With interest rates at all time lows, banks need to come up with innovative solutions for their customers to earn decent rates of returns on their investments. Fidelity Bank & Trust International recently announced it was going to launch a brand new fund for the Cayman market geared to providing good returns for local residents keen to get more bang for their buck than a traditional savings account. The Cayman Mortgage Opportunity Fund will invest in a diversified portfolio of fully performing residential mortgages originated by Fidelity Bank (Cayman) Limited. Business Editor Lindsey Turnbull speaks with Fidelity Bank (Cayman) Ltd President Brett Hill to find out more.
Why did Fidelity explore this particular area of investment over others?
In these volatile and uncertain times, investors are looking for safety and security. This Fund aims to provide a return better than cash and bank deposits. It provides risk averse investors with a steady stream of interest income and at the same time security as the Fund invests in a pool of quality residential mortgages. Investors in the Fund will have a beneficial interest in all the underlying mortgages owned by the Fund. The idea is to reduce risk through diversification and increase returns compared to other options such as bank deposits or fixed income securities. In addition, it allows investors a convenient way to earn competitive rates without tying up money for long periods and without having the hassle of negotiating rates on a regular basis.
Aren’t mortgage-backed investments highly risky? Just how risky is an investment into this new fund?
No, they are not. In fact banks regard mortgage loans as lower risk than other types of loans they make because they are secured by a first charge over a primary residence (typically) of the borrower. Because homes constitute a significant portion of most peoples’ net worth, the incidence of default is much lower than for other loans. Unlike US mortgage securities, the Fund will own mortgage loans that meet prudent lending criteria, including adequate Debt Service and Loan to Value Ratios and borrowers with good credit experience and a demonstrated ability to pay. Well underwritten mortgages seldom default and in rare cases when they do, the sale of the underlying home typically results in the full loan balance being paid off.
Who is Fidelity targeting as would-be investors of this fund?
Fidelity is targeting savers and large institutional investors who are looking for relatively steady returns and a higher yield than they would typically get from a bank deposit, while at the same time want the safety and security of collateral, in this case real estate. The Fund allows for easy access to the investment with monthly or quarterly redemptions, an option to have income paid quarterly or reinvested to take advantage of compounding returns.
How does an individual become an investor of the fund?
As with all investments, investors need to read the Fund’s Prospectus and understand the risks of investment. The Prospectus of the Fund will be issued shortly.
What is the minimum investment required?
The fund is structured to offer two classes of shares, one for retail investors with a minimum investment of $10,000, and the other for institutional investors with a minimum of $500,000.
Is the fund aiming at long or short term investors?
Ideally long-term investors. However, the Fund allows investors to redeem their investment as frequently as monthly or quarterly.
What is the minimum amount of time an investor must retain their cash in the fund?
Ordinarily, 30 days for small investors and 90 days for large institutional investors. It is anticipated that most investors will remain invested for extended periods of time. The Fund will distribute interest and principal payments it receives from the underlying mortgages to the shareholders on a quarterly basis. Shareholders will have the option to reinvest these distributions for additional shares.
What are the projected returns?
The returns from the Fund will be linked to mortgage rates. These fluctuate as interest rates vary from time to time. The current mortgage rate in Cayman is largely linked to US Prime. The Fund does not guarantee any returns and actual returns will be calculated after the deduction of any fees and expenses paid by the Fund. The returns net of management and administration expenses are expected to be around US prime.
How far away are you from launch?
[At the time of writing] 90 days, subject to regulatory approval.
Anything else you may wish to add?
The Mortgage Fund is an excellent vehicle for yield driven investors who are looking for safety and higher yield.