While super funds have shown much less enthusiasm than their international counterparts to invest in residential property, the recent dislocation in the fixed interest markets seems to have created a once-in-a-generation opportunity in the securitised segment of that market.
The much-maligned residential mortgage-backed securities (RMBS) market, arguably the cause of the financial crisis of the past two years, is still open for business and, in Australia at least, is offering investors potentially higher risk adjusted returns. The local market is not weighted with much sub-prime lending and has a far superior borrower attitude and legal recourse. Founder Stuart Fowler has gathered a group of experienced fund managers and investment bankers under the banner Spar Capital Partners, to launch a range of specialist products, including an RMBS fund or strategy for the institutional market.
[Fowler was a founding partner of Basis Capital, where a wave of margin calls by bank lenders to the specialised Structured Credit Fund pulled it into liquidation, but it has been wound down in an orderly manner.]
The group of eight executives includes three from Basis – Fowler, Chris Graham and John Murphy – as well as transport investment expert Chris West, most recently at Allco Finance, founder and Chairman of Record Realty, and others with expertise in warrants and structured products.
The firm is talking to potential clients about launching three RMBS funds or strategies: a “benchmark-plus” fund, which is long-only and has relatively low fees; a 120/20 long/short fund; and a higher risk/reward ‘credit opportunities” fund.
Fowler said the group had formed about three months ago and was working on a range of investment strategies.
“We think, for instance, that the RMBS sector has been ignored by fund managers, who have historically pooled their debt securities within a grab bag of fixed income assets,” he said. “We don’t think you should blend the asset mix and there is a need for a dedicated and specialist RMBS manager particularly as pricing is now differentiated in secondary. The primary market must find a way to rebuild.”
With the RMBS market in Australia, spreads blew out to 500bps over the bank bill rate earlier this year and currently trade at a still-healthy 200 bps over. And they are AAA-rated securities because of the very low default rate attached to Australian residential mortgages.
“Not many managers have stepped in to take advantage of these spreads,” Fowler said. “There’s definitely a lot of value still in the market.”