Wholesale investing case study: A Fund Manager’s new strategy

Financial Planning Written by , Sep 1 2021
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In this case study, we’re looking at an Investment Manager whose outlook for fixed income had become bearish. They were looking for a strategy that could provide a better income stream and also diversify their Managed Fund’s investment strategy.

What they were looking for

  • Returns net of fees and costs, consistent with their performance objectives
  • A diversified portfolio
  • An investment policy where they could evaluate potential loans across many factors like the loan’s purpose, the loan size, loan to value ratio, interest rate, term, security and borrower grade.
  • They wanted control over which loans they invested in based on their own criteria
  • Low credit risk
  • Liquidity, while the Manager planned a 'buy and hold' strategy for the loans, they wanted the option to reduce exposure in the event that their strategy changed, or investors withdrew their investments.
  • A strategy that aligned with their accounting, auditing and financial reporting responsibilities
  • Operational ease
The Manager put Squirrel under the microscope

After careful examination of Squirrel’s credit policy and procedures, the Manager agreed on an investment process and management policy with Squirrel. They then chose to invest in Squirrel’s Home Loan Investment Class with the expectation of earning 4%p.a.* with interest paid monthly on the loans. They also selected and funded whole loans which gave them control over the maturity profile.

The Manager worked with its Administrator and Squirrel to establish the procedures to manage their investments including investment instructions, settlement, daily reporting and pricing.

After providing Squirrel with an indication of when and how much they planned to invest, Squirrel provided them with a selection of qualifying loans that fit with their requirements.

Once the Manager selected the loans for their Fund, Squirrel received the cash from the Fund's Administrator and then transferred the loans from its warehouse to the Fund's portfolio. The loans would reflect in the Fund’s Squirrel investment account with reporting to the Fund’s administrator and custodian.

Squirrel’s reporting tools allowed the Manager to monitor and manage their investment portfolio, as well as choose whether to reinvest the interest income or repay it to the Fund’s bank account.

The final results

By investing in a selection of Home Loans secured over residential property with risk profiles that suit their criteria, the Manager has enhanced their Fund’s portfolio.

Squirrel Home Loans offered the Fund a 4%p.a.* floating rate of return which is very attractive compared to other New Zealand fixed income interest returns. Unlike common fixed interest options, Squirrel’s loans aren’t subject to capital risks associated with rising interest rates.

The Fund’s credit risk is low given the secured nature of the investments and the overall defensiveness of New Zealand’s residential property market. On top of that, the Fund is also benefiting from Squirrel’s Reserve Funds which are there to cover expected credit losses as well as offering greater predictability to investors.

The Manager also has a choice to sell a loan down (partially or completely) through Squirrel’s secondary market to other platform investors before a loan’s maturity date.

More opportunities for the Manager to enhance its expected returns

The Manager also has the option to increase their returns by doing the following:

  • Investing in other loan classes like Residential Construction Loans with return of 5%p.a.* return; or
  • As the Fund is investing in whole loans, the Manager could choose to earn a loan’s Reserve Fund Levy (averaging 35bps) by assuming its credit risk.
  • Widening its investment policy to include loans that would meet the Manager’s investment policy but are outside of Squirrel’s policy, i.e. a loan of more than $2 million to a single borrower.

Squirrel offers Wholesale investors a range of options than can be tailored to meet Investor’s needs. You can contact Doug Thomson to learn more about Squirrel and how Squirrel can assist you enhance your return prospects.

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*This was the prevailing rate offered to investors during this period

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