Independent Assessment by SQM Research - MacarthurCook Mortgage Fund
05.21.2013
MacarthurCook Mortgage Fund Independent Assessment By: SQM Research
Investment SummaryThe MacarthurCook Mortgage Fund is a registered managed investment scheme structured as an open-ended unlisted unit trust. The Fund primarily invests in a diversified portfolio of commercial registered first mortgages. Any remaining funds are held in cash or short-term, investment-grade interest bearing securities.The Fund will only invest in mortgages where first mortgage security is held over income producing commercial, industrial, retail or residential investment property located in major capital cities and regional centres with populations in excess of 30,000 people. Loans will not exceed 66% of the property security value at approval and borrowers must demonstrate their ability to meet loan commitments.The Fund’s investment objective is to provide investors with regular income streams coupled with low to medium levels of risk while out-performing the one-year UBSA Bank Bill Index. The objective is to be invested in an appropriately diversified portfolio of mortgages and to deliver consistent performance across a range of market conditions through a conservative investment approach.Loans made by the Fund will typically have a loan value of $250,000 to $1,500,000, have a loan term of three years, are interest only and are assessed in accordance with the Fund’s standards. The Fund does not entertain loans that are ‘low documentation’ or ‘no documentation’ applications.The Fund has received a 3¾-star rating. SQM Research’s ReviewA key benefit of the Fund is the experience of the Fund’s investment staff. The Fund is well led by Head of Mortgages Michael Petruccelli, who demonstrates significant experience in the mortgage industry. Moreover, Mr Petruccelli reports to Executive Chairman and Chief Executive Officer George Wang who maintains broader oversight of the Fund. Mr G. Wang’s has extensive experience, as well as a strong public profile in the Financial Services Industry. Mr G. Wang plays an important role over the strategic direction of the Fund and oversees all aspects including the loan approval and investment process. In addition to this, Mr G. Wang and Mr Petruccelli work closely alongside Head of Treasury and Investments Ms Moni An, Investment & Financial Controller Mr Andrew Lam, Senior Lending Manager Jason Wang and Manager of Operations and Service Ken Liu.The Fund is managed and supported by different arms of AIMS Financial Group, which include loan approval, settlement, servicing and investment aspects. The operation of the Fund is assisted by a Credit Committee for the assessment and approval of loans and an Investment Committee for the review and consideration of asset allocation and investment opportunities.The Fund aims to outperform the UBS Bank Bill Index by investing in a diversified portfolio of loans in Australia with some exposure to fixed interest and floating rate securities including mortgage backed securities, bills of exchange, negotiable instruments and deposits with banks and other financial institutions. SQM Research believes that the benchmark employed by the Fund is not an appropriate one, as the UBS bank bill index is largely a risk-free index and investing in mortgages is not. SQM Research would suggest adding a premium of at least 100 basis points to the UBSA Australian Bank Bill index.The Fund boasts a conservative mortgage portfolio and appears to have a strict lending policy in place, which is supplemented by a stringent lending process. The maximum Loan to Value Ratio (LVR) permissible in the Fund’s mandate for loans in the Fund’s mortgage portfolio is 66%. At December 2012, it has been observed that the Fund had no loans with a LVR above 66%.Moreover, the Fund’s weighted average LVR has remained stable, at below 50%. The strict lending policy and stringent lending process is viewed upon favourably by SQM Research.The Fund’s stringent lending policy and process in place has historically benefited the Fund, with no loan arrears recorded by the Fund since MacarthurCook become manager in 2003. Interestingly, the Fund adopts a relatively passive strategy towards its arrears management process, with contact by the investment team only being maintained with the borrower when a loan is classified as being in default. It is the responsibility of the originator to arrange for the borrower to forward the amount owing to the Fund. SQM Research notes that while MCK will only maintain minimal contact with borrowers before a loan is in default, no loan losses have been recorded by the Fund since MacarthurCook become manager in 2003.Since the global financial crisis, the Fund has made a conscious effort to maintain liquidity levels. Bearing this in mind, investors should be aware of the trade-off between the Fund maintaining high liquidity levels and the weaker returns of the Fund, given the thinner margins over the Fund’s cash investments.The Fund’s rating has been positively affected by the Fund’s performance. Since its inception, the Fund has recorded an annual net return of 5.9% p.a. – above the 5.4% delivered by the benchmark and the 5.7% recorded by peers. While the Fund marginally outperformed its peers and the benchmark, pleasingly however, the Fund’s mandate only allows for conservative full documentation loans, which entails a lower risk profile than some of its peers. Although the Fund’s returns have deteriorated over the last year, the extent has been less when compared to peers and the benchmark index. The decline across the industry was driven by falling cash rates, with the Fund also impacted given its large exposure to variable loans.While the Fund demonstrates diversification on a sector level, on a borrower and geographical basis, the Fund is somewhat concentrated. On a sector basis, the Fund demonstrates a strong sector spread across its Commercial, Retail, Cash and IBS exposures. However, the Fund’s mortgage portfolio is concentrated towards Victoria accounting for 41.9% of the portfolio. The Fund is also heavily bias towards the Eastern States of Australia, however given the size of these markets, SQM Research believes its exposure to the Eastern States of Australia are appropriate. In terms of its largest borrowers, its largest borrower represents 8.5% of the mortgage portfolio and its top 10.0% of borrowers account for 41.8% of outstanding principal.The Responsible Entity MacarthurCook Funds Limited appears to be in a reasonable financial position. Overall, despite key liquidity ratios weakening over the last year, they remain to be recorded at sustainable and conservative levels. MCK maintained high cash levels, in addition to sustaining a moderate net working capital position.Overall, the Fund has exposure to a conservative mortgage portfolio and historically has recorded no arrears or loan losses. Based on its history, the Fund should continue to deliver regular monthly distributions above its peers and benchmark index.Strengths of the Fund
- The Fund is well led by Head of Mortgages Michael Petruccelli who demonstrates significant experience in the mortgage industry. Moreover the Fund benefits from the leadership of Executive Chairman and Chief Executive Officer George Wang, who plays an important role over the strategic direction of the Fund as well as overseeing all aspects of the Fund including the loan approval process and investment.
- The Fund is exposed to a portfolio of conservative mortgage loans with a maximum LVR of 66%.
- Since its inception, the Fund has outperformed its peers and benchmark index.
- The Fund has no loans in arrears with all loans being income producing loans. In addition to this, the Fund has recorded no loan losses since MacarthurCook became manager in 2003.
- The Fund has in place a strict lending policy and adopts a stringent lending process.
- The Fund’s on-going fee structure is below peers.
Investment SummarySince its inception, the Fund has recorded an annual net return of 5.9% p.a., above the 5.4% delivered by the benchmark and the 5.7% recorded by peers. During this period the Fund has delivered an annual risk premium (over the risk-free rate) of 0.7% as compared to 0.2% by the benchmark and 0.5% by the peers. Pleasingly, the Fund’s mandate only allows for less risky full documentation loans. While the Fund marginally outperformed its peers and the benchmark, it is important to note that all of the Fund’s loans were assessed on a full-documentation basis, which entails a lower risk profile than some of its peers.It is evident that during the Fund’s history it has demonstrated periods of both under and outperformance against its peers and benchmark index on a one-year rolling returns basis. However, the Fund has been able to outperform peers and the benchmark index since mid-2009. For the twelve months to December 2012, the Fund recorded return of 5.3% compared to the 4.0% by the benchmark and 4.3% by the peers.While the Fund’s returns have deteriorated over the last year, the extent has been less when compared to peers and the benchmark index. The decline across the industry was driven by falling cash rates, with the Fund also impacted given its large exposure to variable loans.
Investment SummaryThe Fund’s performance has predominately led the benchmark index while against peers the Fund has outperformed since April 2010. An investment of $10,000 into the Fund at its inception would have peaked at $16,643 in December 2012. This is above the $15,934 and $16,287 reached by the Fund’s benchmark and peers over the same period respectively.
Summary At the end of December 2012, the mortgage portfolio had a value of $69.6 million, representing 65.7% of the total funds. This was comprised of 73 loans distributed between 66 borrowers. The Fund had a 19.3% exposure to cash, while also having a 15.0% exposure to interest bearing securities. The Fund currently invests in six Mortgage Back Securities (MBS) with an AAA rating and six Floating Rate Notes (FRN) with a minimum AA- rating. The maturity profile of the MBSs and FRN range from March 2013 to April 2037. The Fund’s cash exposure includes seven term deposits all expiring before the end of February 2013. Since the global financial crisis, the Fund has made a conscious effort to maintain liquidity levels. Given this, investors should be aware of the trade-off between the Fund maintaining high liquidity levels and the weaker returns of the Fund given the thinner margins over the Fund’s cash investments. The Fund boasts a conservative mortgage portfolio and appears to have in place a strict lending policy, which is supplemented by a stringent lending process. The Fund’s has no loans with a Loan to Value (LVR) above 66%, moreover its weighted average LVR has remain relatively stable, below 50%. The Fund also had no loans in arrears at December 2012. The Fund is somewhat diversified, with the Fund demonstrating a strong sector spread across its Commercial, Retail, Cash and IBS exposures. However, the Fund demonstrates concentration risk in terms of its largest borrowers and geographically. The Fund’s mortgage portfolio is concentrated towards Victoria accounting for 41.9% of the portfolio. The Fund is also heavily bias towards the Eastern States of Australia, however given the size of these markets, SQM Research believes its exposure to the Eastern States of Australia are appropriate. In terms of its largest borrowers, its largest borrower represents 8.5% of the mortgage portfolio, and its top 10.0% of borrowers account for 41.8% of outstanding principal.Overall, the Fund has a conservative mortgage portfolio, with low LVRs and no loan arrears. However there is a degree of concentration in terms of geographically and its largest borrowers.
Independent Assessment by SQM Research - MacarthurCook Mortgage Fund.pdf
