Should you be invested in debt funds?

Alternative mortgage expert says now's the time to understand various real estate-related options

Should you be invested in debt funds?
Christine Xu, president of Moneybroker Canada and Ready Capital Mortgage Investment Trust

In a way, launching the Ready Capital Mortgage Investment Trust has brought Christine Xu full circle. After studying economics at the University of Toronto, she spent the first 10 years of her career in banking and investments before moving over to the mortgage business in 2000. As she grew from a residential mortgage broker to one of the top alternative mortgage experts in the country, she now fully comprehends the benefits her current knowledge could have brought to her clients during her time in the wealth advisor field.

Four years ago Xu, president of Moneybroker Canada, decided to start “a new but related business.” Similar to a mortgage investment corporation (MIC), the mutual fund trust invests exclusively — for now — in private mortgages. Larger MICs or trusts such as Xu’s are well-regulated, especially on the trust side, and while many fixed income products sold through a bank channel are seeing returns not much better than GICs, on the alternative market side the return is much higher.

“Financial professionals give advice to investors, and most want a holistic approach to portfolios that encompass high-risk, high returns, a conservative part, and a fixed income aspect,” Xu says. “But the fixed income returns over the last few years were low and the investment market volatile, and many advisors don’t have enough product to pass on to investors. We consider ourselves a fixed income fund because we give a fixed monthly interest distribution to the investor based on our projection of 8% per year. It’s great for people with lower risk tolerance but want a higher return than GICs on their investment.” 

Since inception, Ready Capital Mortgage Investment Trust has grown to over $60M and in the three years of financial reports available delivered a compounded return of 29.58%. Though currently selling only through exempt market dealers, Xu expects that later this year the mutual fund trust will be available more widely — meaning now’s the time for advisors to investigate the opportunity.

With an already impressive track record of fund management, Xu is joined as a trustee by Ron Cuadra, who has been in business over 30 years, and former President and CEO of Home Trust Martin Reid. Together with the solid underwriting team, there’s close to 70 years industry experience behind the trust. It’s this expertise that sets them apart — “We are industry professionals, and it’s important when investing that the fund manager really knows the business,” Xu notes — as many people fail to recognize the differences between various real estate-related funds. For example when looking at a debt fund, such as Xu’s trust, versus an equity fund, like a REIT, the former is much more secure because whether the markets are up or they’re down, people have to pay their mortgages.

“We may be the new kids on the block, but I’m confident we’re one of the best performing debt funds in the country because that’s all we do: we know the market very well, we control the risk very well, and our distribution cost is much lower because it’s mostly to direct borrowers,” says Xu. “Debt funds are safer than any other investment product available: safer than stocks, than most mutual funds, safer even than REITs or other real estate-related funds because it’s debt. In a volatile market, it’s much better to invest in a debt fund.”

Especially in this environment, where real estate value might be lower than previous years, Xu adds that “investing in our fund is even safer than buying your own investment property, because if you bought a property at $1M last year it would be worth $800,000 if you had to sell today, and your value is down 20% — if you invest in our fund the average loan-to-value is close to 65%.”

Xu’s knowledge of the real estate market has her confident in a springtime rebound as it comes out of its annual seasonal slump and people recover from the shock of the historic interest rate hikes. For those like Xu who have been in the industry for decades, those incredibly low interest rates were the real outliers historically speaking and the current 5 and 6% primary rates are much more in line with what is normal in the market — in fact, this is still a low-rate environment compared to the past 10 or 20 years.

Read more: Can seasonality help you anticipate the stock market?

“When people understand the reality that rates will likely never go back that low, they’ll prepare for that: they still need to buy, they still need to sell,” Xu says, adding that especially in central urban areas the demand is there, and the expected influx of immigrants will also need to find places to live. This means that it’s a prime opportunity for advisors to take a hard look at real estate funds and Xu is on a mission to educate.

“I understand the benefit of financial advisors understanding the mortgage side of the equation. I’m confident now is the best time for the investor, because there’s a short period of time before the real estate market takes off again.”