One of the positives of mortgage trust funds is that they are a higher-yielding fixed income alternative, and generally don’t follow the performance of the stock or bond markets, which helps diversify investor portfolios.



Canada’s housing market has been sizzling this year, and more investors are searching for ways to benefit from this trend.

Mortgage trust funds are one option as they invest in either a pool of residential mortgages or provide capital via a mortgage to developers and construction companies that are building residential housing.

“We have definitely had greater inquiries and … some additional [fund] inflows” since August of last year, says Glenn Murray, president and chief investment officer with Capstone Asset Management Inc., which offers several mortgage trust funds that focus on the construction side of the business, mainly in Ontario. One fund is Capstone Mortgage Pool Fund, with $176-million in assets under management (AUM) and a five-year return of 7.4 per cent.

Capstone’s funds boast steady annual returns ranging from 4 per cent to 9 per cent after fees and require a minimum investment of $50,000 or more. “The yield is something that definitely attracts people,” he says.

With the high yield and the lower volatility, some investors may infer that mortgage trust funds are low-risk investments, which isn’t always the case. “There is risk involved and there’s a reason those yields are better,” Mr. Murray says, adding that they’re backed by real assets and collateral.

Not all mortgage trust funds have such a high return, though. Ian Tam, director of investment research at Morningstar Canada, says the average return for Canadian mortgage funds over the past 10 years is just less than 3 per cent. Currently, there’s about $27-billion invested in 15 mortgage-oriented funds in Canada.

One of the biggest is PH&N Short Term Bond and Mortgage Fund, with almost $9-billion in AUM. It invests mainly in government and corporate bonds as well as mortgage-backed securities. Its 10-year annualized return is 2.1 per cent and the minimum investment is $500.

A high-performing fund is YTM Capital Mortgage Income Fund, with $157-million in AUM and a 10-year annualized return of 7.1 per cent. It invests in Canadian residential mortgages and residential construction in New York. However, this fund is available only to accredited investors who meet certain asset and income thresholds.

Matthew Ardrey, vice-president, wealth advisor and portfolio manager at TriDelta Financial in Toronto, says he likes alternative investments like mortgage trust funds and recommends them to his clients as a fixed income option, but says investors need to be fully aware of the pros and cons before they jump in.

One of the positives of these funds is that they are a higher-yielding fixed income alternative, and generally don’t follow the performance of the stock or bond markets, which helps diversify investor portfolios. “We think it adds value while reducing risk,” he says.

However, one of the key negatives of mortgage trust funds is the liquidity constraints, Mr. Ardrey says. While they can be purchased like a mutual fund, they don’t have the same ease of selling necessarily.

“The liquidity of these investments is not the same as a typical stock or bond,” he says, and there can be restrictions as to when redemptions can be made, such as monthly or semi-annually. Also, there can be a holding period of one or two years before the funds are sold, or there could be a penalty if sold before a certain time.

“Even though this might not have the typical volatility risk associated with it, it does have liquidity risk,” he says.

Another factor to consider is concentration risk, depending on where you live if you own your home, Mr. Ardrey says. Many of the big funds invest in the large Ontario market, and if investors live in the province, “they’re essentially concentrating on residential development in a market that they live in,” he says.

The quality of the mortgages within the fund matters, especially as interest rates rise. The bonus is they are secured against an asset, Mr. Ardrey says.

However, “if all of a sudden interest rates shot up and property prices dropped, then that would be a catastrophic situation for a mortgage fund,” he adds.

Yet, one investment company wants average Canadians to benefit from the current housing and construction boom.

In June, Dorr Capital Corp. announced the launch of RealAlt® Investments, a mortgage fund that will invest in the development of the hot residential real estate market in the Greater Toronto Area and across Ontario.

It will invest in a pool of medium-term diversified mortgages and will focus on land and construction development. RealAlt® Investments will target an after-fee return of 7.5 per cent, which can be taken out as income or reinvested into the fund. The minimum investment is set at $1,000, so average investors can get involved, says Brian Dorr, Dorr Capital’s president.

“We’re allowing you access to participate in what would actually be the most profitable sector of the development sector, which is the land development. It’s a very nice little niche,” he says.

“RealAlt provides investors a secure way to diversify their portfolios while maximizing yields,” and investors can choose a product like this to earn monthly income, he adds.

Ontario’s housing market is expected to remain hot as demand outstrips supply and the province continues to see its population grow as people move from across the country and immigration numbers rise. The launch of this fund is “absolutely” tied to this trend, he says.

“I don’t see that’s something that’s going to change in the near or distant future,” Mr. Dorr says. “That coupled with lots of people means that pretty much this market is here to stay.”

Nevertheless, the fund is meant to be a medium to long-term investment, he says. “You want to maximize the benefit of this investment if you hold it,” particularly as projects can take seven to 10 years to complete.

Dorr Capital’s high-net-worth investors have already invested in the new fund, and many switched from other fixed-income investments with a lower yield.

“We’re now pushing the fund to the broad investment sector,” he says.

The fund had already pulled in more than $5-million just a few weeks after its launch.