A new source of fixed income

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Investment manager Gryphon Capital Investments has launched an unusual listed trust offer – a fund that will invest in residential mortgage-backed securities and other asset-backed securities.

Gryphon is seeking $100 million, with the sale of 50 million units in the Gryphon Capital Income Trust. The offer will close on May 2 and Gryphon expects the trust to list on the Australian Securities Exchange on May 18.

Upon listing, the fund will be the only ASX-listed vehicle that provides access to a portfolio of RMBS and ABS, representing an alternative to current fixed income options, such as term deposits, bond funds and hybrids.

Gryphon Capital Investments is an institutional fixed income manager, established in 2014 and with mandates currently valued at around $1.7 billion. Its Australian-based partners are Steven Fleming and Ashley Burtenshaw.

Fleming, who is Gryphon’s chief executive, previously worked at Threadneedle Investments, running its ABS portfolios, and was co-head of Babcock and Brown Capital Markets.

Burtenshaw, who is Gryphon’s chief investment officer, also comes from Threadneedle Investments. He has also worked at Credit Suisse First Boston and Babcock and Brown.

The responsible entity is One Managed Investment Funds Ltd.

According to the Gryphon Capital Income Trust product disclosure statement, the fund is targeting a return of the Reserve Bank cash rate plus 3.5 per cent, net of fees, with income paid monthly.

The portfolio will be actively managed and securities will generally have floating interest rates.

Residential mortgage-backed securities (RMBS) are collections of mortgages that have been bundled together and sold off a lender’s balance sheet in the form of a bond. They produce and income by providing exposure to repayments on the underlying mortgages.

While RMBS is the most common form of asset-backed security in the Australian market, other types of loans can be securitised in the same way. These include credit card debt, car loans and commercial finance.

About $37 billion of RMBS was issued in Australia last year and about $7 billion of ABS. They are classified as secured assets because of the security on the underlying loans. Securitisation of loans has been a feature of the Australian finance system for more than 30 years.

Part of the securitisation process involves dividing the loan into a series of tranches, with different credit ratings and yields. For example, a AAA-rated security would pay around 95 bps over the cash rates, while a BBB-rated security would pay around 335 bps over the cash rates and an unrated security would pay more than 500 bps over the cash rate.

The fund’s investment guidelines require that at least 50 per cent of the portfolio will be invested in assets with investment-grade ratings (BBB or above), non-investment grade ABS must not exceed 5 per cent and the maximum holding in any one security will not exceed 10 per cent.

An indicative portfolio set out in the PDS includes 85 per cent RMBS (of different ratings grades), 13 per cent ABS (also of different ratings) and 2 per cent cash.

The fund is a “closed-end” trust, which means that the manager will not pay redemptions. Instead, unitholders who want to cash out will sell on the ASX.

The benefit of a closed-end structure for a manager is that it does not have to hold large cash reserves to meet liquidity requirements and it can establish a long-term investment plan.

Gryphon launched its first institutional fund in April 2015. The Secured Opportunities strategy, which is a portfolio of Australian prime RMBS, has produced an average return of 6.9 per cent a year since then.

Under the trust structure, all earnings will be distributed to investors on a pre-tax basis.

The management fee is 72 basis points. The responsible entity will receive fees of up to six bps.

Independent Investment Research has issued a report on the Capital Income Trust, rating it ‘recommended’ and describing it as “an alternative fixed income investment.”

IIR says Australian RMBS and SBS have a history of low default and delinquency rates.

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