Income Report / Income Report; A New Investment Opportunity that is ‘outside the box’!

By Market Matters 16 August 17

Income Report; A New Investment Opportunity that is ‘outside the box’!

Income Portfolio Update 16/08/17

The MM Income portfolio declined by 0.43% on the week, which was pretty much in-line with the ASX 200 which lost -26pts/-0.45%. Overall, the portfolio has increased by 0.662% since inception (5th July 2017). Finally, some income flowing which is always nice, with GMA trading ex-dividend yesterday for 14c fully franked,  CBA and SUN trading ex-dividend by $2.30 and 40cps respectively today – all fully franked. The portfolio skew remains Equities (63.5%), Hybrids (27.5%) and cash of 9%. In today’s report we’ll focus on a new income opportunity – the MCP Master Income Trust. This will be a listed trust structure, traded on the ASX under code MXT and we like it because it gives a sensible, well-constructed exposure to floating rate corporate debt that is focussed outside the financial space.

Firstly, no changes to the Income Portfolio in the past week, however as reports have dropped we’ve updated our expected income projection, using Bloomberg Consensus where available. These numbers are inclusive of any franking benefit if applicable.

The MCP Master Income Trust

First and foremost, Shaw and Partners, which is a shareholder in Market Matters is a Co-Manager to this new offer which is available to investors as an Initial Public Offering. We’ve had the MCP Investment Team in yesterday morning to present their strategy, outline their experience, and importantly, detail their track record. In short, we like this deal for 6 key reasons;

  1. It will be listed & traded on the ASX and there is already ~ $200m of demand which augers well for liquidity.  The Listed Investment Trust will pay a monthly distribution.
  2. They are focussing on Corporate Loans - not bank debt and this provides good diversification. The hybrid market in Australia is dominated by Bank securities and the MM Income Portfolio is reflective of that. Diversification into the corporate loan space is attractive
  3. Interest rates are floating, rather than fixed, giving protection (and higher income) as interest rates rise – the target return is +3.25% over the RBA cash rate which sits at 1.50%. Upon listing, the Trust is expected to yield 4.75%, rising in-line with the RBA cash rate.
  4. The Trust will be diversified, with no more than 5% of the Trust allocated to one loan + it will be Australian centric with greater than 80% of loans to Aussie corporates, with the Trust targeting 75-100 different exposures. Although default rates in Australia are extremely low, as we outline below, diversification in this space is really important.  
  5. Experience – the guys running the show have a very strong track record, they’re already managing $2bn in this space for Wholesale Investors, and the team has a very strong relationship with NAB (after being spun out of NAB a few years ago). NAB own 35% of MCP, and the MCP investment committee (comprised of 4 partners) own equal shares in the business – or in other words, the guys on the front line have skin in the game.
  6. And finally, a lot of investments like this are let down by their fee structure in a few different ways. Obviously the management fee is important, but that’s very transparent, there are often other fees, particularly listing fees that are worn straight up by the investor, which is wrong in our view – more on this below. 

All in all, this looks a strong candidate for the MM Income Portfolio – and a position will be taken.

Key Components

The Listed Investment Trust (LIT) is looking to raise a maximum of $500m and we’re being advised they have $200m committed in the first week or so of the offer being open. Three examples of the type of loan deals the fund may invest in are outlined below. MCP sit with a syndicate of banks to finance these sort of deals. Importantly, these are loans that the banks hold on their balance sheets. At time of writing, MCP are yet to have a loan they have invested in default (within their Wholesale Funds).

3 examples

In terms of performance, MCP has not run any other strategies for retail investors. Nonetheless, none of the four funds managed by MCP have posted a negative month. Over the three years ended June 2017, the Diversified Australia Senior Loan Fund has delivered an annualised return of 4.58% p.a. The Secured Private Debt Strategy (which is now closed to new investment but operates a similar strategy to the more recent Secured Private Debt Fund II) has delivered 8.12% p.a. for the year ended June 2017. Clearly, they have a strong track record in this defensive asset class.

As suggested above, actual default rates are very low in Australia, and importantly the loans are priced on a floating rate.

They have a minimum of $100m to raise however they apparently have $200m committed, and we’d expect them to get over 300m at least, and potentially cap out at the maximum of $500m. If we  assume $300m raised the all in fee structure / cost to unit holders is 0.66% pa. This is inclusive of the costs associated with the listing which are recovered over time (not paid by the Trust straight up). A lot goes into managing a loan book, more than most think and the management fees of 0.30% based on $300m look fine. All in all , the fee structure is competitive to gain access to assets / and the associated income stream not normally accessible to retail investors, but importantly, the managers expertise.

Fee structure

We touched on the expertise of the managers, and clearly in an investment like this experience, credibility & track record is key + at MM we like to see skin in the game or an ‘alignment’ between investor and investment manager. Clearly, MCP tick these boxes on all fronts.

The other aspect discussed above, is around diversification, and they certainly tick this box, in terms of corporates, in terms of tenure (duration of loan) and in terms of risk / return.

Ratings

Both Lonsec and Bond Adviser have a positive rating on this fund, with the Lonsec Report available here.

If you’d like more information about participating in the offer, please get in touch with the Market Matters team for a priority allocation.

Key dates Here

Conclusion (s)

The MM Income Portfolio continues to edge along, although clearly it is only in its early days

SUN & CBA are trading Ex-Dividend today, GMA went ex-dividend yesterday

We are keen on the MCP Listed investment Trust that will be listing in early October.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Wednesday.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 16/08/2017.  11.30AM.

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