Balancing Risk and Reward with Pooled Mortgage Funds
Risk and reward are underlying concepts for all investments. Whether trust deed investments or open-ended mutual funds; an investor’s return and risk tolerance are closely correlated. History is another factor that affects investment decisions. Bull markets turned bearish and cash parked on the sidelines as down markets rebound each influence investor psychology moving forward.
The continued strength of the American housing sector offers a glimpse into managing investment risk amidst market strength with recent history as a backdrop. In terms of fundamentals, a flurry of positive news continues to attract interest in fixed income investments. An average 30 year fixed mortgage was near record lows as of late February. Meanwhile, wage growth continues to rebound from anemic rates in 2014.
Pooled mortgage funds are a convenient means for investors to tap into the housing sector and generate cash flow. Mortgage Backed Securities (MBS) are popular choices to participate in real estate markets with lower minimum investments and mitigate risk through diversification. However, the structure and management of an MBS greatly affects the risk/reward profile, which provides insight into making investment choices for all markets.
Cause for Pause
Why are cheap money and strong economic data cause to rethink fixed income strategies?
Memories of the recent housing crash partly explain risk aversion among many investors. While a MBS may be diversified, the underlying portfolio is still subject to interest rate risk. Juicy coupon rates with long maturities have reinvestment risk as rates drop, which means investors have difficulty matching that cash flow in a MBS of comparable risk.
Aside from reinvestment risk; the NAV volatility of securitized investments also creates concerns for many investors. A REIT, high yield mutual funds and other fixed income investments may be subject to these fluctuations.
So, where may income investors turn for cash flow with attractive yields compared to risk-free treasuries and fewer pitfalls than mortgage-backed-securities?
The WFP Income Fund is a pooled mortgage fund with a favorable risk-reward profile that mitigates interest rate sensitivity and market correlation, while offering competitive yields. This stems from the fund’s structure and the loans that comprise the portfolio.
Market Correlation-Adapt and Thrive
Stable NAV: Unlike the mark-to market pricing of a Mortgage Backed Security; loans in the WFP Income Fund are held to maturity with a stable NAV. Conversely, a securitized MBS may need to sell off loans as investors redeem shares or to meet other obligations.
Short Loan Maturity: Meanwhile, the fund’s shorter loan maturities of typically 3 years or under further protect against shifts in rates or fundamentals that may affect NAV. Translation: A shorter time horizon has reduces the chance of surprise to repayment. Indeed, the fund has maintained a stable Net-Asset-Value since inception.
Low LTVs: Loan-to-value ratios of 60% or below are typical and dampen risk against dips in property values.
Less Sensitivity to Interest Rates
Prevailing interest rates are a catalyst for fixed income investing. ‘Good Yield’ is a dynamic bogey that is made easier to hit with a flexible approach to lending. The WFP Income Fund can adapt interest rates on new loans issued to match changes in the lending environment. Rates on the rise? Investor appetite for yield and borrower need for capital can each be met with new funding. This enables the fund to quickly adjust risk premiums on each loan based on macro factors and the borrower itself.
A laddered portfolio with staggered maturities further aids in reducing rate sensitivity. While the fund holds shorter maturity loans overall, a one year loan will respond differently to rates changes than a 3 year maturity. Mortgage backed securities may have more constraints to laddering based on liquidity, market conditions and need for more homogeneous assets within the underlying pools.
Increasing yield and lowering risk are common goals for fixed income investors. Evaluating pooled mortgage funds for structure and philosophy helps investors make informed decisions.
How may the WFP Income Fund improve the risk-reward profile of a bond portfolio?
- Mortgage Backed investors or those in search of REIT alternatives can increase monthly cash flow with less risk to principal from market changes.
- Risk adverse investors who seek an attractive yield without the mark-to-market pricing of high yield investments or sub-prime funds.
- Yield-hungry investors in treasuries or FDIC paper seeking higher income.
To learn more about short term, the WFP Income Fund and Wilshire Finance Partners, please contact us at (866) 575-5070.
The information contained on this Website (the “Overview”) is not an offer to sell or the solicitation of an offer to purchase trust deed or mortgage investments, or the securities of the WFP Income Fund, the WFP Opportunity Fund or other securities or investments (individually and collectively, the “Investments”) offered through Wilshire Finance Partners, Inc. (“Wilshire”). The purpose of this Overview is to provide an overview of one or more Investments and its private placement. Persons interested in learning about one or more Investments and their private placement will be provided with the Private Placement Memorandum, Operating Agreement (as applicable), Subscription Agreement and other related documents (collectively and inclusive of exhibits and any supplements thereto, the “Memorandum”) prepared by Wilshire, which provides a description of the particular Investments, the terms of the private placement, a discussion of risk factors, and other information related to such Investments. To the extent that there is any inconsistency between the information provided in this Overview and the Memorandum, the Memorandum shall control. This Overview and the Memorandum contain certain forward-looking statements regarding the Investments. The forward-looking statements are based on current expectations that involve numerous risks and uncertainties which are difficult or impossible to predict accurately and many of which are beyond the control of Wilshire’s management, including, but not limited to, national and international economic conditions, changes in legislation, and other factors that can disrupt economic stability. Although Wilshire believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Wilshire, any placement agent, or any other person, that the respective objectives and strategies of investing in one or more Investments will be achieved. Investments be made solely by accredited investors (which for natural persons, are investors who meet certain minimum annual income or net worth threshold), who are provided with the Memorandum and who complete, execute and deliver the subscription documents included therein. The Investments are securities and each of the Investments are being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Regulation D, Rule 506(c), and are not required to comply with specific disclosure requirements that apply to securities registered under the Securities Act. Neither the Securities Exchange Commission nor any state securities regulator or agency has passed upon the merits of or given its approval to the securities, the terms of either offering, or the accuracy or completeness of any offering materials. As securities offered in an exempt transaction, each of the Investments are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the Investments. Past performance is not indicative of future results. The Investments involve substantial risk, including loss of investment, and is not suitable for all investors. Loans are made by Wilshire Finance Partners, Inc., Bureau of Real Estate Broker’s License number 01523207. Loans made by Wilshire Finance Partners, Inc. outside California will be made pursuant to licenses, authorizations or exemptions in each other state.