Term Investments: what options are available for building wealth?

Our next presenter is Andrew Mervain, co-founder and managing director at Remara.

Andrew founded Remara, which is a Sydney-based investment firm focusing on real estate, private credit and tactical investment.

His presentation topic today is term investments.

What options are available for building wealth?

Welcome to the presentation, Andrew.

Thanks, Angela.

Happy to be here.

So obviously just disclaimer, very important to review.

A little bit of an introduction on Romara.

So we're an Australian asset manager.

We have product offerings that cover institutional investors, wholesale, as well as retail investors.

And one of the key aspects of our platforms that we co-invested with our clients in each one of our funds.

Our investment classes go across credit as well as real estate and tactical opportunities.

Across the group, we've been in business since 2019.

We manage 1.1 billion, 10 investment professionals across four investment funds.

We have two extra funds or new funds that are opening

at the end of July, and they'll cover investment grade credit as well as opportunistic development, so real estate equity investments.

We have funded across that time from a credit business perspective, $3.4 billion in loans.

We've got a platform with $16,500 underlying loans, annual net losses across that loan pool is about 15 basis points per annum.

And we've got five portfolio companies and 90 staff that sit across those portfolio companies.

In terms of our credit offerings, we go across the capital stack.

So we've developed a series of funds that go across senior securitized credit in terms of our cash management funds.

So that's got at call as well as term options.

We've got an investment grade fund, so that invests primarily in rated or shadow rated securitized credit.

We've got our diversified fund, which is our private credit income fund, and that's a mixture of investment grade and non-investment grade rated.

And then we have our opportunistic fund, which is at the bottom of the capital stack, a little bit higher yielding and provides investors opportunities for non-rated credit investments.

In terms of term investments available, it's a challenge for most investors to have a strong understanding of what the differentials are between the options available for investing across a term.

So I thought the best thing to do today would be to take each and every one

through some of the options available and where they are different.

So obviously we start from a risk spectrum perspective at the lowest end with a traditional bank term deposit.

I think most people are aware of these.

Some of the return profiles that you are seeing at the moment is around about the 5% range.

Obviously, no fees are attached to that.

Returns are generally paid at maturity as well.

So one of the key things from a bank perspective is on those term deposits is you generally only receive your proceeds at term and that's the interest and the principal in one bullet repayment.

The risk profile is obviously very low with these products.

There is government guarantees attached to it which cover up to an amount of $250,000.

After that you then have an unsecured liability of the bank.

The return is generally a fixed return, so you're generally taking a position on duration or interest rate risk through that, that interest rates might rise or reduce through that period.

and you could be left with out of the money option or an out of the money return if interest rates have risen or an in the money return if interest rates have declined through that period.

And generally banks have a very wide array of timescales available.

So it can be anywhere from one month to 60 months.

And then they're obviously on risk in terms of being the provider of that product.

In terms of Ramara, we've got our cash management fund, which is a newly opened fund for retail investors.

It provides a term option and there are some differences for what we provide versus a term deposit.

So our return profile at the moment is 7.5%.

There's a fee that is attached to that, which is five basis points.

So our return is post fees.

And we've got the opportunity to pay investors either monthly through their distributions or pay at maturity returns.

So your interest is capitalised throughout the term of the investment and essentially paid at maturity.

The risk profile is slightly wider than the bank.

given that we are not an ADI, we don't provide the government guarantee.

But what we have done in the mandate of the fund is set it so investment grade credit assets are the only forms of assets that can be purchased by this fund.

So the underlying investors of this fund are secured by a series of investment grade securitized credit options, which provides a very strong security profile, while not the same as a bank, very similar to a risk profile of the bank.

What we've done, which is a little bit different and provides a bit of a differentiation to most others in the market, is we've created a fixed and a floating class.

So this allows investors to essentially take a position on locking in for the term of their investment on the fixed rate, which means you will receive what the disclosed rate is on our website for that day for the entire term.

So very similar to how those banked term deposits work.

Or you could select the floating option.

That floating option is essentially a return that's above

the RBA rate.

So as the RBA rate changes, you'll be compensated for those changes, whether they are up or down through that timeframe.

In terms of the terms available for our term note, it's six month or 12 months options.

And we are also on risk from a provider perspective.

So max duration that we've got there is 12 months.

And for us, we are on risk.

So once you get to the end of your term, we are required to ensure that you get paid back within a 90 day timeframe of completion of that term.

We then moved to a pulled mortgage trust and these have been around, these types of vehicles have been around and they have been extremely popular with a number of investors for a very long period of time and there's a number of providers of these types of trusts that provide term options.

and their returns generally move anywhere from 6.5 to 8.5%.

What's really different in terms of noting these types of products, both for single asset and the pulled mortgage trust, generally the fees that investors pay are substantially higher.

So in pulled mortgage trust, you can be up to 200 basis points or 2% and contrast that to the remarra term account where it's five basis points or zero point.

0.05% as a fee.

Generally returns are paid monthly on pooled mortgage trusts.

The risk profile is medium, so while you've got a bigger pool of assets, you are exposed to each and every loan from 0 to 100% of that loan.

So generally those types of vehicles are not tranched up, there's not additional security and they can't be rated investment grade as a result of not having that tranching and being all within the same type of asset class generally with larger individual obligations or exposures.

So while you're secured by a senior mortgage, you generally have a very different risk profile to what would be exhibited in the remarra term account where your investment grade credit assets or obviously a bank where you've got the government guarantee attached to it.

Usually those pulled mortgage trusts are floating rate returns as well.

So as the RBA rate increases or decreases, you'll generally move around with that.

So very rarely do they have fixed rate options available for that.

Size limitations, not really.

So they generally enable investors to be slightly bigger or lower with a minimum investment.

And one thing to note really on the pooled mortgage trust and also the single asset trust,

When you get to the end of the term, there's generally a longer time frame because they are a single deal or a pool of real estate mortgages.

There's generally a longer time frame that the manager has to be able to meet liquidity requirements if people choose to exit their term investment at that point.

So what we see across the market is that generally can be up to 12 months.

So if you have a six month investment and you choose not to

roll that investment, the manager can provide you liquidity up to 12 months after that six months.

So that would end up being an 18 month investment.

So these are some of the key considerations when looking at pulled mortgage trusts in comparison to the remarra term account in comparison to a bank term deposit.

And generally in the pooled mortgage trust, you don't have the provider of that on risk.

And what we mean when we say on risk is generally covering losses for the pools or the underlying credit contracts.

So sometimes when you write credit, there are losses that happen through those pools.

Generally, with a term deposit, the bank is on risk.

With the remarra term account, remarra is on risk.

On pulled mortgage trust, generally, the provider of that product isn't on risk, which can then challenge some of the credit quality of the underlying assets or loans that they're putting in that.

And generally, in the single asset real estate trust, those providers are also generally not on risk for that period as well.

And that kind of then brings us to the final comparison there in terms of single asset real estate trusts.

These are also another popular option.

People believe they are very safe and secure as they are secured by a senior mortgage, 65% LVR.

And while that is the case, and generally losses are probably quite minor on those,

there are a few key differentials between them.

So generally you see, again, a return profile of 7.5%, so very similar to what's provided by the pulled mortgage trust or a MARA term account.

The fee return is generally a lot higher on the single assets to the manager.

So in that process, you've got up to 400 basis points or 4% that might get paid to the manager for managing that loan.

So a big portion of the overall return of the loan actually goes to the manager who is managing that loan and doesn't make its way through to investors.

The return can be paid monthly and the risk profile is generally a lot higher because you are secured by one asset and one asset only and with such a concentration in terms of one single security and one single asset the risk profile does tend to go higher in those circumstances.

Obviously no government guarantee while you do have a mortgage the biggest challenge is in around single assets generally the timing so the underlying timing of repatriation of funds at the end of term

are predicated on the loan being repaid at the maturity date.

And if it isn't repaid, then essentially most of those investment trusts roll over and continue their life cycle until that loan is paid.

So you're not really sure exactly when you're getting those funds back.

And essentially, again, in the single asset trust, most of the providers of that trust are generally not on risk.

So there's a couple of key differentiations as you look through

your term investments accounts, going for everything from bank accounts where you have a lot lower risk profile and your return really reflects that, moving your way out through to your what are fund and fund style offerings in the term space, where you've got the remarra credit fund, cash fund, sorry, providing 7.5% in comparison to pooled mortgage and single mortgage trusts where they're providing similar style returns.

But the risk profiles are very, very different on that perspective.

In terms of

Our term account credit investment options, we've got a couple.

So essentially, as I said, we've got a six month fixed and a six month floating and a 12 month fixed and a 12 month floating.

So in relation to the differences, they all invest into the same underlying asset classes, which are investment grade rated or shadow rated instruments.

primarily in securitized credit.

But what we have built is essentially a platform that allows investors to take a bit of a position on the RBA rate.

So if you believe the RBA rate isn't going to decline, then you could take a floating rate approach.

If you think it is going to decline, you can take a fixed return approach.

And that will essentially lock that RBA rate in for the term of your investment.

We do offer reinvestment, which is strong, and that allows you to reinvest your proceeds on a monthly basis into your balance and essentially get compounding interest effect.

And essentially for us, the investment grade rating of the underlying securities means you're in triple B securities or better.

And across the strategy for us, we've got about 289 million that's invested across this strategy of triple B better or better credit rated investment.

opportunities.

In terms of what really sets us apart, for us at Remara we look at smaller exposures.

So we've got, as I said before, 16,500 underlying contracts.

So for us we're looking for smaller individual obligors, bigger pool, and that certainly diversifies away individual credit risk.

As a result of that, we've got an improved risk profile.

So our underlying loans are to prime borrowers, they're all secured.

They're secured by real assets or structural protections within that.

So 90% of our borrowers are property owners, and we have security and backup security against their property through directors guarantees and etc.

We are aligned, as I said before, we co-invest with our investors.

So that's both vertically as well as horizontally.

So we will provide the first risk retention, first loss across each and every loan in our portfolio.

So across all 16,500 loans, we're on risk for each one of those, which is a very unique model in comparison to a lot of other credit managers.

And as a result of the diversified platform and the portfolio companies we've got, we have a lot of embedded liquidity through the platform.

Majority of our contracts are principal and interest paid monthly, which means we collect a lot of principal.

We've got a lot of cash that rolls through.

on a monthly basis and that allows us to be able to manage that liquidity need as investors move in and out or as we have our term investments come to maturity.

It provides a cash buffer for us to be able to ensure that we can meet those redemption requirements as and when they're needed.

And that would probably take us all through Angela.

Thanks Andrew.

Do you have time for two questions?

Certainly do.

Can you tell us what's the difference between a term deposit and a term option within Remara?

Yeah, look, the major difference is obviously with the bank you've got the government guarantee, so that will cover you up to the 250,000 and then after that you're an unsecured creditor of the bank.

With the Remara account you don't have the first 250k protection from the government guarantee.

but what we've really built within the asset is what we think is an alternative to that which is the investment grade credit assets.

So all assets that support the term account need to be investment grade rated or shadow rated and that provides a very strong backing and that's kind of noted in the you know essentially two and a half percent more that you'll get from the Romaro account versus the bank

You've also got the opportunity to receive your proceeds or your interest monthly, whereas generally banks are essentially at the end of term as a bullet repayment.

How do interest rate changes affect these investments?

Yeah, really good question.

I think looking at most of these products here, so with the bank product, it's a fixed rate product.

So if you set it today, interest rate changes are not going to affect what you ultimately receive.

With Remara, we allow you to take a view.

So if you want a fixed, we can provide you a fixed if you want floating.

you can take a floating option so you'll move around with the RBA.

Generally on pooled mortgage and single asset real estate trusts, they're generally floating so you will move around based on the RBA.

Sometimes you don't move as fast, sometimes they're not even linked to the RBA.

So you might be in a position where I think a lot of investors found themselves over the last 24 months that as the RBA rate increases, their investments in old mortgage funds or single real estate deals didn't move in line with those RBA changes.

So while they're floating in nature, they don't always mirror a match or have mechanisms in those agreements where investors can be compensated for those changes in RBA.

So they're probably the

the major differences in terms of the fixed flooding nature and how does changes in RBA rate impact people's investments on a term nature.

Thanks Andrew.

No worries, thanks Angela, appreciate it.