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MCP Master Income Trust (MXT) IPO brings fixed income to LITs

ETF Watch - Aug 17, 2017

Metrics Credit Partners (MCP) are specialist fund manager focusing on the fixed income space, in particular corporate debt. Founded in 2013, they now manager over $2 billion of assets through their unlisted managed funds. MCP are now seeking to jump on the Listed Investment Company/Trust (LIC/LIR) party, and are in the process of raising up to $500m for their MCP Master Income Trust (MXT).

What's the investment Strategy?

According to the prospectus the fund aims to:

... provide monthly cash income, low risk of capital loss and portfolio diversification by actively managing diversified loan portfolios and participating in Australia’s bank-dominated corporate loan market. The Manager seeks to implement active strategies designed to balance delivery of the Target Return, while seeking to preserve investor capital.

The fund will diversify itself across both industries and borrowers, with no more than 5% of the assets with a single borrower, with approximately 50 investments initially and aiming for 75-100 assets over the medium term. The fund will invest only Australian Corporate Debt and won't target global debt markets.

What return is the fund targeting?

The fund is benchmarking itself at the RBA Cash rate plus 3.25% per annum (after fees), a target that is likely to excite those who are looking for low volatility investments but a better return than the paltry rates available within cash investments.

MXT's target type of loan, Corporate Loans, tend to pay 'floating-rate' interest, meaning the interest rate is a certain percentage above the RBA cash rate, in the same way a variable home loan will change as the RBA cash rate changes. This means movement in long term interest rates are unlikely to provide risk the capital value declining. Of course MXT will still carry credit risk if the borrower defaults on their loans.

Fees that reduce as size increases

LICs & LITs generally charged a fixed percentage based fee, regardless of their size. The reality is that the costs borne by the investment manager will proportionately decrease as the size of their fund gets bigger, where the fixed costs associated with running an investment company become proportionately less. MXT promises to pass this on to the investor, with total management fees of 0.86% pa if the minimum amount is raised, down to 0.60% pa if the max is raised. These fees will decrease when all the listing costs have been recouped, more on that below.

No 'free' options, no listing costs borne by investors, but there's a catch!

In what is beginning to become a more common approach, the manager will not be providing investors in the IPO 'free' options, which for the last few years at least have been the way fund managers have enticed investors to participate in LIC IPOs.

Free options are generally provided as investors in the LIC are effectively paying the costs borne by the fund manager to list (legal fees, ASX listing costs, commissions to brokers, etc). When the fund lists, the Net Asset Value (NAV) of the fund is generally 2-4% less than the investor paid for the units. This is where the free options come in as the reward for investors to participate. If the share price rises, the options are 'in the money', but if the price falls the options expire worthless and the investor has only given up the 2-4% premium to participate.

MXT will be paying all listing costs, meaning every dollar invested will be available to the manager to invest on day 1. Because of this, there's no need for 'free options'. However, there is a catch The listing costs are essentially provided to investors through a kind of loan, paid back incrementally through higher management fees until the initial costs have been recouped. They say there's no such thing as a free lunch, and in this case, MXT is providing lunch on a 'buy now pay later' type of deal.

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.

What else is available that is similar to MCP Master Income Trust?

There's now over 100 LICs available on the ASX, however the vast majority are focused on Australian and Global shares, with fixed income products generally reserved for the ETF space. There's a few LICs which technically focus on this space, called the "Australian Masters Yield Funds", however all have low liquidity and appear to have been created with a finite time period in mind. As a result MXP will be pioneering this sort of LIC on the ASX.

For investors prepared to look to ETFs for this exposure, there's plenty of options. There are now 19 ETFs with fixed income exposure, with exposure to everything from broad based fixed income indexes through to niches like government debt, or global debt. Fees for these ETFs rainge from 0.19% to 0.56%pa.

 

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IPO Facts

  • Minimum raise of$100m
  • Maximum of $500m
  • $2.00 issue price
  • Offer open date 10 Aug 2017
  • Offer expected to close 19 Sep 2017
  • Expected trading on the ASX 9 Oct 2017

This post was prepared with publicly available information available from Metrics Credit Partners. ETF Watch did not receive any payment from Metrics Credit Partners for this post.

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