After a brief post-pandemic boom, the global economy faces a variety of uncertainties in 2024. Geopolitical tensions, persistent inflation, and shifting central bank priorities have made it more difficult for investors to maintain a competitive edge. A broad deceleration in economic growth across Canada, the United States, and eurozone economies has only added to the uncertainty, with investors becoming increasingly unsure about the pace and timing of interest rate adjustments by central banks.
Against this backdrop, investors are increasingly turning to alternative investments to fortify their portfolios. Within alternatives, mortgage investment corporations (MICs) can be a strategic investment choice during times of economic uncertainty and interest rate fluctuations.
Understanding MIC Funds
Mortgage investment corporations are specialized companies that pool investor capital to fund primarily first and second mortgages on residential real estate, offering financing to borrowers who need short-term loans to purchase a home or refinance an existing property.
In Canada, MICs operate under the guidelines of the Income Tax Act, which outlines specific regulations and tax benefits. MIC funds are structured as flow-through investment vehicles, allowing 100% of the net income to be distributed to investors, who are shareholders of the fund.
A typical MIC receives capital from investors and uses it to issue mortgages to borrowers. The MIC collects interest payments and fees from these borrowers, which it subsequently distributes to its investors as dividends, typically on a monthly basis. The goal is to generate a steady stream of income while preserving capital and managing risk through diversification and prudent lending practices.
Before the advent of MICs, private mortgage investments were limited to high-net-worth individuals and corporations within private equity and private debt circles. MICs have lowered the barrier to entry into Canada’s private mortgage market, with minimum investments typically starting at $5,000.
The Impact of Economic Uncertainty on Traditional Investments
Recent history is filled with examples of how economic uncertainty can threaten or undermine traditional investments, such as stocks, bonds, and real estate. The 2008 financial crisis, public health lockdowns during the COVID-19 pandemic, and monetary policy divergence between central banks have all contributed to significant volatility in traditional investments.
In the stock market, economic uncertainty can impact investor sentiment, corporate earnings, and market liquidity—factors that often lead to sharp declines in equity values.
As central banks respond to changes in the economy, interest rates are usually the first to be affected. Since 2022, uncertainty about inflation has significantly impacted bond prices. When investors anticipate higher inflation, they demand higher yields to offset the reduced purchasing power of future cash flows, which in turn drives bond prices down.
Economic uncertainty and interest rate fluctuations directly impact real estate demand. Over the past two years, higher mortgage rates have decreased housing affordability, reducing demand for residential real estate. If economic uncertainty is accompanied by a slowdown in economic growth and rising unemployment, job losses are likely to increase, potentially impacting rental markets and leading to a rise in vacancies.
Benefits of Investing in MIC Funds During Economic Uncertainty
As leading alternative investments, mortgage investment corporations make compelling investments during periods of economic uncertainty. Mortgage investing through MICs provides diversification away from traditional assets, such as stocks and bonds, which are highly susceptible to changes in the economy and interest rates.
MICs continue to offer higher potential returns compared to traditional fixed-income investments. During periods of economic uncertainty, traditional investments like bonds may offer lower yields due to central bank policies aimed at stimulating the economy. As central banks lower interest rates, bond yields typically decrease. MICs, however, can still offer attractive returns through high-interest mortgage lending.
As income-generating assets, MICs can provide investors with a predictable stream of income during uncertain economic times. Moreover, MICs are managed by a professional team with extensive expertise in mortgage lending and real estate markets, helping investors navigate market complexities amid changing economic conditions.
Additionally, mortgages held by MICs are backed by real estate assets, providing a buffer against economic instability.
Navigating Interest Rate Fluctuations with MIC Funds
Central banks worldwide are responding to moderating inflation and slowing economic growth by lowering interest rates. The European Central Bank, Bank of England, Swiss National Bank, and Bank of Canada have all lowered their benchmark rates this year. The Bank of Canada is expected to continue its rate-cutting cycle in the fourth quarter.
In the United States, the Federal Reserve has been maintaining a higher interest rate environment to combat persistent inflation. However, economists warn that the Fed may have kept rates too high for too long, as evidenced by the recent spike in unemployment. With concerns about a possible recession, the Fed is widely expected to begin cutting interest rates in September.
MIC funds can offer attractive returns during periods of economic uncertainty and interest rate fluctuations by leveraging their unique structure and investment approach. MIC funds generate income through interest payments from diversified mortgage loans, which are not directly tied to stock or bond markets, making them less susceptible to market volatility.
Since MICs primarily invest in short-term, high-interest mortgage loans, they have historically outperformed traditional fixed-income investments. The ability to renew these mortgages at current rates enables MICs to adapt more rapidly to interest rate changes. . This flexibility can lead to higher yields in a fluctuating interest rate environment and positions MICs as a potential inflation hedge during periods of rising prices.
Considerations and Risks
Despite the unique advantages offered by MICs, it is crucial for investors to conduct thorough due diligence and seek professional advice to ensure alignment with their investment goals and risk tolerance. Before investing in a MIC, it’s important to consult with a financial advisor to understand the opportunities and risks of private mortgage investing and ensure MIC funds align with your individual investment goals and risk tolerance.
Case Studies and Historical Performance
MIC funds have demonstrated strength and resilience during periods of economic uncertainty. As history has shown, leading MIC funds offered predictable returns during the 2008 financial crisis and the more recent COVID-19 pandemic. During this latter period, leading MIC funds outperformed traditional fixed-income investments—a trend that has continued even in the more recent higher-rate environment.
The CMI MIC Balanced Mortgage Fund achieved an average net annual yield of 8.46% from 2020 to 2022—significantly outperforming many traditional investments during one of the most volatile periods in modern history. The fund has a yield of 8.72% since inception. The entire CMI MIC Funds family has an exemplary record of meeting its targeted annual returns, which range from 6% to 11%, depending on the specific fund and its risk profile.
How to Get Started with MIC Fund Investing
Mortgage investing is suitable for investors with various risk profiles. If you decide that MIC investing is right for you, it’s important to select a trusted institution with a proven track record in the private mortgage market. This includes researching and comparing the performance history of various MIC providers, as well as their management team and portfolio construction methods. This will help ensure that your investment selection aligns with your investment goals and risk tolerance. A trusted partner that offers a transparent lending program with a consistent performance track record helps ensure your capital is being put to effective use.
Once you select the right MIC fund, you can usually invest through a brokerage account or directly with the mortgage investment corporation.
Conclusion
By leveraging MICs’ unique structure and investment approach, investors can benefit from attractive returns and portfolio diversification. During periods of economic instability and interest rate volatility, investing in funds backed by real estate can provide a buffer against uncertainty.
CMI Financial Group is one of Canada’s fastest-growing non-bank financial services providers with nearly $3 billion in mortgage fundings and more than $1 billion in mortgage assets under management (AUM).. To learn more about our CMI MIC Funds and to get started today, contact us for a free consultation.
