Investing for Income
February 2014
High Livez Did your investment return 9.63% over the last 12 months?
1
Economic Environment
•
GFC first saw deposit rates increase as banks scurried to find funding
•
Jan 1990 to Dec 2008 = 228 months, 34 months 1 year TD rate > RBA Cash
rate, highest 1.45%, average -0.47%
•
Jan 2009 to Oct 2013 = 58 months, 56 months 1 year TD rate > RBA Cash
rate, highest 2.25% average 1.11%
•
Central banks around the world then dramatically cut interest rates to “save”
economies
•
While the global recovery is happening, interest rates don’t look like increasing
significantly in the near future
•
But investors still need to generate sufficient income from their portfolios
•
What are some of your options in the fixed income market?
High Livez Did your investment return 9.63% over the last 12 months?
2
Product comparison – Term deposits, Mortgage funds, Bond funds
Attribute
Term deposits
Mortgage funds
Bond funds (Firstmac
High Livez)
Frequency of distributions
Depends on term,
monthly available at a
cost
Monthly distributions
Monthly distributions
Capital Growth
No
No
Potential for capital
growth
Liquidity
Locked in for term, fees if
term broken early
Generally locked in for at
least 12 months
Monthly, subject to
potential restrictions
Capital risk
Repayment of capital is
government guaranteed
subject to limits
Repayment of capital is
not guaranteed
Repayment of capital is
not guaranteed
Underlying assets
All lending activity of the
ADI
Residential , land,
commercial, rural,
development,
construction
Australian prime
residential first mortgages
Current yield
3.4%-4.0% for 1 year
3.8%-4.2%
5.50%-6%
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3
Yield comparison – Term deposits, Mortgage funds, RMBS
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1 yr TD
RMBS AA- Note Yield
Mortgage Funds
Source: RBA, Macquarie, SQM Research, Morningstar
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4
Risk/Return comparison – Term deposits, Bond fund, Mortgage funds
International shares
Higher risk
Australian shares
Property
Mortgage funds
Lower risk
RMBS bond fund
Term deposit
Lower return
Higher return
High Livez Did your investment return 9.63% over the last 12 months?
5
Types of Clients
•
•
•
•
The Retiree
The Independently Wealthy
The Balanced SMSF Client
The Importance of Income for every Client
High Livez Did your investment return 9.63% over the last 12 months?
6
Retiree Portfolio
Asset Classes
Cash
Percentage
Amount
Income
5%
$50,000
$1,000
$150,000
$200,000
$5,250
$11,000
$200,000
$50,000
$10,000
$2,000
$50,000
$1,000
30%
$300,000
$15,000
100%
$1,000,000
$45,250
4.5%
Fixed Income
- TD’s
- Firstmac High Livez
35%
Australian Equities
- Direct
- Funds
25%
International Equities
- Funds
Property
Totals
5%
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Independently Wealthy Portfolio
Asset Classes
Cash
Percentage
Amount
Income
2%
$40,000
$800
$60,000
$150,000
$150,000
$2,100
$6,000
$8,250
$500,000
$200,000
$25,000
$8,000
$300,000
$6,000
Fixed Income
- TD’s
- Bonds
- Firstmac High Livez
18%
Australian Equities
- Direct
- Funds
35%
International Equities
- Funds
15%
Property
30%
$600,000
$30,000
100%
$2,000,000
$86,150
4.3%
Totals
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8
Balanced SMSF Client
Asset Classes
Cash
Percentage
Amount
Income
5%
$15,000
$300
$52,500
$52,500
$1,838
$2,888
$60,000
$15,000
$3,000
$600
$30,000
$600
Fixed Income
- TD’s
- Firstmac High Livez
35%
Australian Equities
- Direct
- Funds
25%
International Equities
- Funds
10%
Property
25%
$75,000
$3,750
100%
$300,000
$12,975
4.3%
Totals
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9
The Importance of Income
•
The more frequent you get income and build up cash reserves means:
 the less you need to redeem other assets to meet your income needs
 sooner you can buy more assets without having to sell or borrow
Amount of Income % pa
Frequency
Firstmac High Livez
5.5%
Monthly
Rolling 3 month TD
2.5%
Quarterly
BHP Dividends
1%
Half yearly
CBA Dividends
5%
Half yearly
International shares
2%
Half yearly
Property
5%
Monthly but lumpy
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10
The Importance of Income
High Livez
Rolling TD
BHP
CBA
Platinum Int
Westfield
Jan-13
$511
$0
$0
$0
$0
$0
Feb-13
$575
$0
$0
$0
$0
$2,353
Mar-13
$435
$975
$1,466
$0
$0
$0
Apr-13
$459
$0
$0
$2,593
$0
$0
May-13
$486
$0
$0
$0
$0
$0
Jun-13
$499
$900
$0
$0
$2,973
$0
Jul-13
$438
$0
$0
$0
$0
$0
Aug-13
$533
$0
$0
$0
$0
$2,424
Sep-13
$486
$863
$1,698
$0
$0
$0
Oct-13
$706
$0
$0
$3,162
$0
$0
Nov-13
$399
$0
$0
$0
$0
$0
Dec-13
$525
$775
$0
$0
$0
$0
Total
$5,952
$3,513
$3,164
$5,755
$2,973
$4,777
Yield
5.95%
3.51%
3.16%
5.75%
2.97%
4.78%
High Livez Did your investment return 9.63% over the last 12 months?
11
The Australian RMBS Market
High Livez Did your investment return 9.63% over the last 12 months?
12
The Australian RMBS Market
•
•
•
•
The first Australian RMBS was issued in 1992
•
The major investors in the RMBS market are the industry super funds,
fund managers, family offices, HNW.
•
This is not a new market, it just hasn’t be readily accessible by the retail
investor
Approximately $500 billion of bonds issued since 1992
Currently around $100 billion of bonds outstanding
All the major bank, regional banks, credit unions and non-bank lenders
use this market to fund their residential loans
• No noteholder of any prime Australian RMBS has ever lost money
 So what is it that I am buying?
High Livez Did your investment return 9.63% over the last 12 months?
13
Bonds backed by Australian home loans
Series
Firstmac 1-2010
Firstmac 2-2011
Firstmac 1-2012
Firstmac 3-2012
Firstmac 1e-2013
Aug-10
Dec-11
Aug-12
Dec-12
Jun-13
416
300
300
440
500
1,445
1,059
1,028
1,464
1,584
Average Loan Size (A$)
245,244
208,936
239,548
241,972
265,170
Maximum Loan Size (A$)
765,464
692,249
743,036
750,000
994,822
Maximum LVR
95%
95%
92%
95%
95%
WA Current LVR
76%
69%
68%
71%
71%
Current LVR > 80%
32%
20%
20%
22%
25%
NSW
18%
29%
25%
33%
31%
VIC
18%
20%
24%
20%
21%
QLD
39%
27%
30%
31%
32%
Other States
25%
24%
21%
16%
16%
0.45%
0.25%
0.11%
0.24%
0.00%
Closing Date
Total Issuance (AUD m)
Loans
Number of Loans
Loan to Value Ratio
States
% of loans > 30d arrears
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14
Recent issuance comparison table
Series
Firstmac
1e-2013
Resimac
1-2012
AMP Bank
1-2012
Westpac
1-2012
ME Bank
1-2012
ING Bank
1-2012
BankWest
1-2011
Jun-13
Jun-12
May-12
May-12
Apr-12
Apr-12
Nov-11
500
500
500
1,150
1,000
800
500
Average Loan Size (A$)
265,170
215,021
269,546
210,739
170,039
200,401
239,063
Maximum Loan Size (A$)
994,822
745,000
744,051
1,457,948
737,135
724,555
980,232
Maximum LVR
95%
95%
95%
94%
95%
90%
94%
WA Current LVR
71%
70%
64%
63%
62%
62%
61%
Current LVR > 90%
5%
2%
1%
1%
5%
%
1%
Current LVR > 80%
25%
20%
9%
3%
16%
14%
7%
72%
77%
78%
76%
75%
66%
89%
Closing Date
Total Issuance (AUD m)
Loans
Loan to Value Ratio
Location
Metropolitan
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15
Firstmac High Livez
November 2013
The trust aims to provide stable monthly income from a diversified portfolio of
asset backed securities and short term money market securities
High Livez Did your investment return 9.63% over the last 12 months?
16
High Livez at a glance
Investment Overview
Investment objective
The trust aims to provide stable monthly income
from a diversified portfolio of asset backed
securities and short term money market securities
Investment timeframe
3 to 5 years
Investment Strategy
Minimum
Maximum
50%
90%
Cash products 10%
50%
RMBS
Minimum initial investment
$10,000
Minimum additional investment
$1,000
Minimum investment balance
$10,000
Valuations
Monthly
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17
Portfolio construction criteria
•
RMBS









•
‘Prime’ residential loans
Insurable loans
No adverse credit history
Registered first mortgage
No construction or development lending
Australian Issuers
Residential mortgage pools with weighted average LVR less than 80%
Minimum single A rated tranches but majority AAWeighted average life of the fund targeted between 3 and 5 years
Liquid assets invested across A1 rated banks call, term deposits and commercial
paper
High Livez Did your investment return 9.63% over the last 12 months?
18
Risk management constraints
•
Interest rate risk
 Floating rate assets only
 Bonds all reset over 1 month BBSW
•
Foreign exchange risk
 AUD denominated assets only
•
Compliance
 Perpetual Trustees is RE and control cash flow movement of fund bank
accounts
High Livez Did your investment return 9.63% over the last 12 months?
19
Managing RMBS risks
Net
Income
Mortgage Insurance
Borrower’s equity
High Livez Did your investment return 9.63% over the last 12 months?
20
Firstmac Historic Losses and Claims
Life to date Issuance since 2003
•
Firstmac RMBS Issued
= $12,000,000,000
•
Loss on Sale of defaulted properties
= $23,322,633
•
Claims paid by Mortgage Insurer
= $22,225,856
•
Shortfall
= $1,096,777
•
Shortfall as a % of Issuance
= 0.01%
This loss of 0.01% is covered by excess of Borrower Interest Paid over funding costs
There has never been a single dollar of losses against any Australian Prime Issued RMBS
High Livez Did your investment return 9.63% over the last 12 months?
21
RMBS Explained
Volume
Expected
Maturity
Rating
Coupon Rate
Class A
$450m
3 yrs
AAA
Bbsw1m + 1.10%
Class AB
$35m
6.1 yrs
AAA
Bbsw1m + 1.75%
Class B
$15m
6.1 yrs
AA-
Bbsw1m + 3.50%
TOTAL
$500m
Series
Interest Rate paid by Borrower
= 5.00%
Floating bank bill rate (bbsw1m)
= (2.50%)
Gross Margin
= 2.50%
Weighted Average Funding Margin
= (1.22%)
Net Margin
= 1.28%
High Livez Did your investment return 9.63% over the last 12 months?
22
High Livez past performance - as at 31 December 2013
12%
1.06
1.05
10%
1.04
1.03
8%
1.02
1.01
6%
1.00
0.99
4%
0.98
0.97
2%
0.96
0%
0.95
1 Year % Total Return (incl Distribution Return)
Distribution per unit based on opening month unit price
RBA cash rate
Ex distribution price
1 month
3 months
6 months
1 year %
2 year % pa
Since Inception
(29/3/11)
Distribution Return
0.51%
1.58%
2.91%
6.17%
6.62%
6.97%
Growth Return
-0.07%
-0.40%
-0.24%
3.46%
2.05%
1.67%
Total Return
0.44%
1.18%
2.67%
9.63%
8.67%
8.64%
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23
Returns
Example Portfolio
85% at bbsw1m + 3.50%
2.50% + 3.00% = 5.50%
15% at bbsw1m + 1.00%
2.50% + 0.15% = 2.65%
Gross Margin above bbsw1m
2.50% + 3.15% = 5.65%
Buy / sell spread, entry, exit fees
Nil
less Fees
-0.60%
Net Distribution above bbsw1m
2.50% + 2.55% = 5.05%
High Livez Did your investment return 9.63% over the last 12 months?
24
Questions…..??
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25
Disclaimer
Firstmac High Livez is issued by Perpetual Trust Services Limited (”Perpetual”) ACN 000 142 049 AFSL 236648 as
the Responsible Entity of the Trust. The Investment Manager is Firstmac Limted (”Firstmac”) ACN 094 145 963 AFSL
290600. Firstmac High Livez and the Product Disclosure Statement (PDS) is available at www.Firstmac.com.au or by
contacting Firstmac on 13 12 20. The information in this document is general information only and does not take into
account any person’s situation, financial objectives or needs. You should read the PDS in its entirety before making
any decision to invest. Perpetual and Firstmac strongly recommend you obtain independent professional financial
advice on the risks and suitability of this product. The value of your investment in High Livez could go down as well as
up. Past performance is not a reliable indicator of future performance. Restrictions may apply to the amount and
timing of withdrawal requests.
Performance is calculated on an initial investment of $10,000 with distributions reinvested. Ongoing fees and
expenses have been applied however individual taxes are excluded.
The Zenith Investment Partners (“Zenith”) ABN 60 322 047 314 rating (assigned January 2013) referred to in this
document is limited to “General Advice” (as defined by section 766B of Corporations Act 2001) and based solely on
the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to
purchase, sell or hold the relevant product(s), and Zenith advises that individual investors should seek their own
independent financial advice before investing in this product. The rating is subject to change without notice and Zenith
has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund
manager and product against accepted criteria considered comprehensive and objective.
High Livez Did your investment return 9.63% over the last 12 months?
26