RMBS: One of the Fastest Growing Asset Classes You've Never Heard of

Residential mortgage-backed securities (RMBS) are one of the fastest-growing areas of Australia’s fixed income market, yet the asset class remains relatively unfamiliar to many investors.

In this webinar, Scott Rundell, Chief Investment Officer at Mutual Limited, joins John Clothier, General Manager of Distribution at Copia Investment Partners, to explore how Australian RMBS works, what is driving the growth of the market, how it differs from the US experience, and why institutional investors are increasingly looking to the asset class for income, diversification and capital preservation. Watch the full webinar below:

https://video.wixstatic.com/video/4ef974_f49c87363eca45f696a6dc3484084fcd/1080p/mp4/file.mp4

Transcript

John Clothier (00:01.174)

Good morning everybody. My name's John Clothier. I'm the general manager of distribution at Copia Investment Partners. We have the pleasure of partnering with Mutual Limited, a cash through to fixed income fund manager based out of Melbourne. Today I have with me Scott Rundell, who is the CIO of Mutual, who has a a pretty in interesting topic for us to run through.

Pretty interesting markets on the equity side, volatility in the markets. I think there are a lot of people having a look into this space for some income solutions without having to dial up that volatility. So, I think it'd be a  great opportunity to hand over to yourself and take us through all the nuances of this space, if that's all right.

Scott Rundell (00:45.39)

Thanks, John. Good morning everyone.  I am Scott Rundell, Chief Investment Officer of Mutual Limited.  We’re a Melbourne-based funds manager.  We specialise in fixed income, primarily floating rate product, with just under five billion under management spread across retail and wholesale institutional mandates. So .the topic today is the fastest growing asset class you've never heard of, mainly RMBS.  Now most people have probably heard of RMBS or may be familiar with it from the GFC.

What happened during the GFC? Why it matters is it is an excellent alternative income generating asset that a lot of people are probably not familiar with.  Just on this slide, on the left-hand side, there's a very generic breakup of what a client's portfolio might look like: cash, equities, property, and traditional bonds.  In the Australian context, we are as a country are heavily invested in equities and property for that matter, while traditional bonds, which would incorporate thesort of product we're talking about today is probably less appreciated for various reasons which I won't go into.  But to give you some context, within the Australian superannuation asset pool, roughly 19% is held in traditional bonds or fixed income. This compares to about 35% across the OECD average. So, we are well underrepresented and somewhat overrepresented in equities for historical reasons. Again I won't go into it, but I'd say your typical fund manager would say they have zero in RMBS.  So. Hopefully we’re looking to change that.

So, what are we going to touch on today? What securitization is, which is the sort of the technology backing RMBS and ABS, and then why the market's grown so rapidly over the last few years.  Even though it has grown rapidly recently, the market has in fact been around for almost 30 years.  Why institutional investors such as us use it, why it differs from US products, which some people may be more familiar with given the GFC and some of the stories coming out of the US.

And where RMBS fits into your portfolio potentially.

The size of the opportunity. Over the past decade we've seen strong growth in RMBS and ABS, , especially in the last five years. And this chart on the righthand side shows you RMBS issuance going back to 2004.  YWe can see the impact of the GFC in 2008, it dropped quite drastically and then it's recovered consistently.

That final column is iyear to date. If you analyze the data, we're in for another strong year.  If we add ABS securities, which uses the same technology, we're looking at about $80 billion a year on issuance over the last two or three years.  And the outstanding market is roughly $250 billion.  To give you some context, the overall credit market, so that's bonds issued by companies and banks generally in Australia, is roughly around.  two hundred and fifty billion in the floating rate space and slightly less in the fixed rate space. Arrocingly,  it’s a meaningful part of  the domestic investment landscape, especially the area that we're focused on.

Why is it growing so quickly?  What are the drivers?  There's three key areas in this regard.  On the left, you'll see banks. Banks are the main funding mechanism for credit in the Australian market. A lot of people, the banks control, say 75-80% of the ABS, sorry, the mortgage market, and a similar percentage of the deposit market.  But increasingly, because of regulatory changes around the banks post GFC and the differentiation between what's called a prime mortgage, what's called a non conforming mortgage, has seen the banks step away from a particular type of lending, specifically lending to people who are classified as non conforming.  It's not a stigma, it's just a sort of regulatory classification. But nevertheless, they are big users of RMBS as a funding tool, but less so in than in the past. The big users of funding this space are the nonbank originators . And they’re  names you might be familiar with, Red Zed, if you follow Rugby League.

Other major non-bank originators include the likes of  Liberty Home Loans, Red Z, Resimac, and Pepper. These are companies that have been around for 20 plus years.  And their specialty is lend to mum and dad investors who perhaps aren’t consider prime borrowers for various reasons.   And they fund themselves using RMBS securities.  Why ? Well, it's a deep, cheap, and a very accessible market for them, but they also don't have access to deposit takers, deposits, because they're not a regulated institution, although they do adhere to regulatory requirements and the like.

And then lastly, the right-hand side is demand from investors such as ourselves has been growing very, very strongly. Interest rates have been rising. RMBS and ABS securities are floating rate securities. So as interest rates go up, the coupons that you generate through these securities increase as well. They're what you call inflation immune, and your income continues to rise as interest rates go up.

Who uses it, as I've touched on, or from an investor's perspective, Australian superannuation funds are big investors in this space, particularly the triple A part of the capital stack, and I'll touch on what that means in a moment.  Insurance companies, banks, sovereign wealth funds, and then asset managers such as ourselves, we like this product because it generates stable income.  As I mentioned earlier, it's inflation immune and historically the capital price has been very, very stable, such that your capital downside in a risk off events such as COVID is relatively modest.

So the GFC itself is relatively modest compared to say equities or other securities that are more exposed.

How do they work? What is  securitisation? Securitization is basically a bundling up of assets.   In a simple example of the left, say  1,000 mortgages.  If we placed all those mortgages into a trust, a specialized vehicle, its only job in life is to own  those loans or those mortgages and then issue securities to fund the purchase of those mortgages. We investors buy  the securities and they're backed by the loans.

As borrowers make repayments on their loans being principal and interest, the investors receive income through time. And on the righthand side, I've talked about sort of the broad dynamics. There's RMBS, so home loans, there's owner occupied and investment loans. And obviously the latter will be growing slower because of the budgetary changes or proposed budgetary changes around negative gearing and capital gains tax.

As I mentioned, the income source is your mortgage payments.  And in Australia, mortgages are very, very robust relative to offshore markets.  They're full recourse.  We have a first charge over the underlying property and for tax reasons you're incentivised to pay your mortgage off as quickly as possible. The underlying debt is ABS. So this is asset back for auto loan. Banks sort of don't do as much auto lending as they used to again for capital charges that have increased post the GFC in the regulatory environment. Equipment finance. So an example is there's an ABS issue out there that finances  solar panels. there are specialist RMBS or ABS deals, I should say, that do medical equipment. So dentist chairs, operating table, all those sort of things need to be financed. and those assets are So the loans that buy those assets are bundled up into these securities and allows us to buy them and get decent risk adjusted returns. One of the big misconceptions about RMBS is that it's risky. I've put a picture of the movie The Big Short here, which is a fantastic movie. very entertaining even if you're not into finance.  Mywife who is not financially inclined watched it and actually found it very enjoyable and it is it is a fun watch. But it  goes around what happened in the US market and why we had the GFC, the catalyst and the there's Michael Bury who is a renowned person who predicted  the decline of the US housing market and it tells the story of how it collapsed.

Now people watch this and think RMBS is a dirty word. The difference between what happened in the US in Australia is quite stark and is worth focusing on for a few moments. But from what a lot of people remember in the RMBS is the GFC, the subprime market and Lehman Brothers collapse, the housing collapse in the US, and that sort of thing.  As I said, great movie, but does not reflect what happens in Australia or has happened historically in Australia. as I said, RMBS has a branding problem. and hopefully we can start to  turn that around. Whyare mortgages in Australia so much better than or stronger historically than the US.  There's just a couple of examples here, just some metrics that I've put up. If you look at the size of the housing market in Australia relative to  outstanding mortgages, so top left chart there. These stats are a little older, bit out of date, but the  relativity is about right. It says that the value of housing in Australia is about 10 trillion, it's close to 11 trillion at the moment.

And the loans back against our 2.2 is close to about 2.5, 2.6 trillion. In an aggregate sense, the loans and value ratio is around 25-26%.  lot lower than say the US example, where it's roughly don't do the math. It's actually the same LVR, but where it differs is the actual individual loan level. So it sort of implies a lot more people own their houses in America.

On the right hand side, we see how important housing is to our GDP.  It is a major part of the market.  We are incentivized in Australia to own our own property from a tax perspective, and I'll get on to that in moment. Then the bottom left is what percentage or the arrears rate, I should say.  So this is the percentage of mortgages that are behind scheduling their payments. If you look at the Australian example at the moment.

Arrears data per this slide is 3.65%.  So that's 3.65% of non-conforming mortgages are behind in their payments by more than 30 days. The long run average there is written as 5.95%.  This uses a varied degree of data. Other data I have sort of indicates the long-on-average is about eight percent, but the current level is about three and a half percent compared to say eight percent long on average, and at its worstwhich was in 2002, the arrears rate was 23% in the Australian mortgage market, which is obviously very, very high. in the US market, you can see it's a lot higher consistently. The average is north of 20% over the long run, and it's currently running well above it's okay well above what the Australians experience.  And then you have on the right hand side bottom sort of prime arrears prime. To define prime, prime is a mortgage where the borrower has a salaried job.  Every week or every month they receive the same income from their job, their employee to whether, say, a company or a business, and they're getting the same money every week. They don't have any black marks against their name from a credit perspective.  They've never missed a bill, they've never defaulted on anything. and the loan to value ratio of their mortgage is less than 80%. They're the three main determinants of what's a prime mortgage.  Anything that's not classified as prime in the Australian context with regards to APRA is non-conforming.

For example, if you're a self-employed doctor, lawyer, accountant, or anything like that, and then in solid professions that earn good income, albeit from one month to the next, would be variable, they are considered non-conforming. Theoretically the banks don't lend to people like that. They then go to what we call a non-bank originator, which is the companies I mentioned earlier, the RedZed, Liberty’s, and so on.

Prime versus non-conforming in Australia mean a lot different than say the US versus prime versus subprime. Subprime is a much more negative, I guess, if I could use that term, classification.  A little bit more detail about the historical performance and dynamics of a US mortgage versus the Australian mortgage. A US mortgage, your interest payments on your primary residence are tax deductible.

Any profit you make when you sell your primary residence is taxed. Because of these two dynamics, you are incentivized to maintain your loan to value ratio as high as you can. And I think the average is about 85% LVR in the US mortgage system compared to, say, in Australia, where it's about 45% in secondary markets.  Mortgages in the US are typically non-recourse. Now it does vary state by state. So this is a very generic commentary here.

You compare that to the Australian market, and yes, this has changed recently because of the budget but mortgage payments on your primary residence are not tax deductible, and profits on your prime residence are not taxed.  So roughly 70% of mortgages in Australia are owner occupied.  The balance of 25, 30% is investment. So that's a different dynamic. Further, as a result of those dynamics, you are incentivized to pay your mortgage off as quickly as possible because you're building up equity that's essentially tax free.

and that's what we see in Australian mortgage. The average mortgage in Australia is written up to 30 years, but on average are repaid within nine years or refinanced within nine years and with RMBS securities, and I'll go a little bit more detail on how they're structured in moment, but the weighted average life of these securities is around three and a half years. So, we invest in an RMBS today, usually within 18 months of us investing, we start to amortize our exposure because people start paying their mortgages back.

and then with three and a half years we're paid off.  So again, very good risk return dynamics. and the last thing with regards to Australia mortgages, we are full recourse. So you can't just walk away from your mortgage. if there's a shortfall, the bank will come after you, your first born, your car, your kidneys, whatever, they'll take it.  With regards to the US mortgage, you know, there's terms through the GFC called jingle mail.

Once you're in negative equity, you can just walk away. You're incentivized to walk away. The bank can't come after you and  chase your other assets. So there was a thing, jingle mile, where people put the keys to their house and just mail it back to the bank. Come and get me, you can't.  So if you look at the bottom left-hand side there, you'll see between 2000 and now, loss rates on RMBS have ranged from two and a half percent prime to seven and a half percent non-conforming. Now that's prime. That's that's people who have very good jobs and that sort of thing.

You look at the Australian market, there has been zero loss across both prime and non conforming over the same period. So no rated RMBS security has ever made a loss or a capital loss that hasn't been cured through the history of RMBS. And I've been doing RMBS since ninety six, which is pretty much when the market took off.

A little bit more detail about the resilience of the market here. and there's a sort of commentary from the RBA during or post the GFC on mortgages and sort of talking about the loss rates that have been seen elsewhere versus here where it's virtually donut.  The chart on the left there, the data's a little bit old, it sort of ends in 2014, but it covers a very important 30-year period there. And you can see in '94, the last global recession before the GFC inspired one.

But you can see the Australian loss rates or non-performing housing loans is very, very static and stable.  Whereas you can see the volatility in other markets such as the US and UK, we just don't have that volatility, which is encouraging.  Bottom right hand side, this shows you historical arrears rates across the non conforming market. So we can see back in the early noughties it did get as high as twenty three percent, which I mentioned. Even when it hit twenty three percent back then. No RBS security lost any money in a capital sense. There's volatility in market valuation, but there was no loss of capital through default of underlying mortgages and that sort of thing.  Into the GFC, areas were rising, you know, 15%, still no losses. And then post the GFC, the underwriting standards and the regulatory oversight has really improved. That's why we have such strong and consistent performance through time across the asset class.

So why do we like RMBS?  Each RMBS deal typically has about a thousand lines.

As a security holder, we get a coupon every month, which is based on the bank bill swap rate plus a predetermined margin. As I mentioned, floating rates, so it's immune from inflationary pressures. Historically low realised loss rates, as I said, or virtually zero. and then structural protection.  So we get paid before the originator gets paid. They don't receive any of their money back. They don't get their equity back until we're repaid in full.

So the Liberty’s, the RedZeds, Peppers, for them to get paid, we need to get paid first. And then the right hand side is  the secret source as we call it, which is the credit enhancement. There's multiple layers of protection within a structure. And the next slide I'll go into the structure and how it works in a bit more detail. But there's what we call an excess spread capture. We just build a reserve account to cover any losses. There's subordination. You can pick what layer of the mortgage pool you invest in.

And then in some instances there's more insurance, which is which is less common in non-conforming, more common in prime, that provides you a layer of protection as well around losses.

This is what an RMBS looks like. On the left hand side is a rough and dirty, what an RMBS deal looks like. There's class A through to class G. Class A is the highest ranked, typically rated triple A. Sometimes there's three layers of triple A with varying structural dynamics. Class B, which is double A, which is the same rating as a major bank senior bond. Then you go class C D E and F.  The ratings change from A, triple B, double B, single B, and then down to equity, the unrated tranche, or theoretically, the first  loss piece. As you can see, a thousand mortgages in that structure. It doesn't mean that if you buy the class E note or the class D date, you have a select percentage or a select number of mortgages allocated to you. You have a floating exposure to a thousand loans. Now if the thousandth loan or one of those loans defaults or goes into arrears, the losses start at the bottom and work their up. now keeping in mind that the loan to value ratio of a of a mortgage is typically on a new structure about 65 to 75 percent. Borrowers typically have 25 to 35 percent equity already in their house. soif there is a major cyclical downturn, we would need to see house prices fall on average by 25 to 35 percent and the borrower to default before we were at risk of being impacted from a capital sense. On the right hand side is what a major bank's  balance sheet looks like. And I just want to highlight that an RMBS is very similar to a bank's balance sheet and vice versa. Another way of looking at a bank's balance sheet is it's just one big RMBS.

Major banks and the regional banks, such as Bendigo Bank and Bank of Queensland, their main asset pool is mortgages, roughly 80%. At the very bottom is the equity piece, so the shares you buy in the share market. Then there is the hybrids, which are being phased out.  But then there's the tier two, the subordinated bonds, which if you look across the rate A-Rough and dirty, similar to the class C notes on RMBS deal. Then you've got senior debt and deposits, which is just different layers of the capital stack.

And whereas a bank is exposed to commercial property and housing, RMBS structures are exposed only to residential housing.  We can choose which layer of the stack that we want to invest in.  I've given you some rough yield coupons, given prevailing credit spreads and BBSW rates. Let's take the triple B tranch, the class D, you could get 6.3% to 6.5% on thatFor roughly three, three and a half year exposure. If you compare that to a triple B corporate or bank paper in the market, you're getting a  roughly 100 basis points more than what you would for something else that was a bit more vanilla.  The argument for that, why you get more spread, some people would attribute that to a complexity premium because RMBS are all a bit more complex than, say, vanilla bond issued by Westpac, or sorry, Westfarmers or Woolworthsand then there is also the argument there is a liquidity premium added to this because RMBS structures are not as liquid as say bank paper.  That used to be the case. now I'm not saying that a double B rated RMBS tranche is as liquid as a bank senior or subordinated bond, but they are traded.  You can buy and sell them in secondary markets, and increasingly we are seeing trading banks, global trading banks coming to Australia and trading this paper in secondary markets. So if we were forced to sell for whatever reason, there is a market for us to sell them. and just in the middle is just an example of the investor base. This is not just a random part of the market where a few small fund managers invest. There are some big global and systemic fund managers active in this space quite aggressively and deeply into the broader market. And we also see a lot of foreign investors come into the RMBS market, especially out of Japan and Europe as well are very active in this space.

Just a bit of a comparison and I don't like to kick private  credit when they're down, but for the record, Mutual is not active in private credit and by private credit I mean the stuff you see in the AFR and all the coverage that ASIC and everyone's looking at. We do a small smattering of what we call warehousing, which is doing RMBS before it becomes a public deal. So, it's technically private. but it's still backed by first ranked mortgage over property and the like.

So, a different sort of risk profile.  But anyway, private credit, often based on model pricing, it is illiquid, often unrated and very opaque.  There's been a lot of talk and focus on the transparency of the underlying assets.  It's pricing often left at par. Sometimes you have coupons accruing, all those sort of bits and pieces. Whereas the RMBS market is priced daily and independently and transparently. It is liquid.

Is traded in over-the-counter markets, as are all bonds in the Australian market.  It's publicly rated by any of the three major rating agencies, S&P Moody’s or Fitch.  It's very transparent.  We receive regular monthly reports on the state of the underlying mortgage pool that we've invested in. And when an RMBS deal is done, say it starts with a thousand loans, loans are not replaced. Once a loan is paid off, whatever reason the underlying borrower goes and refinances, gets a better rate elsewhere, that mortgage is repaid, and the capital returns to the borrower, to the investors such as ourselves.  And this is why RMBS pools typically have an average life of three and a half years, because people refinance, chase cheaper deals, and the money comes to us first before going to the equity holder - he RedZed’s and  Liberty’s and so on.  So that's a key feature as well.

Just a bit more detail around why it's I think an area that advisors should look at is there are a lot of cash balances in the market are elevated. There is a degree of uncertainty. You know, we looked at so yesterday we passed the financial year end and the ASX 200 is up only 1.2%. So not exactly a great performance for equity with a lot of uncertainty going forward, whereas these sort of products, capital secure and you will generate solid income and consistency.

Going forward. And we would expect sort of our high yield fund, which invests in extensively in RMBS and ABS.  You know, your 12-month returns are running around 9% with very minimal capital downside.  As an alternative to private credit, and we also see a lot of people looking at RMBS as an alternative to hybrid capital. Now, the challenge for a lot of investors is RMBS is not available to retail investors. It is a wholesale or institutional market.

The only way they can really invest in it is through a managed fund. There are some ETFs out there, but they're mainly triple A level, they don't give you the same return. but nevertheless it is a liquid market underlying it. Our own higher yield fund has daily pricing, is has daily redemptions and applications and the like.

What could go wrong?

I had a meeting this morning with a client who asked these questions, as you would expect, given the budget, and that  we're seeing house prices have come off 3%, 3.2% in Sydney as of June. Over the last three months, Melbourne's off a bit. Historically, through housing cycles, on any rolling 12-month period, the worst performance in house prices at a national level we've seen is typically around 10% downside. If you look at the GFC, you look at COVID, rolling 12 month return, the worst has been around 10%.  Keeping in mind the weight average loan value ratio on these things is around 65 to 75%.  So yes, down 10% versus equity in the  individual homes of around 65-75% at the mortgage level. What could go wrong? I mean, a severe recession would obviously be a major headwind for at least sentiment, not necessarily the underlying performance.

We saw an unemployment shock that would I mean people pay their mortgage while they have their job. Importantly, unemployment 4.4% earlier this week. The post-GFC average for unemployment is 5.6. We're more than a percent under that. The long-run average is about 6.7%. We are well below the long-on average. and employment's holding up pretty well, despite sort of GDP growth being pretty anaemic.  It's still positive, but not as strong as it could be.

A housing downturn, obviously.  There's been a lot of press, a lot of coverage about the structural dynamics of the Australian housing market.  I saw a statistic the other day since the  Labour government, Federal government came to power, we've added one point four million immigrants to the country. Without any bias towards immigration policy or whatever, regardless, one point four million people need to be housed.  And as an economy we are not building enough houses to cope with the rising population.  So that causes in basic economics 101 supply versus demand. Demand greater than supply, prices go up. and that demand won't change, but supply is still being constrained. As a result, that provides, I guess, a floor, if you will, over the next twelve to eighteen months where a lot of forecasters are suggesting house prices could fall up to 10%.  Spread widening, we saw this post the Iran war. We saw credit spreads move wider and that sort of caused a very, very modest capital decline, capital price decline, but that's normal. and those spreads have come back, i.e. capital gain.  So again, not a major concern for us at the moment. And then there's a liquidity event. COVID was an example, GFC is an example. Donald Trump announcing tariffs last April, or actually last year, causes a shock to the system and liquidity dries up.

So all those things aside, I think it's other key things to remember. It is, I would say, systemically important. So Australian banks, I'd say, are systemically important, i.e., during times of crisis, the government steps in to support them.  We saw that with COVID, we saw that with GFC. The RMBS market has also attracted government support. Through COVID, the AOFM. the government's funding arm bought RMBS paper to ensure the continued funding of that market. While RMBS funding for mortgages is modest in the grand scheme of things, the estimates roughly around seven to ten percent of mortgage funding, it's still a major part of the market.  It lends to parts of the market that the banks don't touch. So politically, there is a will, if you will, to support it.

Fundamentally different to the US, touched on that earlier. Credit enhancements provide plenty of protection. So, for all the negative headlines you see in the paper about house prices, these things can withstand some pretty severe downside. And I'll go through that in moment in a separate chart. And they provide good portfolio diversification from an income perspective. If income is key for you or your clients with capital preservation, also a strong desire, then these are an asset class thatyou should look at as well. And lastly, there are floating rate structures. So more interest rates are potentially going up again, depending on which view you have. I think Westpac has two more rate hikes in the in the can, other banks one, some none. Either way, we're still in the rising and inflationary environment. There's risk to higher interest rates. These are floating rates, so your income improves and you don't have the duration hit or capital hit from a duration position.

Still plenty of positives to go of the asset class and it is continuing to grow and has very strong support in in the institutional space.

Just some very broad fundamental charts here. bottom left shows you the arrears number first is unemployment. As you can see, not a huge or easily observable correlation there. More observable is the is the next one to the right, which shows you arrears versus interest rates. Interest rates have risen strongly from 2022 onwards, obviously given inflation. But as we can see, yes, arrears have gone up, but not by as far as you might be expecting.

And then on the top two charts, the same data, just in a scattered plot form. Key points, I think, is the black dots. That's the post COVID data. And as you can see, unemployment has gone from three to seven percent. yet the arrears rate stayed well below long on average, and the same with interest rates stay well below long average. And that's a function of the improved underwriting standards we've seen post GFC, and  basicallyregulatory oversight and like, which has really, really helped.

How bad can it be? This is an actual deal we looked at earlier in the year. Sapphire 2026-2.  So that's the name of the trust. This one has a 1,300 loans, roughly a billion dollars, average loan size 765,000. and that table at the bottom left shows you and I've highlighted a particular part. So the B-rated tranche, which has credit support below it of 0.4%. if house prices fall.

10% and mortgages in that pool, or 27% of that mortgage in that pool default, the capital is still safe.  That's just giving you this sense of how much these things can withstand.  Now, this also assumes the drop in house prices and the default rate happens all at once.  It just doesn't happen. So again, these things are designed to withstand very, very strong, I'm sorry, very, very negative dynamics.

Before I go into the last slide, the thing, some data I'd sort of like to leave you with. Since the 1980s, the cumulative loss rate from mortgage lending from the banks is 0.02% of what they've lent. To put that in context, that's a $20 loss for every $100,000 lent. Now, if you look at what the non-bank originators, this is the unregulated part of the market.

Their loss rates in the last or before the or late 90s onwards is around a similar figure, some a little bit high, but not much. On average, $20 for every $100,000 lent has been lost through mortgage lending.  That's very, very, very low. And again, a reflection of the strength and quality of the underlying assets in these pools.

Some myths vs reality. Again, I've touched on a lot of this stuff. RMBS caused the GFC. No, it's not right. It was US subprime lending caused the problem. And I'll give you an example actually.  There was a lady in Los Angeles who was 85 years of age and had repaid her mortgage 20 years prior to the GFC, and a rather unscrupulous mortgage broker convinced her to remortgage her house at 95%.  She lost her house within 12 months.

So it's an example of the US system versus the Australian system. We're much more regulated. We have 12 banks that control 90% of the market. In the US, you have six, seven thousand banks, and you have many, many number of defaulting banks in finance companies every year.

All securitization is risky. No, structure matters. So. we spend as much time on the structure as we do the underlying loans, the originator, all those bits and pieces. We don't just look at the pool of assets and go, yep, that's ours.

That's our source of repayment. We look at the history of the borrower of the lender, how good they've been through the cycle, what their arrears rates are versus the broader market. House prices must rise. That is a myth. we've saw through COVID house prices fell 10%, arrears rates still stayed below the long and average. I think they peaked about 5% versus an 8% average. and these transactions are designed to withstand stress.

The GFC taught a lot of people lessons. and we're just stronger through it. Only institutions can access it. Yes, that's correct, but through managed funds you can access these securities. there are several managers out there who can do it. we would obviously promote ourselves. try our website, there's plenty of information there or reach out directly.

There's our funds. There's four of them. Just a bit of a product flog. the bottom two funds have RMBS in them. and there's the fee structure. So the both of them are rated recommended by Zenith and Lonsec. the income fund, so the credit fund's been around. We actually launched that March 2020, which is great timing, but that fund has doubled in size. You know, performance has been very strong. And the high yield fund was launched a year earlier.

Sort of that's five hundred and fifty million now. and performing very, very well. So I will leave it there. John, any comments you want to make.

John Clothier (37:06.038)

No, thanks very much for that. It's a pretty comprehensive play by play there of what's available within the mutual limited portfolio. I think pointing out some of those fundamental differences between the market here and in the US and how stable it has been in that environment, the return for the risk taken on board's been a a pretty handsome trade. And and I think, especially in the current environment, that that consistent access to money.

the no buyer sale spreads, the daily liquidity for people to get in and out is becoming more and more important with with some of the other developments that we've seen in the market. So thank you very much for your time. If anybody has any questions, please r reach out to any of your business developers at copia and we're happy to provide you with any more information on any of the strategies within mutual or more broadly within the Copia stable. Thanks very much.

Scott Rundell (38:02.2)

Thank you.