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SQM Research Ratings Update - Monday  
3rd February 2014
Property Valuations
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SQM Research Media Release

SQM Research Releases Its Annual Mortgage Trust and Residential Mortgage Backed Securities (RMBS) Fund Sector Reviews

Tuesday 3rd February 2015
For Immediate Release
SQM Research has today released its annual Mortgage Trust and RMBS Fund Sector Reviews for 2014. The key findings of the review are as follows –

Mortgage Trusts
  • Majority of the surviving mortgage trusts are now experiencing modest fund flows.
  • On a five-year basis to December 2014, the sector produced an average return of 4.5% p.a.
  • Unlike the pre-GFC era, few conventional mortgage trusts (first mortgage funds, predominately over commercial collateral, with conservative lending practices) remain open for investment.
  • Consistent with the previous review, in 2014, the mortgage sector continued to be dominated by unique and distinct mortgage funds offering different structures and underlying exposures.
  • The low interest rate environment and increasing competition in the commercial lending space has impacted the margins earned and the distributions paid out by the trusts.
RMBS Funds
  • The securitisation market (dominated by RMBS) has recovered over the last year, though not to pre-GFC levels. An uptick in investor demand is testament to improved confidence in the asset class.
  • The sector is split between prime and non-conforming RMBS investors with varying credit profiles. These core factors underpin divergence in returns and credit performance.
  • Over time, the credit performance of both funds reviewed have largely tracked their respective S&P SPIN indices and for the period under review outperformed their respective indices.
  • Credit spreads narrowed in 2014 and the big question is where they will settle in 2015.
  • Regulatory uncertainty caused by changes such as Basel III requirements for securitised assets are worth monitoring.
  • Counterparty risk to Lenders Mortgage Insurance (LMI) providers is also worth monitoring. In February 2015, S&P’s revised methodology for assessing mortgage insurance in structured finance comes into effect. As such, the revised methodology will also have flow on effects on funds investing in LMI-dependent notes.
Speaking of the reviews, Managing Director of SQM Research - Louis Christopher says, “Many of the quality Mortgage trusts on offer have been evolving over the recent years with a view of providing greater transparency and certainty to investors on loan quality and exit mechanisms. I think next year we are very likely to see growth in this sector, both on the mortgage backed security side and the standard mortgage trust. The growth will be driven by investor demand for anything that can provide a reasonably certain return above and beyond term deposits. Of course there remain trusts of lower quality provided by managers of a chequered background. The operators of these schemes tend to stay away from the ratings process and so it goes without saying that investors should stay well away from trusts that don’t have independent research on them.”  

The following Trusts were included in this year’s Mortgage Trusts review. The La Trobe Australian Mortgage Fund – Pooled Mortgages Option was upgraded to 4.25 stars. The rating on all other previous rated Trusts remaining unchanged –

The following Trusts were included in this year’s RMBS Funds review. The Firstmac High Livez Fund was upgraded to 4 stars. This was the first time the Pepper Investment Management High Income Fund was reviewed by SQM Research –

For further information on our Mortgage Trust Review please click HERE. For more on Residential Mortgage Backed Securities (RMBS) Fund Sector Review please click HERE.
For further information:
Louis Christopher
Managing Director
SQM Research
Tel: (02) 9220 4666
Aakriti Chona
Senior Investment Analyst
SQM Research
Tel: (02) 9220 4601
Pamela Wightley
Investment Analyst
SQM Research
Tel: (02) 9220 4602
About SQM Research
SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.
For more information please visit

Research Methodology

In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products,
Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:
4.5 stars and above – Outstanding. Highly suitable for inclusion on APLs.
4 stars to 4.25 stars – Superior. Suitable for inclusion on most APLs.
3.75 stars – Favourable. Consider for APL inclusion.
3.5 stars – Acceptable. Consider for APL inclusion, subject to advice restrictions.
3.25 stars – Caution required. Not suitable for most APLs.
3 stars – Strong caution required. Not suitable for most APLs.
Below 3 stars – Avoid or redeem. Not suitable for APL inclusion.
Hold – The rating is currently suspended until SQM Research receives further information. A rating is typically put on hold for a period of 2 days to 4 weeks.
Withdrawn – The rating is no longer applicable. Significant issues have arisen since the last report was issued, and investors should avoid or redeem units in the fund.
Not rated – the fund has not been rated by SQM.

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