2021 looks set for more uncertainty, where should investors turn?

CMI VP on the potential benefits of MIC investing in an extremely volatile time

2021 looks set for more uncertainty, where should investors turn?

Nothing is certain. That’s been the lesson of 2020 and, arguably, the underlying lesson in the past 4 years. It’s a lesson investors have learned enduring shock after shock in the public markets and their portfolios. Even as this year of tumult draws to a close, experts and analysts predict more uncertainty ahead. If all we know for sure is that we can’t be sure of anything, how can investors keep and grow their capital?

Private markets and “alternative” investments have been the widely touted solution for investors seeking stability. But the “alts” universe is a diverse one and not all alternatives can offer the desired mix of capital appreciation, principal defense and yield that investors seek from their alternative investments. One asset class, though, stands out in uncertain times: private mortgage investment corporations (MICs).

“MICs are a historically unique entity within Canada, set up in the 70s to bridge the gap between what the banks were lending out and what the Canadian public needed,” explains Julian Clas, vice president of Canadian Mortgages Inc. (CMI). “We’re an ‘alternative lender’ working with clients who fall outside the tight lending regulations banks have to follow. A MIC allows investors to purchase shares in mortgage loans, offering them exposure that’s uncorrelated to the shocks we see in the public markets.”

Clas says that MIC investments traditionally enjoy returns uncorrelated to macro shocks, especially those originating in the U.S. where, as the recent election cycle taught us, a change in the news cycle can send public markets spinning. MICs, effectively, are investments in Canadian mortgage holders and the wider Canadian real estate industry, which remains largely insulated from news cycles and goings on in the U.S.

But what about the volatility in the mortgage and real estate markets? It’s important to note that one of the few asset classes that has shown consistent growth and capital protection in 2020 has been Canadian real estate. That said, Clas and his team of portfolio managers at CMI are dedicated to maximizing return and yield and mitigating risk. He says that any MIC investment is also an investment in that MIC’s manager and CMI boasts the expertise and experience required to navigate today’s turbulent markets.

In the early crisis days of COVID, Clas says, unsure of what the real estate market would do, and how mortgage holders could keep up payments in a lockdown-ravaged economy, many MICs prevented their investors from liquidating their assets. CMI, instead, allowed investors to chose for themselves. Clas and his teams worked to quickly mitigate risk in the funds by increasing their cash holdings. In the months since, that management has paid off with CMI significantly increasing their AUM along with investor confidence.

One of the reasons CMI has been so successful this year, is that MICs offer an attractive yield on top of their potential for capital appreciation. Because they’re an alternative lender, CMI’s mortgages yield a far higher rate than banks might. At the same time, they’re backed by Canadian real estate assets for collateral. In a low-rate environment across the public bond markets, MICs can play an important role in generating much-needed income for investors.

In an uncertain world, Clas stresses that diversification is key for any client’s portfolio. At the same time, he sees MIC investments as a key part of that diversification, as an asset class that can provide many solutions for many kinds of investors.

“Every portfolio has to look for yield somewhere,” Clas says of that asset allocation question. “Historically that’s been in the corporate bond market, but today because of the year we’ve had, corporate bonds aren’t providing the yields investors need. Advisors should look to MICs for an alternative form of fixed income which has an attractive risk-adjusted return. CMI stands out in the MIC world, too, with an experienced team managing three structured funds designed for a variety of risk profiles.”