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Flat Interest Rates

Banks offering five year fixed interest home loans at sub 5% is a clear indication that they believe interest rates are not going anywhere far for quite some time.

As the Big Four now control over 85% of the home loan market, I believe this is a powerful indicator.

Term Deposits

Term Deposits often have an automatic reinvestment at the then current interest rate settings. Banks and other financial institutions rely on this default clause to secure long term investments even when that form of investment has lost its competitiveness.

Please review the roll over rates offered on your term deposits and re-evaluate whether there are better risk / return investment opportunities for your moneys.

Loan Market

I am starting to see the big fellas move back into the sub $3 million construction and development loan market. My understanding is that such loans are effectively then being written as home loans!

While GPS can still compete on service levels in the sub $3 million loans segment, the overall preference is to head for where there is reduced competition, namely, in the $3 million to $7 million loans segment. This segment is too big for home loans but too small for property departments. Experience has taught me that, in the larger loan segment, GPS can attract professional and competent Borrowers who know what they are doing and who get on with the job.

Liquidity

I am currently researching GPS opening a Cash and Mortgages Fund featuring 24 hour call access with a target interest rate of approx. 4.2% p.a. paid monthly (as at today’s date).

Long term readers will recall my concerns about the liquidity of such Funds. The problems of a miss match between investment terms and lending terms has been around since (at the least) Gran Tavola Siena in 1298. It did not start or end with GFC.

My concerns with such Funds start with them advertising short term withdrawal rights but, in the (very) small print, there is a clause which allows for a substantially longer period in which to actually pay the withdrawal in the event of an emergency. Advertising two business day’s availability but having 12 months in the fine print is an example.

The second concern is looking at some of the ratios between the withdrawal or access period to the funds and the term the funds are actually invested. In one study, I found that over 50% of the Fund was invested in loans which had maturity dates of over 3 years. Without getting too technical, section 601KA(6) of Corporations Act provides “property is a liquid asset if the Responsible Entity reasonably expects that the property can be realised for its market value within the period specified in the constitution for satisfying withdrawal requests while the scheme is liquid.”

The Board of GPS shares my view that having 12 months under a constitution to satisfy withdrawal requests but having 50% of the assets in loans which have a maturity in excess of three years does not satisfy the “reasonable expectation” test.

If GPS opens a Cash and Mortgages Fund, and in the event of an emergency or “run” on funds, we will make it absolutely clear that we have a longer period than 24 hours to satisfy withdrawal requests and we will set out why we “reasonably expect” to be able to comply.

The current thinking is to have a period of up to 12 months in which to satisfy withdrawal requests in the event of an emergency or “run” but we will have all moneys invested for a maximum period of six months, all held exclusively in cash or GPS sourced and managed loans. If we have a further six months to deal with events such as GFC then we believe we will be fairly safe in our “reasonable expectation.”

I will provide further details in due course but in the interim, I would, as always, appreciate feedback from the GPS Investors.

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