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Gryphon Capital launches fixed income trust (GCI)

ETF Watch - Apr 17, 2018

Gryphon Capital Investments are currently raising up to $350m for their new Listed Investment Trust (LIT), Gryphon Capital Income Trust (GCI). GCI is a fixed income focused product with monthly distributions, aiming to help fill the fixed income component of many investors’ portfolios. The offer is expected to close on 2 May 2018 unless fully subscribed prior.

What is the strategy?

The fund targets a predictable monthly income stream.

  • Deliver a consistent monthly income stream by investing in a diversified portfolio of secured fixed income securities.
  • Attractive yield with a target net return of RBA cash rate + 350bps (5% per annum) paid monthly.

It invests in:

  • Residential Mortgage Backed Securities and Asset Backed Securities have a number of important structural protections that mitigate the risk of bondholders taking a principal loss. These credit enhancements include borrower’s equity, lenders mortgage insurance, originators excess interest and originators first lost provisions
  • Every proposed Residential Mortgage Backed Securities investment is stress tested to withstand the APRA stress scenarios that are used by Lenders Mortgage Insurers in calculating Probable Maximum Loss which corresponds to a 1 in 200 year event, prior to its consideration for the portfolio.

GCI is aiming to fill the fixed income part of an investor’s portfolio, promising low volatility and an attractive income yield, primarily be investing in residential mortgages.

How has the strategy performed?

Gryphon Capital has traditionally managed portfolios for large institutional clients. As a result, there’s no direct comparison available of the strategy being promoted. They do list two examples in the Prospectus, for strategies with targets of 5% and 2.7% above the RBA cash rate respectively. Both strategies have outperformed the benchmark, albeit over a short time frame, dating back to just 2015.

Who is Gryphon Capital Investments?

Gryphon Capital Investments were founded in 2014 and now manage $1.7b of fixed income assets. To date they have only dealt with institutional clients, with GCI being the first opportunity for retail investors to invest in their strategy.

What else exists in this space?

According to the ETF Watch Fund Database, there's 3 fixed income LIC/LITs and 20 ETFs available on the ASX. The only LIC with size to note is the reasonably recently listed MCP Master Income Trust (MXP), a fund that raised over $500m in just November last year, proving the demand for this type of strategy. The key difference between MXP and GCI appears to be the type of fixed income investment they target, with GCI targeting residential mortgages, and MXT corporate debt.

Listed Investment Trust Structure

The fund will be listed as a Listed Investment Trust (LIT), compared to the more common Listed Investment Company (LIC) structure. We looked at the two structures when Forager Australian Shares listed last year, with the key difference being the trust structure must pay out all earnings to investors, whereas a company is able to retain earnings.

Details of the Offer

In what is now the norm for LIC IPOs, there will be no 'free' options tied to the offer, with the company absorbing all costs associated with listing, and repaying this cost over time through management fees. This is great news for investors, as it means investors in the IPO will not have their initial Net Asset Value reduced, and for each $2 share purchased, there will be $2 available for the manager to invest on day 1.

Management costs of the fund will be 0.96% per annum.

Quick Links

IPO Facts

  • Minimum raise of $100m
  • Maximum of $350m
  • $2.00 issue price
  • Offer open date: 20 March 2018
  • General Offer expected to close: 2 May 2018
  • Expected trading on the ASX: 18 May 2018

This post was prepared with publicly available information available from Gryphon Capital Investments.  ETF Watch did not receive any payment from Gryphon Capital for this post.

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