The global investment landscape has seen a dramatic shift in recent years, as the combination of market volatility, rising interest rates and a generational uptick in inflation have forced investors to reconsider their traditional portfolio construction methods. Bond yields have risen sharply over the past 18 months, but so has inflation. This scenario has created an “unreceptive environment” for stocks and fixed income, forcing investors to think outside the box, according to a new report by Investor Economics.
In their quest for higher yield and diversification, investors are turning to private credit markets, the report said. The shift isn’t a one-off but part of a broader move away from the traditional 60/40 portfolio comprised of stocks and bonds. Private credit funds provide access to a portfolio of loans and offer much higher yield potential than bonds.
Private wealth managers interviewed by The Globe and Mail have confirmed that this shift toward private credit is intensifying, especially among high-net-worth investors. These investors are “looking for products that can be included in a portfolio to generate income through a diversified return stream,” Darcie Crowe, senior portfolio manager at Canaccord Genuity Wealth Management Canada, told the Globe.
Andrew Feindel, a portfolio manager at Richardson Wealth Ltd., said he expects that institutions will add private credit exposure to their pension plans and that “[i]t will become democratized in the sense that it’s not just institutions anymore but individuals purchasing.”
This newfound attention to higher yields is partly driven by the failure of fixed-income to protect investors during one of the worst down years in history—2022. The year was no ordinary downturn: stocks and bonds nosedived, and investors had few places to turn. Bonds are supposed to be the shock absorber of portfolios when stocks plunge, but they failed to offer that protection as central banks raised interest rates and economic activity weakened.
Fast-forward to 2023, and bond yields are hovering at 16-year highs. However, the challenge for most investors is that inflation continues to eat into the margins, meaning real yields are much lower. Canada’s marketable 5-year bond reached 4.17% in August, but annual CPI is still 3.3%. Core CPI is much higher at 4.1%.
While traditional fixed-income securities like government bonds and Guaranteed Investment Certificates (GICs) offer much higher yields today, their rates aren’t competitive enough. That’s why more investors have set their sights on alternative investments.
The Appetite for Alternatives Grows
The world of alternatives is vast and diverse. As an investment strategy, alternatives refer to any asset class that falls outside the traditional categories of stocks, fixed income, and cash. The global alternative asset market is currently valued at over $10 trillion. It could reach over $18 trillion by 2027, according to Preqin.
Private credit is one of the fastest-growing segments within alternative investments. The sector emerged in response to banks exiting the direct lending business in the wake of the 2008 financial crisis. As global investment manager Nuveen explains, “private credit plays a vital role in facilitating economic activity and growth by providing capital to companies unable to access public markets.”
As an investment class, private credit has a proven track record of delivering predictable, uncorrelated returns for institutional and high-net-worth investors. But the private debt market isn’t just limited to financing business opportunities. It also includes mortgage investing, where lenders (i.e. investors) use private capital to fund short-term mortgages. Mortgage investors play a crucial role in ensuring that liquidity and financing opportunities flow to borrowers in need of alternative lending arrangements. That pool of potential borrowers has increased due to stricter lending rules imposed on banks by the federal government.
Mortgage Investing Opportunities Offer Higher Income Potential
In Canada, private lenders are classified as non-bank financial entities. Combined, they account for just under 2% of the country’s residential mortgage market—but their share of mortgage refinancing transactions is much higher.
Mortgage investing provides investors with direct exposure to the real estate market but without the risk of property ownership or title transfer. Unlike property or land, mortgage investing doesn’t carry high overhead costs or potential liquidity constraints, negative cash flow risks and vacancies. The mortgage market is far less susceptible to lapses in market conditions, something most investors look for when investing in income-producing assets.
Mortgages provide asset and geographic diversification and the potential to earn higher yields on individual loans. CMI Mortgage Investments’ whole mortgage investment program targets annual yields of between 6% and 16%—returns that are much higher than conventional fixed-income securities.
By embarking on the path of mortgage investing, you effectively become a private lender. Mortgage borrowers pay you interest and fees for advancing them a mortgage. This gives you an alternative cash flow investment that can be used to fund your lifestyle or reinvested for compound growth.
Mortgage investment programs come in many forms; for high-net-worth and accredited investors, whole mortgage lending programs offer the most potential upside in terms of yield. A whole mortgage program is geared toward investors who want to add residential mortgages to their portfolios. Under these programs, mortgage investment opportunities are presented to you by private mortgage lenders that manage the entire investment process on behalf of the investor. This includes sourcing, underwriting and managing each mortgage in the portfolio.
If you live in Ontario or British Columbia, you must have a minimum net worth of $1 million to qualify as a whole mortgage investor. A net worth of $500,000 or greater is required for all other provinces. Whole mortgage investment programs typically do not have a specific minimum investment amount. However, this type of investment is best suited to higher net-worth investors who have a larger amount of liquid financial assets, anywhere from $500,000 – $1,000,000 and who have Accredited Investor status.
CMI Financial Group is Canada’s premier private mortgage lender. With over $2 billion in lifetime mortgage placements, CMI has elevated Canada’s mortgage investing landscape with award-winning business practices, innovative investment strategies, sound risk management and due diligence practices, and a nationwide network of partners. CMI Mortgage Investments offers an exclusive full-service program designed to customize and simplify the mortgage investment process. To learn more about how private lending can fortify your investment portfolio against inflation and market volatility, read about our unique process and contact one of our Investment Managers for a free consultation.