CMI's Warren Aarons explains how mortgage investment corporations can give investors the real estate exposure they’re looking for
The past year has been a year like no other for investors. A health crisis ripped across the globe causing death, illness, and lockdowns, instilling a deep sense of uncertainty about what the future holds. The market crash in March hit portfolios and, while the vaccine rollout is now under way, the economic recovery remains at an early stage and many people have seen their income reduced.
One industry that appears immune to the drama is the housing market – and Canada ended 2020 with a bang. The number of existing properties that changed hands in December was 47% higher than in 2019, while the benchmark price of a home was 13% higher.
Faced with equity market volatility and an unattractive bond market – both Canada’s 5- and 10-year benchmark bond yields remain below 1% - real estate represents a defensive strategic opportunity. However, not every investor is comfortable, or able, to buy a house or willing to saddle themselves with a full mortgage.
Enter CMI Mortgage Investments, a leading private mortgage lending firm that offers individuals the chance – independently or through their investment advisor – to profit from the red-hot housing market without being a property owner. This can be achieved via a uniquely Canadian investment vehicle, the mortgage investment corporations, or MIC. CMI offers three unique MIC Funds, which allow investors to earn yield from the “lending” side while their investment is backed by mortgages secured against residential property.
With a MIC, investors pool their money together to lend out to borrowers in the form of private mortgages. It operates much like a mutual fund, but instead of stocks and bonds, it is made up of carefully selected mortgages.
And rather than owning a particular mortgage, investors purchase shares of a MIC so their investment is spread across a broad range of private mortgages. This provides diversification, mitigates risk and means that if one mortgage doesn’t perform, others can make up for it.
Income is generated by collecting interest and fees from mortgage borrowers, which is paid out to investors as a regular monthly dividend – or it can be reinvested through a DRIP, or dividend reinvestment plan.
Warren Aarons, VP of Investor Relations at CMI, explained that most MICs are not priced daily and, therefore, don’t exhibit the market price fluctuations typical of stocks and mutual funds.
He said: “MICs have provided yield through times of economic uncertainty, as we have experienced in 2020. With interest rates in Canada remaining at historical lows, the targeted yields offered by MICs to investors can be attractive when considered as an investment in a portfolio.
“MICs have demonstrated a low correlation to the broad equity market, and because the MIC is composed of a pool of mortgages with fixed rates and set times to maturity, the valuation of a MIC is calculated at various times throughout the year and should show little price fluctuation between time periods.
“A small MIC exposure can enhance the yield of a portfolio while reducing the risk to traditional asset classes like stocks and bonds.”
The yield is attractive given the current environment. CMI’s trio of MIC funds have target yields of between 6-11% at a time when retirement income is top of mind. Investors can participate with a starting investment as low as $5,000, which are RRSP, RRIF, TFSA DPSP, RESP and RDSP eligible, making them a versatile investment alternative.
CMI’s flagship MIC is the CMI MIC Balanced Mortgage Fund, which consists of mortgages in first and second positions primarily and targets an approximate annual yield of 8.5%. The CMI Prime Mortgage Fund consists of mortgages in first position and targets an annual yield of 6%, while the CMI High Yield Opportunity Fund includes mortgages in first, second and third positions, and targets an annual yield of 10.5%.
For those who prefer to invest directly in specific mortgages, CMI also offers a whole mortgage investment service, where portfolios can be individually tailored and built to the needs and requirements of the investor, with expert guidance and complete administrative support.
If advisors have clients who want to participate in the housing market boom without actually buying a property, CMI believes its MICs stand out as an increasingly compelling investment opportunity.
Given current market volatility and economic uncertainty, debt investing is a good defensive strategy to add ballast to a portfolio, and Aarons believes there is potential to reallocate some assets from volatile stocks or underperforming bonds.
He said: “If you are an investor at CMI in any of the three MICs, or the direct mortgage lending service, you're basically giving your investable amount to somebody who actually is buying a house. You’re earning a return from your capital being used as a mortgage because they have come to us for that funding need rather than another institution.
“CMI offers a way for investors to be exposed to the housing market across Canada in the form of short-term obligations. On the borrowing side of home ownership, most of our mortgages are one year or less in term, so it allows the investor to take advantage of real-time opportunities to earn a return from the housing market.”