Alternatives in fixed income investing

The COVID-19 pandemic has sent shockwaves throughout the economy. Stock and bond markets have been spiraling as both corporate profits and interest rates have fallen in response to this unprecedented historic event. It appears that uncertainty will remain in the market until such time that the global economy reaches a new normal.

Fixed income investments, in particular, will be impacted by the effects of COVID-19 due to the current ultra-low interest rate environment. This is forcing investors to look for alternatives that are able to deliver respectable yields and returns.

What should I invest in?

While this has never been an easy question to answer, today it has become exponentially more difficult. The Bank of Canada’s decision to cut interest rates in quick succession suggests that the central bank is attempting to preempt a major market downturn, in hopes that this will at least temporarily avert the threat of a market sell-off.

During less turbulent times, deciding where to invest depends on a number of key factors including your investment objectives, risk tolerance, and current asset allocation along with current market conditions. However, as concerns about the impact of COVID-19 on corporate profits continue to mount, prospects for both Canadian preferred shares and the bond market are equally concerning. In the case of the former, weakened profits could result in a drop or even cessation of preferred share dividends.

So what are investors to do in this state of hyper-uncertainty? A flight to safety is the normal course of action but in today’s investment climate, what does that actually mean? If anything, it’s telling us that now may be a good time to look at strong, stable alternative investments as a potential solution, and specifically to real estate and mortgage investments as a way to create yield in these trying times.

Alternatives: Mortgage Investments

Alternative investments are an asset class that falls outside the traditional categories of equity, income, and cash. They are primarily hedge funds, venture capital, private equity funds, hard assets (like collectibles and art) and real estate. This segment has experienced rapid growth in recent years as investors search for alternate asset allocation solutions and avenues for portfolio diversification.

In much the same way, mortgage investments have demonstrated strong and stable growth in recent years. There are many benefits to this investment vehicle and given the current investment climate, one of the biggest is their low correlation to stock markets. This means that they are unlikely to be impacted by market volatility and usually move independently from stocks and bonds. This is an important consideration for investors looking to diversify their portfolios.

Since mortgage investments are secured by collateral against property, they add an additional layer of protection for investors. Other advantages include higher yields relative to similar investments, regular monthly ‘dividend’ payments and few if any fees (as fees are borne by the mortgage borrower). This type of investment is considered a debt investment as a borrower is indebted to pay back the funds they have borrowed. These investments into debt are usually considered safer than equity investments because borrowers are incentivized to pay back their debts or stand to lose their asset.

For more information about private mortgage lending please check out our private lending blog.

However, mortgage investments do have a large buy-in requirement that not all investors are able, or are willing to afford. For this reason, some investors opt to invest in mortgage investment corporations.

Mortgage Investment Corporations (MICs)

A Mortgage Investment Corporation (MIC) is a made-in-Canada investment product that offers investors an opportunity to gain access to the mortgage and real estate markets.

This alternative, fixed income investment fund, which is composed primarily of lower risk residential mortgages, is similar to mutual funds since both are made up of a pool of assets.

Another similarity between MICs and mutual funds is the fairly low initial investment required. Most MICs required minimum contributions as low as $5,000, which makes them much more accessible compared to many other real estate and mortgage investments.

MICs: A higher yield investment solution

During these uncertain economic times where investments struggle to generate consistent yield, MICs are a beacon of light MICs are often able to offer high yields since most help finance mortgage assets for borrowers who do not qualify for traditional bank mortgages.

With the banks becoming more stringent with their lending practices, these clients come to private lenders for help. In securing mortgage financing for these borrowers, private lenders can charge higher interest rates along with certain fees, all of which help to derive a higher rate of return for investors.

Coupled with more flexible terms and conditions and quicker turnaround times, private lenders that offer MICs provide a compelling value proposition for mortgage borrowers, all of which add to the value that an investor can expect to achieve by investing in a MIC fund.

Role of the MIC’s Fund Manager

Most MICs have a specific investment mandate or policy, which is overseen by a fund manager. These fund managers are experienced mortgage underwriters who handle all investments and are mandated to review, adjudicate and approve mortgage deals on behalf of the fund and its investors.

This ensures that only the right mortgages are included in the fund, and that these mortgages align with the MIC’s investment policy, which is a reflection of the investment objectives and risk profile of the fund itself. Hence, it’s imperative that fund managers effectively manage this matching process, ensuring the underlying mortgage assets selected for the portfolio match the profiles of its investors.

This comprehensive due diligence process represents a critical component in a MIC as it helps to ensure only quality and appropriate mortgage assets are added to the fund. Investors should be sure to verify that such safeguards are in place with any MIC fund they’re considering investing in.

CMI’s family of MIC funds

At CMI, we offer clients two distinct MIC funds to select from. Each fund has its own unique asset mix and is geared toward investors with distinct risk profiles and investment objectives. With a thorough due diligence process that is led by our team of experienced underwriters, we offer you peace of mind.

You can invest with confidence in our MIC funds.

Since MICs are qualified investments under the Income Tax Act, they can be included in a variety of investment plans such as RRSPs, RRIFs, TFSAs, RESPs or RDSPs. This adds additional flexibility for most investors since you won’t need to withdraw funds from your investment account to invest in a MIC.

Speak to your investment advisor today to learn how CMI’s MIC funds can be the right investment option for your portfolio. Together, we will be able to select the fund that best matches your goals and objectives.
MICs represent a defensive investment option that can deliver respectable returns even during these volatile and uncertain times. Investors should therefore consider alternative investments as a viable option they can turn to in times like these.

We encourage you to learn more about our MIC family of funds and how they can be the right asset to add to your investment portfolio. Be sure to contact us if you have any questions or would like more information.