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Balancing Investment Portfolios: The Strategic Role of MICs in Asset Allocation

11 December 2023

Balancing a portfolio is a nuanced art that involves the strategic allocation of assets to achieve diversification, manage risks, and optimize returns. Mortgage Investment Corporations (MICs) have emerged as a significant instrument that investors can incorporate into their portfolios to realize these objectives. 

MICs offer a unique blend of stability and attractive returns, making them a compelling choice for investors seeking to enhance their asset allocation strategies. This article aims to illustrate the strategic role of MICs in portfolio balancing, offering insights into how they can be effectively integrated into an investor’s asset mix to foster financial growth and resilience.

MICs: An Introduction

MICs are alternative investment portfolios that invest in primarily first and second mortgages on behalf of investors. Governed by the Income Tax Act, MICs operate like mutual funds or exchange-traded funds, but instead of holding stocks and bonds, they are composed of carefully selected mortgages. Most MICs are regionally focused, with the greatest concentration in Ontario and British Columbia – primarily in the Greater Toronto and Greater Vancouver areas – while other MICs are nationally focused and invest in mortgages from across Canada. 

MICs are structured as flow-through investment vehicles, allowing shareholders to access a diversified portfolio of mortgages without the burdens of homeownership or property management. MIC investors are considered preferred shareholders and are eligible to receive 100% of the fund’s net income through regular dividend payments, which can be received as income or reinvested into the fund for compound growth. As a qualified investment, MICs can be purchased in an RRSP, RRIF, TFSA, RESP, or RDSP.

In addition to being an investment fund, a MIC is a lending corporation that manages the entire mortgage selection, adjudication,  servicing, and monitoring process, giving shareholders a truly passive investment experience. A MIC is managed by a team of mortgage professionals who can set their own criteria for adjudicating and approving loans. This flexibility allows MICs to serve a wide range of borrowers who may not be eligible for loans from traditional banks. By serving a more diverse population, MICs can charge higher interest and fees on mortgages than traditional lenders.

Given their unique characteristics, industry-leading MICs have historically outperformed fixed-income assets such as government bonds, corporate bonds, and Guaranteed Investment Certificates. While MICs have a different risk profile and structure than traditional bonds, they are primarily suited for defensive investors who prioritize cash flow and capital preservation or want to grow their retirement nest egg through RRSP investing. 

Investing in a MIC provides unparalleled diversification benefits—both in terms of asset selection and geographic diversification. MICs give investors the opportunity to access private debt markets that were historically limited to high-net-worth investors. By investing in private markets, MIC returns are generally non-correlated with public markets and don’t experience the same levels of volatility as stocks and bonds. Geographic diversification, or the process of investing across multiple mortgage markets across Canada, mitigates the risk of over-concentration in one area of the country. 

Strategic Asset Allocation with MICs

Portfolio managers often advise their clients to invest in a diversified mix of financial assets to ensure a balanced investment portfolio. This strategy helps investors embrace market opportunities while also being prepared for volatility and unexpected events. Traditionally, this approach was embodied in the “60/40” investment portfolio, which recommends a 60% allocation to stocks and 40% to fixed income. 

With the rise of alternative assets, portfolio managers are rethinking the 60/40 investment thesis. That’s because investing in traditional assets such as stocks and bonds is challenged by relatively low expected returns, concentrated portfolio risks, and uncertainty around monetary policy. Against this backdrop, MICs can be strategically positioned within a portfolio to achieve a more balanced asset mix. 

Historically, MICs have performed well during various stages of the market cycle, providing increased portfolio diversification and enhanced long-term returns without the risk associated with investing in public markets.  For example, in the decade following the 2008 financial crisis, MICs provided relatively stable yields at a time when traditional bonds were barely outpacing inflation. While bond yields have risen sharply since 2022, the bond market has been a significant source of volatility. Bond duration risk was a major contributor to the 2023 U.S. banking crisis that resulted in the failure of multiple mid-sized banks.  

Regarding specific asset allocation, there’s no one-size-fits-all approach to investing in MICs. Risk tolerance, investment timeline, and long-term goals should be weighed before investing in the mortgage market. However, defensive investors with a large position in cash and cash equivalents may want to consider adding MICs to their portfolio. That’s because defensive strategies often require active management, which carries higher fees and tax liabilities. There’s also the opportunity cost of sitting on the sidelines of the market as inflation erodes your portfolio’s purchasing power. 

A MIC is a passive investment strategy that contributes positively to risk management within a portfolio by lowering management costs and reducing vulnerabilities of investing directly in real estate. Unlike real estate, mortgage investors don’t have to worry about overhead costs, liquidity constraints, negative cash flow, and vacancies. Due to the short-term nature of private mortgages, combined with rigorous due diligence and risk management practices, MICs are less prone to fluctuations in the housing market. As history has demonstrated, Canadians have an excellent track record of paying their mortgages, with delinquency rates well below 1%. 

Practical Considerations and Best Practices

MICs offer investors a rare opportunity to increase their exposure to alternative assets without taking on excessive risk or sacrificing higher expected returns. Unlike other private debt markets, investing in a MIC is cost-effective, as it only requires a much lower minimum investment than a whole mortgage investment. 

While many Mortgage Investment Corporations operate in Canada, investors should prioritize funds with a strong track record in mortgage origination, innovation, and regulatory compliance. Corporations with a proven track record of meeting their expected returns and delivering regular distributions while keeping risks to a minimum are the best options for new investors. Like any other asset class, MICs should be approached carefully and with proper due diligence, beginning first by identifying your long-term goals and then selecting a fund that meets your risk tolerance and investment horizon. 

In 2024 and beyond, alternative investments will be increasingly vital in building a well-balanced and robust portfolio. MICs aren’t the only solution, but their strategic advantages cannot be overstated. Investors who seek diversification, high expected returns, and limited exposure to volatile public markets should consider MICs as part of their broader asset allocation strategy. 

CMI Financial Group is one of Canada’s leading non-bank financial institutions, having originated more than $2 billion in mortgages since our inception. Our CMI MIC Funds have set the industry standard for innovation, due diligence, and consistent performance. Our funds target net annual yields of 6-11%, providing investors with risk-adjusted income potential depending on their goals and risk tolerance. 

 To learn more about why smart investors are choosing MICs, contact CMI today for a free consultation. One of our investment professionals will be in touch to discuss your options and help you get started in the lucrative mortgage market. 

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