Wednesday 06 March 2019 by Kieran Quaine At FIIG

Changes to Managed Income Portfolio Services (MIPS) Investment Programs

In response to a number of changes in both market and business conditions, the MIPS Portfolio Management Team (PMT) have announced changes to their three flagship Investment Programs that will improve their opportunity to deliver the MIPS value proposition.

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The MIPS value proposition: Professional fixed income management that delivers high yield and distributable income, derived through direct exposure to a diversified pool of Investment Grade (IG) and Non-IG debt assets, held in your own Individually Managed Portfolio (IMP).

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These changes will be effective from 5 April 2019 for existing clients and effective immediately for new client subscriptions. The yield outcomes (above) for each Investment Program are estimated using current price data and exposure that is consistent with the MIPS macro and micro economic investment strategy, as documented in our most recent quarterly report: Dec 2018 Quarterly Report

A summary of the increased yield and diversity achieved across each exposure category for all Investment Programs, as a function of these changes, appears in Table 1 below. Further detailed information on all MIPS investment programs is available on the FIIG website: https://www.fiig.com.au/portfolio-management/investment-programs

Changes impacting all Investment Programs:

The minimum investment amount for new investors has increased from $250,000 to $500,000. Existing investors, with account sizes below the new $500,000 limit, will be ‘grandfathered’, meaning they will be able to retain their account size and are not impacted by the change.

We have implemented this change for scale economy reasons. It aligns the recent development of more issuance comprising denomination minimums of $50k, alongside our maximum exposure per issuer limit of 15% across all programs. Current average IMP account sizes exceed $500k.

Changes impacting the Income Plus Investment Program only:

The Investment Mandate (IM) has been changed to allow investment in secured and unsecured and  unrated subordinated debt, to a maximum of 20% of total capital. Prior to the change, the IM allowed a maximum of 75% of capital to be invested only in secured and unsecured unrated debt that was ranked senior. The maximum exposure to total unrated debt remains unchanged at 75%. Subsequently, any investment in subordinated unrated exposure will reduce the investment capacity within the senior unrated sector. It will additionally reduce the investment capacity in the Investment Grade subordinate sector, as total subordinate exposure remains capped at 20%.

We have implemented this change because of the diluting pool of senior (secured and unsecured) unrated debt assets available. Maturities and early repayments of senior unrated assets have successfully delivered high returns for investors, yet have come at the price of lower subsequent returns given the diluted opportunity for replacement. Our Debt Capital Markets (DCM) team, having originated in excess of $2bn of debt assets, is advising that the recent prevalence of issuance of unrated subordinated secured and unsecured debt assets will continue. Whilst the opportunity to build diversity within the senior unrated asset pool is diluting, we have the opportunity of bolstering both diversity and yield through these changes.

A number of customised investment mandates that have exposure to this asset pool have historically delivered an average annual performance uplift of ~1.00% above Income Plus.  

Graph 1

^ Max 30% Subordinate, Max 100% Non-IG, * Max 20% Subordinate, Max 75% Non IG. Both: Min 12 months investment.

Changes impacting the Conservative Income and Income Plus Investment Programs only:

Less complicated changes to both investment mandates now allow investment in all rated Asset Backed Securities (ABS), rather than the restrictive allowance to invest in only Residential Mortgage Backed Securities (RMBS), which itself is a subset of the ‘total’ ABS sector. Prior to the change, a maximum of 20% of capital could only be invested in RMBS. The maximum exposure to total (now) ABS remains unchanged at 20%.

We have implemented this change for the purpose of diversifying our exposure within the ABS sector and currently await new issuance. The RMBS sector, whilst attractive, is secured by real property and although not alarming, the recent dilution of property values must be acknowledged. By investing in other ABS such as products secured by auto loans or credit card loans (receivables), which usually have shorter maturity profiles, we are able to maintain or improve yield within the ABS exposure sector, reduce maturity exposure profiles and improve exposure diversity.

Changes deliver opportunities for Core Income investors:

The only change directly impacting Core Income investors (other than those with existing balances of less than $500,000) is the increase in the minimum subscription amount.  However, indirectly, all Core Income investors will benefit from the lower competing demand for senior unrated assets from the Income Plus Investment program.  The IM for Core Income permits an exposure to unrated senior assets of up to 25%.

Alternative strategies for investors given these changes:

Existing investors have been advised of strategy alternates they may wish to consider, should the changes to the investment programs outlined above be perceived to be materially adverse to their circumstances. Those strategies are equally relevant for new investors considering opening a MIPS account, except for the requirements to adhere to the new volume minimums.

  • Where the perceived risk of continuation in Income Plus is considered adverse, they might consider switching to the alternate Core Income or Conservative Income Investment Programs. Each of those programs have a lower management fee of 0.65%.
  • Those with account sizes in excess of $500k, of which exposure is solely to Income Plus, might consider rebalancing the exposure between Income Plus and Core or Conservative Income, at 50% each. The exposure credit metrics of one of these strategies appears in Table 2 below.

Table 1: Model Portfolio exposure metric changes.

Graph 2

The new (Income Plus) model portfolio will improve book value entry yield by ~0.80%, and improve diversity, care of the addition of 4 assets. The credit exposure changes have minimal maturity extension impact.

Readers may note those assets in the senior unrated sector yield slightly lower in Income Plus than they do in Core Income, at 6.54% and 6.82% respectively. Income Plus, having capacity to take more than twice the exposure in this sector, does so. But the expense of diversity, being 10 as opposed to 7 unique names, is a slight reduction in yield as a function of the remaining pool of opportunity being thinner, and lower yielding care predominantly of shorter maturity profiles.

Table 2: Model exposure outcomes of a 50/50 capital allocation to Income Plus & Core Income.

Graph 3

Existing investors (>$500k) seeking to moderate their credit risk given the changes made, could still maintain yield and improve diversity over a sole prior exposure to Income Plus, whilst near matching their prior total unrated credit risk. By splitting capital across both Income Plus and Core Income equally, the yield outcome near perfectly matches the prior (old) Income Plus model portfolio results.

Customisation of your IMP will now have a broader opportunity.

The impending new issuance pipeline, dominated by the likely issuance of subordinated secured and unsecured unrated assets, is a significant high yield opportunity. Those potential investors who wish to pursue a higher level of (diversified) exposure to this sector, who have in excess of $5m, are invited to contact Marcus Blake, Director Distribution, Managed Investments on 0427 063 362 to discuss customisation.

Customised Investment ProgramsEnquiries from all investors are invited:

If you are an existing investor or are contemplating opening a MIPS IMP, or have any questions regarding the changes and how they impact potential risk and return, please contact your FIIG Relationship Manager or one of our experts on 1800 01 01 81.

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