the overall mortgage market in Canada, they play a critical role in meeting the short-term funding needs of a diverse range of borrowers. Stricter lending requirements and rising home values have contributed to the growth of private mortgages as more borrowers turn to alternative lending solutions not currently offered by the major banks.
By allocating a portion of their portfolio to MICs, investors can reap the benefits of a traditional 60/40 strategy – namely, diversification and reduced volatility – but at potentially more competitive returns than traditional fixed-income securities like government bonds. That’s because MICs routinely outperform bonds and other fixed-income securities both in terms of nominal yield and real yield.
CMI’s flagship Balanced Portfolio Fund has nearly $45 million in assets under management and generates an average annual yield of between 8% and 9%. Compare that with leading GICs and the 5-Year Canada Bond:
|Asset||Average Yield (March 2021)|
|Scotiabank Canadian Low Volatility Index||0.35% – 3.50% (max)|
|RBC 3-Year Non-Redeemable GIC||0.50%|
|5-Year Canada Bond Yield||0.93%|
|CMI Balanced Mortgage Fund||8.43%|
A wealth of data shows integrating private funds reduces overall correlation to the market and thus gives the portfolio a smoother ride, which is what investors want. MICs fit that description because, unlike traditional assets, they are not affected by public markets. Stock-market volatility, economic data, corporate earnings and monetary policy do not have a direct impact on private mortgages.
CMI MICs: A Wealth of Opportunity
Our MIC offerings include three distinct funds, with target yields tied to specific risk and return profiles:
CMI Prime Mortgage Fund This more conservative fund minimizes volatility by investing primarily in first mortgages and by capping its loan to value ratio at 65%. The fund aims to deliver targeted annual returns of 6-6.5%.
CMI Balanced Mortgage Fund This more balanced fund targets higher annual returns of 8-9% by investing in both first and second mortgages, and by increasing the maximum loan to value ratio to 75%.
CMI High Yield Opportunity Fund This more aggressive fund aims to deliver targeted annual returns of 10-11% by investing primarily in second mortgages with a maximum loan to value ratio of 85%.
One of the best ways to get started in the mortgage market is to work with an experienced investment corporation. Learn more about how CMI MIC Funds can offer seamless access to Canada’s real estate markets.
Contact us by filling out the form below for more information about our MIC funds.