With yield difficult to find in traditional fixed income vehicles, investors are being forced to get creative in order to safeguard portfolios. As advisors and investors look further afield in the search for returns, interest in alternative investments is growing steadily.
“More and more institutional investors are realizing the need for alternatives to augment their fixed-income bond portfolio,” says Scott Rowland, senior vice president & co-head of debt strategies at Fiera Properties. “I look at commercial mortgages as an ideal alternative: they act like bonds, they have set interest payments and maturity dates, but they also provide investors higher relative yields at a lower duration than standard universe bonds.”
Rowland — along with Geoff McTait, who’s also a senior vice president & co-head of debt strategies at the firm — manages the Fiera Properties CORE Mortgage Fund. Offered by parent firm Fiera Capital
Corporation, the recently launched open-ended fund seeks long-term capital preservation and income for accredited individuals and institutional investors.
“If you look at the FTSE Universe Bond Index today, it’s yielding around 2.3% with a duration of about seven and a half years,” Rowland says. “Our fund is designed to deliver a net yield above 4% with a duration of around two.”
Rowland believes that investing in pooled mortgage funds has two fundamental benefits for investors: diversification away from individual mortgage risk premium and loan maturity dates that are laddered, which synthetically creates the opportunity for investors to exit when desired.
The Fiera fund is focused exclusively on commercial buildings but does include a range of property-types, including offices, apartments, industrial, and retail assets.
“This is a fixed-income alternative fund, so our overriding goal is capital protection,” Rowland says. “The challenge to me, and probably not so much to other fund managers, is selecting the absolute best investment, optimize the best returns for investors, and deliver the alpha while ensuring capital protection, which is needed in a fixed-income book. This is where, honestly, you need to do the research, put in the work, and maintain a very disciplined and rigorous investment process.”
The fund also aims to provide stable monthly income and generate, net of MER, a portfolio yield of above 4%. “As interest rates increase, investors should expect our portfolio yield to increase as well,” Rowland says. “As a lender, our objective is to get repaid 100 cents on the dollar 100% of the time. The key to that is not being afraid to say no. There are plenty of loan opportunities, but you’re working with precious investor capital that you can’t afford to waste.”
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