1 Investing for Income February 2014 High Livez Did your investment return 9.63% over the last 12...

1

Investing for Income

February 2014

High Livez Did your investment return 9.63% over the last 12 months?

2

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?


3


Product comparison – Term deposits, Mortgage funds, Bond fundsAttribute 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%

4


Yield comparison – Term deposits, Mortgage funds, RMBS

Source: RBA, Macquarie, SQM Research, Morningstar

Jan-2007

Mar-2007

May-2007

Jul-2007

Sep-2007

Nov-2007

Jan-2008

Mar-2008

May-2008

Jul-2008

Sep-2008

Nov-2008

Jan-2009

Mar-2009

May-2009

Jul-2009

Sep-2009

Nov-2009

Jan-2010

Mar-2010

May-2010

Jul-2010

Sep-2010

Nov-2010

Jan-2011

Mar-2011

May-2011

Jul-2011

Sep-2011

Nov-2011

Jan-2012

Mar-2012

May-2012

Jul-2012

Sep-2012

Nov-2012

Jan-2013

Mar-2013

May-2013

Jul-2013

Sep-2013

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1 yr TD RMBS AA- Note Yield Mortgage Funds

5


Risk/Return comparison – Term deposits, Bond fund, Mortgage funds

Higher risk

Lower risk

Lower return Higher return

Term deposit

RMBS bond fund

Mortgage fundsProperty

Australian shares

International shares

6

Types of Clients

• The Retiree

• The Independently Wealthy

• The Balanced SMSF Client

• The Importance of Income for every Client


7

Retiree Portfolio


Asset Classes Percentage Amount Income

Cash 5% $50,000 $1,000

Fixed Income- TD’s - Firstmac High Livez

35%$150,000$200,000

$5,250$11,000

Australian Equities- Direct- Funds

25%$200,000

$50,000$10,000

$2,000

International Equities- Funds

5%$50,000 $1,000

Property 30% $300,000 $15,000

Totals 100% $1,000,000 $45,2504.5%

8

Independently Wealthy Portfolio



Cash 2% $40,000 $800

Fixed Income- TD’s - Bonds- Firstmac High Livez

18%$60,000

$150,000$150,000

$2,100$6,000$8,250


35%$500,000$200,000

$25,000$8,000


15%$300,000 $6,000

Property 30% $600,000 $30,000

Totals 100% $2,000,000 $86,1504.3%

9

Balanced SMSF Client



Cash 5% $15,000 $300

Fixed Income- TD’s - Firstmac High Livez

35%$52,500$52,500

$1,838$2,888


25%$60,000$15,000

$3,000$600


10%$30,000 $600

Property 25% $75,000 $3,750

Totals 100% $300,000 $12,9754.3%

10

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

11

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%

12

The Australian RMBS Market


13

The Australian RMBS Market

• The first Australian RMBS was issued in 1992

• 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

• 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

• No noteholder of any prime Australian RMBS has ever lost money

So what is it that I am buying?


14

Bonds backed by Australian home loans


Series Firstmac 1-2010 Firstmac 2-2011 Firstmac 1-2012 Firstmac 3-2012 Firstmac 1e-2013

Closing Date Aug-10 Dec-11 Aug-12 Dec-12 Jun-13

Total Issuance (AUD m) 416 300 300 440 500

Loans

Number of Loans 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

Loan to Value Ratio

Maximum LVR 95% 95% 92% 95% 95%

WA Current LVR 76% 69% 68% 71% 71%

Current LVR > 80% 32% 20% 20% 22% 25%

States

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%

% of loans > 30d arrears 0.45% 0.25% 0.11% 0.24% 0.00%

15

Recent issuance comparison table


Series Firstmac1e-2013

Resimac1-2012

AMP Bank1-2012

Westpac1-2012

ME Bank1-2012

ING Bank1-2012

BankWest1-2011

Closing Date Jun-13 Jun-12 May-12 May-12 Apr-12 Apr-12 Nov-11

Total Issuance (AUD m) 500 500 500 1,150 1,000 800 500

Loans

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

Loan to Value Ratio

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%

Location

Metropolitan 72% 77% 78% 76% 75% 66% 89%

16

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


17

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 initial investment $10,000

Minimum additional investment $1,000

Minimum investment balance $10,000

Valuations Monthly

Minimum Maximum

RMBS 50% 90%

Cash products 10% 50%


18

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 AA-

Weighted average life of the fund targeted between 3 and 5 years

• Liquid assets invested across A1 rated banks call, term deposits and commercial paper


19

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


20

Managing RMBS risks

NetIncome

Mortgage Insurance

Borrower’s equity


21

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


22

RMBS Explained

Series 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

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%



23

High Livez past performance - as at 31 December 2013

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%

1 2 3 4 5 6 7 8 9 10 11 120%

2%

4%

6%

8%

10%

12%

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

1.03

1.04

1.05

1.06

1 Year % Total Return (incl Distribution Return) Distribution per unit based on opening month unit price RBA cash rate Ex distribution price

24

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%


25

Questions…..??


26

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.


Date post:	17-Jan-2016
Category:	Documents
Upload:	nathan-crawford
View:	214 times
Download:	0 times

1 Investing for Income February 2014 High Livez Did your investment return 9.63% over the last 12...

Documents