In the next 6 months, GPS has budgeted to raise an additional $10,000,000 (or thereabouts) across the GPS Invest Select and Pooled Funds. This will take us to what we consider to be an optimal amount of funds under management. Thereafter, funds under management will be limited to organic growth to stay marginally ahead of the inflation rate.
There were many factors in determining what our “optimal size” is. Some are,
Marketing at GPS is largely by word of mouth. I prefer to apply resources to improve service and let the rest take care of itself. GPS has been built on this basis. We are all ever-thankful for the ongoing support of the GPS Investor base and we work very hard to repay the loyalty.
A key message to come from the Reserve Bank of Australia Deputy Governor Philip Lowe’s recent presentation at the Thompson Reuters Australian Regulatory Summit was that investor understanding of liquidity must improve. He went on to note that it is a difficult issue and perspectives range widely.
As part of developing the product line for GPS, I have spent considerable time researching this topic. My perspective is that you need to look further than the promoted withdrawal rights. As noted by Mr Lowe, many schemes have the ability to offer a high degree of liquidity despite the bulk of the underlying assets being illiquid. The liquidity comes from a variety of sources such as continuing inflows from new investors and the sale of assets.
History has shown that such sources quickly disappear in times of stress. It is therefore appropriate to look at the underlying assets of the scheme and treat them as “playing the dealt hand”. To determine how long it will take for the investment to be finalised and the expected return, look at the maturity profile of the loans in the fund and the ratio of non-performing assets.
These figures should be shown in the annual report, or on the Fund’s webpage. A reason for
GPS being popular is that our average expected loan term is around 12 months. All assets continuing to perform.
In Mr Lowe’s presentation he made reference to the value of “liquidity gates” in times of stress. At first, Bruce and I rolled our eyes thinking it was just another piece of economic jargon. On further examination we appreciated that it was a good way to distinguish aspects of the reform to withdrawal rights introduced by the ASIC through RG45 in May 2012 following their review of the performance of the mortgage funds through the Global Financial Crisis (GFC). Prior to GFC, most pooled mortgage funds operated as liquid schemes. The process was that if the fund became illiquid (i.e. did not hold 80% of assets as liquid assets) it must “freeze” and put in place liquidity gates. The problem with this is that a freeze spooks the members, there is an increased likelihood of a stampede, the liquidity gates do not hold and it is off to the external administrator.
Pooled Mortgage Funds at GPS were set up to fully comply with the current RG45. We operate as an illiquid scheme as a matter of course, with withdrawal rights being in the form of liquidity gates. There cannot be a “freeze”.
A problem for pre-GFC established Pooled Mortgage Funds is that they need to amend the scheme constitution to put the May 2012 RG45 requirements in place. Such an amendment would affect members’ rights which triggers a requirement for a special resolution of members. This would be a logistical nightmare. At GPS we simply created new and compliant funds to avoid carrying the risk of a compliance failure.
The recent repayment of the Sage Apartments and Plozza loans has seen a much higher than expected conversion of GPS Invest Select Fund Investors into the GPS Invest Pooled Fund.
In accordance with our legal obligations to “treat the members who hold interests of the same class equally and members who hold interests of different classes fairly”¹ we have re-opened the GPS Invest Pooled Fund. It is now a “disclosing entity”. A new PDS is available on our webpage.
GPS will absorb the additional costs of being a disclosing entity with the target interest rate to continue at 8.75% p.a. Apart from now being a disclosing entity there are few other changes. Peter Lynn, as expected, did pick up some typographical and grammar items which have been corrected in the new PDS.
¹ Secton 601FC(1)(d) of Corporations Act- the provision which Financial Planners do not have.
I thank the ever-loyal GPS Investor base for its ongoing support. Recent offerings have filled quickly with all current loans being either fully-subscribed or wait-listed.
Late last year we saw a large number of loans repay early due to good building conditions and a buoyant sales market. Unfortunately, we have endured a large number of wet days in South-East Queensland so far this year which has delayed many projects and restricted investment opportunities. The dry season is now upon us with builders very keen to make up time and earn some money.
By the time this newsletter is distributed we should have two new loans settled and open for investment. We are targeting another four loans to settle and be available for investment prior to the end of June 2015. As always, settlements will not occur until we have dotted all the “i’s” and crossed all the “t’s”. We would sooner not take your monies than not give them back.
We thank you for your patience.