In an era of record-low interest rates, market volatility and unprecedented fiscal and monetary intervention, investors need to think outside the box when constructing their portfolio. Within the US $10 trillion alternative asset market, private mortgages provide a viable alternative to conventional portfolios composed of stocks and bonds.
Mortgage Investment Corporations, or MICs, are one of the easiest ways for investors to gain direct exposure to the private mortgage market. MICs are pooled investment funds that invest in private mortgages on behalf of investors. They operate very much like a mutual fund or exchange-traded fund, but instead of stocks and traditional fixed-income securities, a MIC is made up of carefully selected mortgages that produce income through the collection of interest and fees from borrowers. These funds can be incorporated into virtually any investment portfolio, including a TFSA, RRSP or RESP.
MICs have carved out a strong place in modern investment portfolios because the traditional 60/40 allocation strategy no longer produces desired returns. Although the rationale for a 60% stock, 40% bond portfolio is still relevant – namely, the need for diversification and reduced volatility – traditional fixed-income assets like government bonds are struggling to produce yield.
Bond yields have collapsed further in the wake of the Covid-19 pandemic, as fears about public health and the economic recovery continued to influence investor sentiment. Bond yields are also significantly impacted by monetary policy. With central banks fixing interest rates near zero in the wake of the pandemic, bond prices have risen and yields have fallen.
A traditional portfolio mix also misses the mark in terms of performance because of the underrepresentation of real estate investing. By exposing one’s entire portfolio to public markets, as is the case with stock-bond portfolio mixes, an investor is increasing their chance of contagion resulting from market cycles, asset bubbles and other forms of volatility. Economic data, monetary policy, geopolitics, investor sentiment and technological changes all influence public markets in some way. These factors produced a virtuous market cycle in 2018 and 2019—and brutal selloffs in 2008, 2011 and parts of 2015, 2016 and 2020.
Although real estate is not always immune from contagion – as we saw during the 2007-08 financial crisis – the mortgage market offers an entirely different risk-return profile. As Canada’s real estate market has repeatedly demonstrated, Canadians have an excellent track record paying their mortgages. Although private mortgages have a slightly higher delinquency rate than conventional mortgages, proper risk management strategies on the part of MICs often mitigate the risk considerably.
Mortgage delinquency rates in Canada routinely hover below 0.4%. During the height of the pandemic, mortgage defaults remained at just 0.28%. The capital loss rate for the private mortgage portfolios administered by CMI Mortgage Services is well under 1%, a result of our comprehensive risk management and adjudication process. CMI MIC Funds also uphold a strong focus on capital preservation and robust lending criteria, which significantly mitigates the risk to investors.
Investing in private mortgages has historically produced higher returns than traditional fixed-income securities such as corporate or government bonds. As of March 2021, the net annual yield for CMI MIC Funds was between 6% and 10.5% across our Prime Mortgage, Balanced Mortgage and High Yield Opportunity Funds. By comparison, the yield on 10-year Government of Canada bonds is currently around 1.50%.
Are you looking to benefit from exposure to the housing market without the added risk of homeownership or speculation? CMI Mortgage Investments has successfully funded over $650 million in private mortgages since inception.
Speak to a CMI advisor to learn about our MIC investment options.