The Firstmac High Livez Fund provides investors with exposure to a diversified pool of investment grade, medium term, Asset Backed Securities (ABS) supplemented with short term money market securities for liquidity.
The ABS are composed of Australian Residential Mortgage Backed Securities (RMBS) while the money market securities comprise highly rated corporate debt securities. The Fund invests in diversified series of RMBS tranches. While these are predominantly issued by FirstMac there is also an increasing diversification across issuers as FUM builds.
Firstmac’s core business is as a housing lender and servicer of loans with the lending program self-funded by RMBS issues. Firstmac has issued in excess of $10bn in RMBS to date. Historically, RMBS has been an asset class limited to institutional investors with few opportunities for retail investors to gain pure exposure and thus the Fund is relatively unique in the Australian marketplace. The Fund performance target is to generate an excess return of 3.0% over the 30 day Bank Bill Swap rate.
Zenith’s View
For the purposes of our evaluation, Zenith has classified High Livez as a Mortgage Fund – Specialist. While technically not a mortgage fund by traditional definitions given the Fund invests in securitised mortgages rather than mortgages directly, ultimately the underlying assets remain the same on a look through basis and Zenith believes that this is the most accurate description from an asset allocation perspective.
Zenith sees the Fund as representing a good choice for investors seeking solid monthly income yields in excess of those offered by most other traditional yield focused funds. Despite the Fund having a limited track record to date, Zenith believes that positive fundamentals deliver a relatively attractive outcome.
In particular, we see a strength of the Fund in having Firstmac as the manager given their deep experience in the RMBS space which will provide them with the specialised expertise to be able to source, evaluate and manage the RMBS for the portfolio.
On a historical basis, Australian prime RMBS investments have been an exceptional performer generating strong risk adjusted returns. However it should be understood that the Fund will be investing in a securitised portfolio of mortgages which are subordinated to the interests of senior tranches and therefore will be first in line to crystallise losses if default levels are high enough to overwhelm the various credit enhancements in place.
While Zenith has reservations around Australian housing markets from an equity stakeholder’s perspective, we believe that an investment of the debt side of the housing equation retains solid merit as it appears that Australian prime RMBS would require an interlinked series of significant events before any losses to RMBS investors would start to crystallise.
Zenith sees the Fund as being most suited to those seeking moderate capital stability and an income return which provides a solid excess over the cash rate. Similar to mortgage funds, the principal risks will be related to credit assessment processes, borrower defaults, property values, macro economic factors and liquidity.