It’s commonplace to see challenges for advice practices around specific classes of products when securing PII coverage. These challenges aren’t limited exclusively to financial planning firms working with retail investors; many wholesale and retail fund managers can face similar roadblocks when it comes to certain asset classes. For advice practices, the more traditional hot buttons like agri-scheme investments, Margin products or those that are highly geared or leveraged, and, more recently, cryptocurrency. For funds, it’s property, private capital opportunities, and alternatives to name but a few.
Of these products that have, and will likely continue to attract a high level of scrutiny are mortgage funds. Specifically, those backed by solicitors or private lenders whose borrowers are limited in the more traditional lending market. Developers or builders looking to finalise projects at various stages that are viewed as high risk, bridging finance when existing lenders may have LVR restrictions or other parameters that are too conservative for the borrower to overcome.
But are these difficulties always justified? Is there a way to decipher what determines which of these funds and managers constitute a good risk or are all of these products viewed as high-risk and something to avoid?
Numerisk spent some time more recently with Natalie Bode, CEO of Australian Securities Limited, a privately managed investment firm that specialises in mortgage funds that aren’t spruiking too-good-to-be-true returns and see value as a guiding principle to the way they approach investing.
“Not all mortgage funds & private credit providers are the same. Some providers spruik returns of 10% plus which is considered to be way above market for first mortgage investing particularly when bank loans are offering fixed 1 year lending rates from 5.74%. When considering mortgage funds, it is important investors and their advisers conduct due diligence on the provider. Due diligence should extend to a manager’s history, licensing, external auditing & compliance reporting requirements, insurance requirements, valuation policy, information on what security the investors are receiving in return for their investment, mortgage arrears and their default management process and the level of due diligence they undertake on a borrower.
Mortgage Fund investing should be considered as a fixed income alternative, whilst higher up the risk curve than a bank term deposit, if managed correctly can be considered as a relatively low risk alternative with attractive returns.
Borrower due diligence is key to success of a manager as it tells you about how they value your money. Many private credit providers spruik ‘no doc’ and ‘low doc’ products in the market. Often these products are on non-regulated loans and therefore fall outside the scope of regulators’ ‘responsible lending’ guidelines. However, as an experienced manager who is proactive in looking after the best interests of both borrower and investor –it is in everyone’s best interest to lend responsibly and obtain suitable information to ascertain the suitability of a loan for a borrower.”
A consideration for Mortgage Funds is the broader macro environment for residential and commercial Real Estate, recent coverage in the AFR in January spoke to a survey undertaken of economists that reflected a bearish sentiment with expectations of an average growth across Australia of 3.1%. In April, a mere 3 months later, expectations grew to more than 5%. Australia’s love for property and “bricks and mortar” seems to show a resilience that few can deny.
Shane Oliver, Chief Economist at AMP Investments, said in a post from Olivers Insights in early June; “Conditions in Perth, Brisbane and Adelaide continue to be very strong, helped by relatively lower levels of supply evident in total listings running more than 30% below their five-year averages, and strong interstate migration in the case of Brisbane and Perth. But this contrasts with far more constrained conditions elsewhere. Sydney has made it back to its record high but only just and the other capitals remain well below their record highs. Melbourne and Hobart are seeing total listings well above their five-year average”
So, it’s possible to achieve exposure to asset classes, often considered high-risk under the stewardship of high-quality managers for the right investors with the right strategies. How then can advisers ensure they don’t run into trouble with PII for their advice practice or AFSL?
“Making sure insurers have a strong understanding of the fund – its investment managers, the assets under management, and the mandate is a great start.” Richard Silberman, Managing Director of Numerisk, said, “We spend a lot of time working through APLs with products we know will attract attention like mortgage funds. There is an analogy that comes to mind, No dog is bad, they just have bad owners and the same can be said for investment products.
When the fund manager can speak to consistent, reasonable returns that are sustainable or volatility that aligns with more obvious macro factors, the underlying mechanics of the fund stack up, and we can positively say that there are no irregularities – then the shift turns away from the product conversation to the adviser and the advice. The first step, however, is ensuring that the fund is sound; then, we work through how the product is being sold, to whom, and on what basis. At the end of this process, we can explain this to insurers as well as the adviser or the manager, and this is how we consistently achieve the results we do in the market”.
In short, following a firm methodology that means spending the time to understand the risk at the product level as the first step and subsequently at the advice. When insurers have a full understanding it can mean that these products can be utilised and clients can see the benefits as they are incorporated into the advice strategy.
For more info, Call Australian Securities Limited on 1300 275 275 or email via our contact us page
