Fixed Income Investments
Fixed income investments generally pay a return on a fixed schedule, but the amount of the payments may vary. Stated differently, the date the payment is made may remain the same (or is fixed), but the actual amount of the payment (and thus the return to the investor) in each payment period may change.
Individual bonds are the best known type of fixed income security, but the category is diverse and includes, among other things:
- U.S. Treasuries
- Certificates of Deposit
- Municipal Bonds
- Commercial Paper
- Investment Grade Corporate Bonds
- High Yield Bonds (also known as “Junk Bonds”)
- MBS, ABS and CDOs(mortgage-backed securities, asset-backed securities, and collateralized debt obligations)
Mortgage-backed securities are part of the broader category of pooled mortgage funds. There are a number of variations of this type of investment. Therefore, a pooled mortgage fund may generally share some of the same attributes as mortgage-backed securities and asset-backed securities, such as the pass-through of the cash flows received from the underlying mortgages and deeds of trust. However, depending on how the fund is structured, it may not have the same complexity or risk profile as some mortgage-backed securities. If structured properly, a pooled mortgage fund may further reduce or eliminate potential correlation to the bond markets and other fixed income securities. In addition, a pooled mortgage fund may be able to reduce its sensitivity to interest rate changes.
Fixed Income Alternatives
The WFP Income Fund, LLC (the “WFP Income Fund”) and the WFP Opportunity Fund, LLC (the “WFP Opportunity Fund”) are pooled mortgage funds managed by Wilshire Finance Partners (“Wilshire”). They are designed to be short-term fixed income alternative investments that are not correlated to the bond markets or other fixed income securities, and to have little to no sensitivity to interest rates.
Little to No Correlation.
The WFP Income Fund consists of a pool of mortgages and deeds of trust with lower loan-to-value ratios, higher gross coupons and shorter maturities. As the name suggests, the WFP Opportunity Fund seeks to take advantage of real estate-based opportunities which have the potential for higher returns.
Each fund is only offered to accredited investors through a private placement and they are not exchange traded. Therefore, neither fund experiences the market risk or related volatility associated with certain other exchange-traded fixed income securities.
Further, the loans in each of the WFP Income Fund and WFP Opportunity Fund are generally held to maturity. By not “trading” in loans and striving to maintain diversified portfolios of good performing loans with a low risk of collateral impairment, the loans in each of the WFP Income Fund and WFP Opportunity Fund’s portfolio have historically been valued at par and there have been no mark-to-market adjustments.
The result of this approach is that the WFP Opportunity Fund has been able to generate cash flow for investors through quarterly dividends and produced a net asset value (NAV) which experienced a moderate increase through year end 2015. Further, the WFP Income Fund was able to generate cash flow for investors through consistent monthly dividends and has maintained a stable NAV through year end 2015.
Little to No Sensitivity.
Sensitivity to interest rates may affect real estate loans several different ways. At the time the loan is originated current market rates may affect the rate that may be charged on the loan. After the loan is originated, the value of the loan relative to changing interest rates similar to the inverse relationship that bonds experience in a changing interest rate environment. Absent other market factors, when rates increase, the price of a loan will decrease and vice versa – when interest rates decrease, the price of a loan will increase. Therefore, unless an investor holds the loan to maturity the price of the loan will be sensitive to interest rates.
Changing interest rates may also affect how a loan performs in a portfolio. Long term loans with higher interest rates may have accelerated repayments as rates decrease. Conversely, long term loans with lower interest rates may have a slower repayments as rates increase. Either case may affect the overall performance of a pooled mortgage fund because of the inability to efficiently deploy or redeploy capital and maintain the fund’s yield targets.
As addressed above, the loans in each of the WFP Income Fund and WFP Opportunity Fund have shorter maturities (e.g. generally between 1 to 3 years in term), the loans are not traded or securitized, and are generally held to maturity. Further, the pool of loans held in each portfolio have staggered maturities. The result are portfolios that have little to no sensitivity to interest rate changes relative to the existing loans held by the funds. In addition, when deploying new capital or redeploying capital after a loan repayment, each fund has the ability to adjust the interest rates on new loans causing in a lag effect on the overall return within the funds, regardless if the funds are in a declining or rising interest rate environment. Absent other factors, this helps Wilshire provide returns on a consistent schedule, albeit the amount of the returns may vary.
How is the dividend payment in each fund determined?
The dividend of each fund is paid from the Distributable Cash of that fund. The Distributable Cash is the cash received by the respective fund, less the fund’s expenditures, working capital and reserves.
The cash received by the WFP Income Fund is predominantly from the interest received on the underlying loans in its portfolio. The Distributable Cash and the amount of the dividend is determined through a reconciliation conducted each payment period by Wilshire (as the fund’s Manager), the fund’s auditor, and fund’s custodian. The dividend for the WFP Income Fund is determined and paid to the fund’s investors monthly.
The WFP Opportunity Fund receives interest on the underlying loans in its portfolio and through the gains and participating interest it receives on the joint ventures and participating loans in its portfolio upon a realization event (e.g. the sale or refinance of the property). Unrealized gains are accrued by the fund and are reflected in the net asset value of the fund, but do not affect the Distributable Cash of the fund until realized. The Distributable Cash and the amount of the dividend is determined through a reconciliation conducted each payment period by Wilshire (as the fund’s Manager), the fund’s auditor, and fund’s custodian. The dividend for the WFP Opportunity Fund is determined and paid to the fund’s investors quarterly.
How is the net annualized return for each fund determined?
The net return of the WFP Income Fund is determined by subtracting the management fee, fund expenses, reserves and other accruals related to the fund’s operation from the accrued interest payable on the underlying pool of loans for the period. To the extent there are any non-performing loans or loans on non-accrual, the interest on those loans is not included in that period’s accrued earnings. The WFP Income Fund reports its return on annualized basis using the year-to-date accrued net earnings through the reporting period.
The net return of the WFP Opportunity Fund is determined by subtracting the management fee, fund expenses, reserves and other accruals related to the fund’s operation from the accrued interest payable on the underlying pool of loans for the period and gains and participating interest accrued on the joint ventures and participating loans in its portfolio for the period. To the extent there are any non-performing loans or loans on non-accrual, the interest on those loans is not included in that period’s accrued earnings. The WFP Opportunity Fund reports its return on annualized basis using the year-to-date accrued net earnings through the reporting period.
What is the relationship between the net annualized return, dividend amount and total return?
Although dividends are declared at fixed periods for each fund, the earnings in each period for the respective fund will vary and both the percentage and the amount of the dividend paid may be higher or lower than previous periods on a standalone basis. Further, the funds are not exchange traded and each strives to distribute virtually all of the available Distributable Cash in each dividend period. As a result, Wilshire believes that the net annualized return is a better representation of the overall performance of the funds.
Because the earnings of the WFP Income Fund primarily derive from the interest received on the underlying loans and Wilshire strives to distribute virtually all of the Distributable Cash in each period, there are generally no retained earnings and the NAV of the fund ex-dividend has remained stable at approximately $1,000 per Unit. As a result, the year-to-date dividends paid and net annualized return for the WFP Income Fund is roughly equivalent to the total return of the fund 1.
The WFP Opportunity Fund derives its earnings from both the interest received on the underlying loans and the accrued, unrealized gains on the portfolio investments. Because they are not part of the Distributable Cash, the accrued unrealized gains are captured as an asset on the fund’s balance sheet and are reflected in the fund’s NAV. Therefore, the dividends paid as a percentage would not reflect to the total return of the fund. The net annualized return reported by the fund is roughly equivalent to the annualized total return of the fund through the reporting period because it includes the dividends paid and the unrealized gains reflected in the NAV.
1 The total return for a bond includes the value of the coupon payments and as well as the appreciation or depreciation in the bond’s price.
What role should the WFP Income Fund or WFP Opportunity Fund play in an investor’s portfolio?
Both the WFP Income Fund and WFP Opportunity Fund are short term fixed income investments that generate income. Neither fund has the same market risk and volatility of traditional fixed income securities.
The role of the WFP Income Fund is a short term fixed income alternative investment. It is suited for conservative investors who would like to receive higher income with greater consistency as compared to other 1 to 2 year fixed income securities, but without commensurately greater risk. It is also suited for investors seeking a hedge against stock and bond market volatility and changing interest rates.
The WFP Opportunity Fund is suited for investors who have a higher risk tolerance and are seeking higher risk adjusted returns. Those investors are willing to forego greater consistency in the potential amount of the dividends received each period in exchange for potentially greater returns over a longer period.
How can an investor learn more about fixed income investing through Wilshire?
Please contact us at (866) 575-5070 to obtain further information.
* ADDITIONAL DISCLOSURES:
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 (individually and collectively, the “Securities”) offered through Wilshire Finance Partners, Inc. (“Wilshire”). The purpose of this Overview is to provide an overview of one or more Securities and its private placement. Persons interested in learning about one or more Securities 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 Securities the terms of the private placement, a discussion of risk factors, and other information related to such Securities. 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 Securities. 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 Securities will be achieved. Securities may be purchased 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. Investments in the funds, trust deeds and mortgages are securities and each of the Securites 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 Securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the Securities. Past performance is not indicative of future results. The Securities 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.