Jeffrey D. Sherman, Special to CMT
The function of Canada’s securities regulation is to protect investors. To help investors make informed decisions, regulated public markets require broad access to information on exchange-listed companies.
In the June 9 article entitled “A Threat to Private Financing,” it was noted that Ontario has restrictions on the sale of securities. These limit many investors to buying only publicly traded Mortgage Investment Corporations (MICs), and not private MICs. This is sound regulatory policy.
For one, it encourages most investors to focus on public markets that have better disclosure and a stronger regulatory environment. Because they trade on the TSX, public MICs are liquid investments with transparent share pricing.
There are currently eight public MICs offering a variety of high-yield investments. Each has comprehensive quarterly reporting and seven of them provide monthly, predictable cash flows to investors.
Public MICs offer all of the advantages of investing in exchange-traded securities — they are easy to buy and sell, many are followed by investment analysts, you can borrow on margin against them, and so on.
Unlike their private cousins, public MICs do not have the illiquid lock-up provisions. During the market turmoil of 2008-2009, several private MICs restricted redemptions at a time when many of their shareholders needed liquidity.
It is often assumed that private MICs offer higher returns to shareholders than public MICs. Comparing net returns can be misleading because different funds can have very different risk profiles. Some private MICs, for example, have high yields because they choose to invest at the riskier end of the alternative market.
A better measure of return is to look at net yield after management fees and administration costs. I’ll reference our fund solely as an example. Atrium Mortgage Investment Corporation (TSX: AI) has total expenses of about 1.25% of its mortgage portfolio — a low figure. Its net return to shareholders in 2013 was 8.5% of book value and 7.7% based upon current market price, with a relatively conservative portfolio averaging 64% loan-to-value with 90% first mortgages.* In short, public MIC returns can compare favourably with the typical returns of most large private MICs.
One “disadvantage” of public MICs, if one can call it that, is that the market value of the investment fluctuates daily. That occurs because the shares are easy to sell, so the market price changes. But if you’re a long-term investor, this should be largely inconsequential. Despite any ups or downs, a public MIC will generally distribute regular ongoing dividends (most commonly monthly dividends, with often an extra annual dividend as well).
Publicly traded MICs offer a reliable way for investors to access the alternative, non-bank mortgage market. Private MICs that operate under less regulation than their publicly traded counterparts need to be approached with more caution. For many less savvy investors, restricting their activity to the public markets protects their savings.
* Figures based on actual 2013 dividends, AI’s portfolio at March 31, 2014, and the market price at June 12, 2014. These figures exclude the change in share price during 2013, which was roughly zero.
About the Author: Jeffrey D. Sherman is a business author and Chief Financial Officer of Atrium Mortgage Investment Corporation, one of Canada’s largest public MICs.