The changing demands of self-managed super fund (SMSF) trustees as they enter retirement, and concerns over potential barriers between asset managers and investors created by platforms, have prompted the boutique fund manager Balmain Funds to adopt a different tack to getting its wares to market.
Property market veteran and Balmain chief executive officer, Steve Tunley, says an opportunity to invest or co-invest directly in first mortgages secured over commercial real estate is striking a chord with SMSF trustees looking for assets tailored to meet defined-income targets.
To date Balmain, has written about $20 million in 16 loans; six of which have reached maturity and of those four exceeded a target rate of return, and two met the target rate.
Tunley’s turning point
Tunley says that for operators like Balmain, approaching SMSFs directly rather than through established administration or platform channels is a response to events of the past five years.
“We made a decision based on two large events that we would not go back into the traditional retail funds management and distribution business,” Tunley says.
Concerns over the power and control of platforms influenced the decision to never put Balmain in a position where it didn’t know who the underlying investor was in products.
“The other thing was that there are six or seven participants in the retail funds management, distribution and financial planning business and in 2007–08 trust was broken between all of them. So it was unlikely that the business was going to be able to grow.
“At the same time, we felt there was an innate level of conservatism growing in, and the banks, unfortunately – and I’ll be deliberate in saying this – would be the beneficiaries.
So, Balmain made the choice to never go back into retail funds management again. That left two places where it could play: institutional and the “mid-market, which is primarily high net-worth investors [HNWI] or SMSFs with an investing balance of more than $1 million”.
According to Tunley, the SMSF market is attractive not only because it’s a potentially rich source of funds, but also because SMSF trustees are starting to look for opportunities outside the mainstream.
Predicting a trend toward investors wanting steady incomes, Balmain has moved into commercial real estate debt. “Mortgage trusts were a very good investment that were sold poorly both by certain mortgage trust managers and by advisers as a higher-yielding quasi-cash trust… and they will never re-emerge the way they were. However, the asset class is sound as one way of receiving a relatively good level of predictable income.”
In addition to responding to structural issues in financial planning and funds management, Tunley says Balmain has harnessed cost-effective technology to put investors and their advisers in the driving seat.
It has created a web-based investment platform that enables advisers and investors to perform due diligence on properties, loans and borrowers before committing funds. All investments are made online and can be monitored in real time.
The platform is structured so that intending investors place funds into a cash management account as a prerequisite to “having a free look-see” at the underlying loans.
The minimum initial investment in the cash account is $50,000 and the minimum that can be invested in each available underlying loan is $10,000.
The current vintage of loans have target returns ranging between 6 per cent and 8 per cent, with terms ranging up to two years, says Tunley.
The manager’s fee is structured so that half of it is set to one side and available to be used to ensure each loan meets its target return to investors or, in extreme cases, to make up capital losses.
“To the best of our knowledge there is no other investment structure that makes secured high-income investments available online in an easy-to-understand and transparent manner with, in effect, a daily updated portfolio reporting service – for free,” Tunley says.
About the Author
Simon Hoyle has been a finance journalist for more than 25 years – a finance journalist because the football and motorsports rounds at The Age were filled when he was awarded a cadetship. He worked on BRW and Personal Investment magazines, and was part of the team that launched Money Management. Hoyle spent 11 years at the Australian Financial Review before moving on to be an investment writer for The Sydney Morning Herald and The Australian.
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