OK, another new listing coming, a listed trusts as opposed to a LIC. The NB Monthly Income Trust is run by global firm Neuberger Berman. Strategy is to basically act as a credit provider to US homeowners by investing in home loans originated from creditworthy borrowers. To be clear, this is not a CDO or securitised loans product, although it is expected to have some initial exposure to Residential Mortgage Backed Securities while the fund gets its loan book set. Plenty of unlisted funds invest in these spaces, however NB will have the first listed vehicle.
In addition, the fund will also do something else you don’t find locally. It will essentially lever its position ~2x (max. 4x). While this sounds a bit wild, given that there is a positive interest rate carry on doing this in the US, it is yield accretive and in theory a safer bet than leveraging equities. The US has a whole industry of listed Mortgage REITs who do exactly the same thing, except their leverage tends to be 6-8x or higher.
The Fund will be currency hedged and is aiming at delivering a 6% yield (distributed monthly) before the impact of hedging. There is also the expectation of NTA growth from gains in the RMBS trades early on plus excess profits from the levered loans where the actual returns should be higher than 6% (i.e. a payout ratio <100% creates booked profits that are accretive to NTA).
The NB managers have plenty of depth and expertise in this area. They have run somewhat similar strategies before in the US. I view their expertise as solid. They do their own credit assessment on top of that performed by loan originators (so not using rating agencies)
This won’t be for everyone. The concept of levered loans is a bit esoteric from an Australian viewpoint, but I have spent a fair bit of time looking at this and I think it has potential merit for those seeking stable income from a diversified source compared to other traditional Australian yield sources. One issue to consider is fund size. Their minimum raising is only $75m which I personally think is a bit thin for liquidity. However I accept that plenty here pursue microcaps and don’t worry about this as much. Max is $250, but I’d be surprised if they raise that much. See what you think! The offer closes 14 April with ASX listing proposed 26 April. http://www.nb.com/pages/public/en-au/home.aspx
