How to spot the good eggs

Louis Christopher

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Mortgage trusts have had a chequered history and the period since 2008 has been no exception with a number of these mortgage funds freezing up. The most recent case, of LM Investment Management, has highlighted once again some of the risks in this sector.

So should investors avoid this sector or is it simply like other asset classes where there will always be a “few bad eggs”?

SQM’s view is that, provided you do your research, you can find some very good mortgage trust offerings that have withstood the test of time, offer a stable return that beats that of term deposits and are conservatively managed. Good mortgage trusts generally have the following attributes:

• The manager of the trust has been in business for many years and is financiallystrong.

• The manager has a solid track record.

• The assets in the trust are diversified

• Loan to value ratios are no greater than 70%

• There are no related-party transactions with any of the loans.

• The manager and the product has been well rated by research houses (such as SQM Research).

• The trust tends to avoid construction and development loans.

• The fees are reasonable at no more than 2.5%.

LM is a clear case of a weak fund in that the assets were highly concentrated on Queensland’s Gold Coast with property development loans. It also had a history of other products freezing up, it tended to avoid being rated by research houses and its fees were very high.

Yes, as in every other sector and asset class, there will be some good managers and some bad ones. But if you do your research and know where to look, the risk of holding a bad egg can be minimised.

Louis Christopher, managing director SQM Research

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