Beyond 60/40: Elevate Client Portfolios with Private Mortgage Investments

[00:00:10] David Kitai: Hello and welcome to this Wealth Professional Canada webinar. My name is David Kitai, Senior Editor at WP. A few quick housekeeping notes to go over. First, this presentation will be made available to attendees following the webinar. Second, there will be a Q&A session held at the end of our webinar. So as questions arise, please ask them via the Q&A button at the bottom of your screens. We will do our best to answer all questions live in this session. With that, let's get into today's topic. The search for non-correlation and true diversification continues. Ask most advisors and they'll tell you that it doesn't ever end. As the contours of the global economy shift, with inflation moderating but still elevated and interest rates normalizing, many of the traditional sources of diversification that advisors and clients once relied on no longer offer the same utility. That's why today we're turning the spotlight on a strategy that's helping advisors differentiate their practices and meet evolving client needs, private mortgage investments. Here to share insights on how these products can enhance portfolio construction and client outcomes are Dean Brown, Regional Vice President, Wealth Advisor Solutions, and Chris Baker, SVP of Investment Sales, both at CMI Financial Group. Gentlemen, please take it away. 

[00:01:22] Dean Brown: Hello, everyone. Thanks for joining us today. My name is Dean Brown, and I'm Regional Vice President of the Wealth Advisor Solutions channel at CMI Financial Group. I work closely with advisors to help them integrate investment solutions into their client portfolios with a strong emphasis on strategies that balance both growth and risk. And I'm excited to share insights on why CMI's 100% Canadian MIT funds can be a great fit even for conservative investors. 

[00:01:54] Chris Baker: Awesome, Dean. My name is Chris Baker. I'm Senior Vice President of Investment Sales here at Canadian Mortgage Investments and thrilled to have everybody here on this webinar today. And Dean is one of the best guys we could have on here to talk to you about this. So he'll do probably most of the work here. But we'll certainly both be able to answer questions toward the end and you'll hear from me in a few of these slides. I've been in the industry for many, many years, both on the investment and insurance sides, as well as the mortgage side of the business. So I've got lots of experience in both worlds. So this role has been an exciting role for me and an opportunity to really showcase the opportunity for investing in something like CMI. And I think that this is going to be a really great opportunity for everybody to ask some great questions. So anything you have, please feel free to put it into the section and we'll—if it's something we can't even answer today, we'll certainly get back to you on it. So, you know, the big thing for—to give you kind of an overview of what we are doing here, clients today are more than—they want more than traditional solutions and investments. I think we're seeing that in the markets today. They expect that their advisors will offer innovative alternatives that deliver enhanced returns and meaningful diversification to them now, knowing what the markets look like. Our webinar today is really designed to explore how private mortgage investments can meet these expectations and how it all complements traditional strategies while providing clients with reliable income and enhanced portfolio stability. So we'll demonstrate throughout this webinar the approach, how this approach itself offers an opportunity to not only enhance the client portfolios, but to differentiate your offerings and set your practice apart in an increasingly competitive wealth management landscape that we're seeing right now. So I'm going to throw it over to Dean now to take it away. 

[00:03:58] Dean Brown: Okay, thanks, Chris. Traditionally, fixed income has played a defensive role in portfolios, first by protecting capital, second by generating income, and third by helping smooth the ride when equities fluctuate. Bonds have traditionally moved differently than stocks, acting as a natural portfolio hedge. This is why the classic 60-40 portfolio stood the test of time. You got growth from the equities, stability from the bonds. But in recent years, the landscape has shifted. Ultra-low yields, rising inflation, and large rate swings have made it much harder for traditional fixed income to deliver on those promises. The turning point came in 2022 when both equities and bonds delivered negative returns. It challenged the assumption that bonds will act as a counterbalance to equities to offset risk. It continues to fuel concerns about equity bonds and the positive correlation risk. The stickiness of inflation has also been a concern. The lesson was and still is the traditional 60-40 approach to portfolio construction no longer works. To build resilient and reliable portfolios, the toolkit needs to expand. Okay, so evolving investor priorities. You know, investors' priorities have shifted during that transition time as well, especially with economic uncertainty we've been experiencing. Investors are less concerned with how diversified a portfolio looks on paper and more with how it actually performs when markets get rough, if inflation spikes or if rates climb. They're looking for assets that offer real uncorrelated performance. There's a stronger focus on risk management and capital preservation, even among growth-oriented investors. Now, income is still important, but the focus has moved to consistency and stability rather than chasing a yield. And inflation is also a key concern. In fact, surveys show that two-thirds of Canadians see inflation and the rising cost of living as the biggest barriers to meeting their financial goals. One in four Canadians has already adjusted their investment strategy in response to inflation. And one in five is exploring new opportunities. These concerns are understandable. Periods of persistently high inflation can reduce real returns and lead to a sustained positive correlation between equities and bonds, which weakens diversification's benefits. The takeaway here is that investors want consistent, defensive, inflation-resistant income, and they're increasingly open to looking beyond the traditional vehicles to find it. So, uh... Alternatives have really seen some growth over the years. Given the shift in mindset, it makes sense that more advisors are incorporating alternatives into their practices. To put it into numbers, a study last year from Mercer, the global investment consulting firm, found that 92% of advisors are already using alternatives in client portfolios. And just as many say they plan to increase that exposure. According to Prequin, an investment data company, global alternative assets under management have more than tripled since 2015 and are expected to rise to nearly $30 trillion by 2030. Pension fund managers have also been boosting their allocations to alternative assets. One of the biggest reasons for this is the growing need for better diversification. Relying solely on stocks and bonds just doesn't cut it anymore. 

[00:07:18] Chris Baker: Okay, so alternatives and portfolio risk return. Depending on the asset class, alternatives can enhance return, increase income, provide meaningful diversification, and in some cases, all three. Alternative strategies like private mortgage investments build on the strengths of traditional fixed income with consistent income, capital preservation, and low correlation to public markets. Within the alternative universe, private credit has been growing at an incredible pace. According to McKinsey, by the end of 2023, the global private credit market had grown to nearly $2 trillion, 10 times what it was in 2009. Within that market, private mortgages have become one of the fastest growing segments. Okay, thanks, Dean. So we have our opportunity to have our first live poll of the webinar. So this is an opportunity for everybody to answer this poll. The poll is on your screen now. Best describes your current use of alternatives in your advisory practice. So you've got a single choice poll. If everybody could enter your answers now. All right, so we've got our answers here. It looks like for the most part, everybody's kind of either established or exploring this opportunity with alternatives. So that's good. So this will be a great opportunity for the rest of the webinar to learn more about these things. We've got some of you that said occasionally use as well. So this is exciting. This is gonna be our opportunity to give you a lot more information on this. So Dean, back to you. 

[00:08:55] Dean Brown: Yeah, this is a good segue into explaining just exactly what is a private mortgage. Okay, so private mortgage investing is gaining momentum in Canada, but some of you still may be unfamiliar with how it works and where it fits into a portfolio. Let's start by reviewing the fundamentals of private lending. But before we dive in, I'll emphasize that our focus today will be on residential mortgage investments. In the residential real estate market, private lending is essentially short-term mortgage financing for borrowers who don't qualify for traditional bank mortgages. That could be because they're self-employed, working in the gig economy, or maybe they had a credit blip in the past. It doesn't necessarily mean they're high-risk borrowers. Many are financially stable and responsible, but just don't meet the increasingly rigid requirements of the major banks. That's where private lenders come in. They fill a vital funding gap in the market. Instead of stress tests, debt ratios, and strict income verification rules, followed by the traditional lenders, private lenders take a more flexible approach. They look at the full picture, things like the borrower's equity in the property, cash flow, and exit strategy to exit the private mortgage. That's the way that they assess their ability to repay the loan. Private mortgage lenders fund their loans differently from the banks and credit unions do, since private lenders are not deposit-taking institutions. Instead, they raise capital through investors, both individual and institutional. From an investment standpoint, this creates a unique opportunity. When investors fund these mortgages, they're basically stepping into the bank's role. They provide capital for the mortgage loans and in return, they earn interest that's paid for by the borrowers. By filling the funding gap in the market, private mortgage investors are an alternative financing source for borrowers, helping them buy a home or access equity in an existing property for other financial goals like consolidating debt or buying a second property. So private mortgage investing serves as a dual purpose. It gives investors a way to earn an attractive fixed income return and at the same time it provides a crucial financing option for borrowers who need it. 

[00:11:44] Dean Brown: Okay, so next slide. Okay, okay, the alternative is landscape. Mortgage investments sit comfortably within the private credit space, but they stand out as a more resilient income-focused option. And there's a few key reasons why that is. First, they're backed by real assets. Unlike corporate loans, which are often secured by things like revenue or receivables, essentially future cash flows, mortgage investments are secured by real estate, a tangible, enduring asset. That security is reinforced by disciplined underwriting and ongoing monitoring, which makes private mortgages especially appealing to the more risk-aware investors. Mortgage investments also have very little correlation to public markets, and that means that they can help reduce overall portfolio volatility and smooth out returns, especially during periods of market stress. We saw this during the COVID-19 pandemic when equity and bonds were highly volatile. Mortgage investments remained relatively stable. Another key advantage is more consistent, reliable income. Many mortgage investments offer monthly interest distributions. Liquidity is also a differentiator. Some private alternatives lock up capital for five to seven years. By comparison, the average private mortgage term is around 12 months. And finally, mortgage investments are more accessible and relatively straightforward. People understand what a mortgage is, that familiarity makes it easier to integrate into portfolios, especially compared to some of the more complex alternative assets. 

[00:13:29] Dean Brown: Okay, so Canada's mortgage market. Next slide please. Okay, there we go. Okay, so if you look at the slide, you can see that the banks still dominate. You know, they hold close to two-thirds of all outstanding mortgage debt. But the market is rapidly shifting, and it has been for some time. Even before the pandemic, we were seeing steady growth in non-bank lending. But COVID-19 really accelerated that trend and drove massive demand for more flexible, high-quality private lending solutions. Stats Canada data shows that by the end of 2024, Outstanding non-bank residential mortgages hit just over $405 billion in Canada. That's nearly a 20% increase since 2020. In Canada, these non-bank lenders include a broad range of players, mortgage investment corporations, or mix as we call them, private lenders, both individual and corporations, mortgage finance companies, and other alternative lenders as well. What they all have in common is that they provide credit, but don't take deposits like a bank does. Okay, so increasingly strict lending regulations and tighter underwriting guidelines from traditional lenders, combined with ongoing economic uncertainty, continue to drive growing demand for non-bank financing. The Alternative Investment Management Association of Canada has described this as a pivotal inflection point for the Canadian market, one that has opened a wealth of opportunity for investors. 

[00:15:08] Dean Brown: Private mortgage investments generally fall into two categories. We have the direct or whole mortgage investments, and on the other side of the equation, the pooled solutions. So direct or whole mortgage investments is when an investor funds an entire mortgage transaction for a given borrower. Okay, we went, there we go. Okay, good. Pooled mortgage investment, investor pool their funds together and invest in a diversified portfolio of mortgages. The most common is a mortgage investment corporation or MCFund. So whole mortgage loan investments receive monthly interest payments, but the key is when borrowers make their mortgage payments, principal is repaid at the end of the term. Investors have a little bit more control over the mortgage they select by evaluating the property appraisal, what security looks like, loan to value, interest rate, and even the profile of the borrower. You know, a whole loan. Mortgage investments carry a concentrated risk in the sense that the investor bears the full exposure of the borrower. And if the borrower defaults or if the property underperforms, they've taken that risk on. Typically, yields range from 7% to 16% depending on the risk profile of the mortgage. Next slide, please. So pooled mortgage investments. They're most commonly known as MCFunds or mortgage investment corporations. They offer a much more accessible and diversified way to invest in private mortgages. Rather than tying capital into a single mortgage loan, mix pool funds from multiple investors and allocate that capital across a diversified portfolio of private mortgages. This reduces the impact of any one mortgage underperforming and helps manage overall risk. Borrowers' mortgage payments are used to pay dividends to the investors on a monthly or quarterly basis, depending on the fund that you invest in. Another key distinction is professional management. MIX are actively managed by experienced teams responsible for sourcing, underwriting, funding, and monitoring each mortgage along its lifespan. Pooled mortgage solutions also offer more transparency. They are subject to more rigorous regulatory oversight and reporting requirements and continuity in the sense that when somebody invests in an individual mortgage, when it matures, they have to find a new source for those funds. Inside a MIG fund, the money is constantly being redeployed and it provides a really constant income stream for investors. And at the same time, after the initial whole lock-in period, the investor does have access to their funds in the middle of after the 12 months at any given month. You know, the liquidity on MIX, usually there's a lock-in period of 12 months. And after that, typically 30 to 60 days notice to redeem funds. The nice thing about these is they can be held in registered accounts like tax-free savings and RSPs. The yield depends on the risk profile of the fund. But historically, annual returns range from six on a more conservative fund to 11% on a more aggressive fund. And a nice entry point, you can start investing with as little as $5,000 with CMI anyways. This makes them a great option for a broad range of investors, including those looking to diversify their portfolios with smaller allocations. 

[00:18:52] Dean Brown: Okay, so the MIC market in Canada. MICs are a Canadian innovation. They were first introduced in 1973 when the Canadian government passed laws to allow them. The goal was to make it easier for borrowers to access mortgage funding while giving investors a chance to get more involved in the housing finance market. Even though Mix have been around for more than 50 years, it's really only in the past 10 or so that they've gained widespread popularity. You know, borrowers are looking for alternative financing options as traditional lending becomes tougher due to all the new bank's rules and regulations, while investors are drawn to MIX for the diversification, predictable income, and defensive benefit they can offer. The Canadian MIX market is the fastest growing segment in the mortgage market today. CMHC estimates that private and alternative lending now account for 10 to 12% of Canada's residential mortgage market, which is fairly significant. Okay, so next slide, please. Okay, so geographical concentration. You know, depending on the MEC, it can vary quite drastically. Some specialize in residential mortgages, some specialize in commercial, and some have a mix of both. We've also seen some consolidation in the market with bigger players acquiring smaller firms to expand their portfolios and increase the assets that they hold under their management. Activity is concentrated significantly in Ontario and BC, particularly in the greater Toronto area and the greater Vancouver area, with almost 90% of Canada's MIC activity concentrated in those two provinces. There are relatively few truly national mortgage investment providers due to the complexity and regulatory differences between all the different provinces. So MICs are structured like mutual funds. So, um, instead of holding stocks or bonds, the underlying asset are carefully selected pool of mortgages. The MIC raises money from investors and then takes those funds to extend mortgages to borrowers. Each month, the borrower makes the mortgage payment and those mortgage payments are used to pay dividends to the investors. A private MIC like CMI's is strict is strictly for income. The shares are bought and sold at the same value, meaning there's no asset price volatility in the underlying value. There are also publicly traded mix in Canada. They're offered the price daily and they're offered on exchanges, but their market values also fluctuate with supply and demand like any other listed security. And as a result, the returns have both an income and a capital gains component. Today, we're going to focus more on the private market like CMI offers. 

[00:22:01] Dean Brown: Okay, so beyond the consistent income and diversification benefits, MIX have a number of other advantages. First, the higher yield potential. Private lenders have more flexibility than banks do, so they can structure mortgages differently. That flexibility often allows them to charge a higher interest rate, which translates to better returns for investors. Secondly, the consistency and predictability of returns. Returns come purely from dividends from interest income, which tend to remain stable even during market downturns. Thirdly, liquidity. Mixed typically have one year stock lockup period because underlying mortgages generally mature within 12 months. And those funds can be used to fulfill redemptions at the end of the 12 month period. Fourth, professional management. So this is a real major advantage to other type investments. MIX are overseen by experienced mortgage professionals who specialize in selecting and underwriting high quality mortgages. Their job is to construct well diversified portfolios, actively monitor loan performance and adjust strategies as market conditions change to manage the risk and maintain portfolio stability. And finally, hassle free investing. Directly managing real estate or mortgages takes time. Individual investors often don't want to devote that time and the expertise required. A MIC offers a way to invest in real estate-backed mortgage investments without the headache of being a landlord or managing individual loans. 

[00:24:09] Dean Brown: Okay, so MICs are a highly beneficial portfolio addition for a few key reasons. Number one is they boost portfolio returns. Private mortgage investments offer high risk adjusted returns, higher than traditional fixed income vehicles. They have diversification benefits. Traditional portfolios often lack sufficient exposure to real estate, making the more vulnerable to market shocks. Capital preservation, with mix being backed by real estate collateral, if a borrower defaults, the property can be sold to cover the loan. This helps protect the investor's capital, which is very important. Inflation protection. As inflation rises, so do property values, typically. That strengthens the value of the underlying collateral, making mix a safeguard against inflation and economic downturns. They also offer rate resilience. Private mortgages are typically short-term, 12 months on average, making them less vulnerable to interest rate fluctuations that traditional fixed income investments have to endure. Private mortgages exhibit little to no correlation with private markets, which means they aren't impacted by stock or bond market swings. They look really good on a consolidated asset statement. These defensive features increase the probability that a portfolio you with mortgage exposure can weather unexpected events. We saw this during COVID-19, where volatility rocked the global stock and bond market, but mortgage investments remained quite stable. And as a result, mortgage investments satisfy investors' need for regular, reliable income while reducing volatility in their portfolio at the same time. 

[00:26:17] Dean Brown: Okay, so, you know, compelling option for a bunch of different investors. Because MICs are designed to cater to a variety of investor profiles. A MIC's risk and return profile is determined by a number of factors, from the security position of the underlying mortgages to the maximum loan-to-value ratio, which is simply the mortgage amount relative to the market value of the property. More conservative MIC funds typically invest only in first mortgages, and they cap their loan-to-value ratios around 65%, keeping risk much lower. On the other hand, in the spectrum, we have mixed with more aggressive risk and return profiles, and they focus on second and sometimes even third mortgages with often maximum loan-to-value ratios as high as 85%. In the middle of those two are the balanced MIG funds, which invest in a mixture of first and second mortgages with an average loan-to-value typically of less than 75%. Whether a client is looking for something more conservative or is willing to take on a bit more risk for potentially high returns, there's a mix option that caters to those specific goals and comfort levels. Okay, so in Canada, private mix are often offered as an exempt market investment, which means they are exempt from filing a prospectus and are instead distributed through an offering memorandum, which details the mix structure, their management, and their risks. MIPS are not available through traditional mutual fund distribution platforms. They are sold through exempt market dealers or portfolio managers registered to offer private placements. Advisors must be licensed with an exempt market dealer to access and recommend MIPS to clients. 

[00:28:18] Dean Brown: So on to regulation. MIPS are regulated at the federal level under the Income Tax Act and at the provincial level through securities regulations. So under the Income Tax Act, to qualify as a MIC and to benefit from favorable tax treatment, a corporation must meet the following criteria. They must have at least 50% of the MIC's assets registered in residential mortgages or cash deposits. The corporation must have at least 20 shareholders, and it must distribute all its taxable income to shareholders annually. MIX are also regulated under the provincial security regulations. So MIX raise capital through the exempt markets. These requirements are outlined in National Instrument 45106. Overall, regulation is lighter in the exempt market, but still falls under the authority of provincial security regulators. This includes compliance with things such as know your client rules, suitability, and anti-money laundering rules. So to recap, MIX must comply with provincial securities laws to protect investors, but they are not subject to the same level of regulatory scrutiny as a prospectus qualified investment would be. Okay, so exempt market investments are sold through an offering memorandum, as I said in the previous slide, rather than a prospectus. And there are limits to how much an investor, an individual investor can buy in these securities. So there's... Basically, there's three different levels. So I'll break it down. In the exempt market, that's governed by the Canadian Securities Administrators. The first level is what we call an accredited investor. So they essentially have no investment limits. But to qualify, an investor generally needs to have an annual income of more than $200,000 on their own or $300,000 combined with a spouse. Or they can qualify if they have over $500 million in assets or over $1 million in financial assets, either on their own or with a spouse. The second category is what's called an eligible investor. Now, to qualify as an eligible investor, you must have a net income of at least $75,000 or $125,000 combined with a spouse, or net assets of $400,000, either alone or with a spouse. Eligible investors can invest up to $100,000 in exempt market securities within a 12-month period. The third category is what we call non-eligible investors because they don't meet either of those previous two requirements. And they're limited to investing just $10,000 per year in the exempt market. But here's where advisors play a critical role. If a non-eligible investor works with a registered advisor, they can automatically qualify as an eligible investor, which increases their investment limit from $10,000 to $100,000 per year. That's a huge difference. It's 10 times the increase in the amount that they're allowed to allot just by working with an advisor. 

[00:31:37] Dean Brown: Okay, so one of the, you know, it's important to understand how mortgage investments compare to other real estate based investment options. One common comparison is with real estate investment trusts, or we'll refer to as REITs for the rest of this conversation. Both MIX and REITs are real estate related investment options, but there's a key difference in how they operate. REITs invest directly in income producing properties like apartments, commercial spaces and office buildings. REITs generally generate income primarily from rent. They're also highly sensitive to fluctuations in both real estate market conditions and in interest rates. So their value fluctuates based on property demand, financing costs, and broader economic trends. Mortgage investments, on the other hand, don't own real estate directly. They invest in mortgages backed by real estate, residential, commercial, or both. They earn income from interest payments on those loans. They set their own lending rates, which provide more control over yield and makes their returns more predictable. They're not directly impacted by real estate price changes as well. Overall, REITs are more exposed to the real estate market's ups and downs, whereas mortgage investments provide a more stable income even when property values fluctuate. So another comparison would be mixed to mortgage-backed securities or as they're commonly called MBS. There are some similarities. Both are a pool type of investment. They involve mortgage lending and can be held in registered accounts, but they're structured very differently. So mortgage-backed securities are created by bundling together a large number of institutional mortgages, usually from major Canadian banks. They trade on public markets. They're subject to price volatility. Performance is influenced by interest rate movements and prepayment risk. Basically, if you think of it like a bond that's backed by mortgages, that's what an MBS is. It behaves like a traditional fixed income investment. On the other hand, mortgage MIG funds, they pool investor money and lend directly to borrowers. They're comprised of private mortgages, not institutional or bank mortgages. They typically focus on shorter terms, average of 12 months. So less influence on interest rate movements. They're generally actively managed, less correlation to public markets for sure, and considered a viable alternative to fixed income strategy. Because of the risk profile of the average private mortgage borrower, these mortgages can carry higher rates than bank mortgages, which means higher yields for investors. 

[00:34:39] Dean Brown: So underwriting, it's important when you evaluate underwriting because you want to make sure that the assets that are being held inside your pooled investment are of sound quality. So underwriting is where private lenders balance opportunity with risk. While their standards are more flexible than a bank's, they're still pretty rigorous. Every deal starts with assessing the asset, which would be involve a property appraisal, because private lenders are mostly lending against the equity as security. Key factors include the location, the property type, condition, and marketability. If a lender wouldn't want to own the property, there's probably a good chance they won't want to lend against it either. Lenders also look at loan-to-value ratio, which is the size of the loan relative to the market value of the property, but underwriting goes beyond that as well. Borrowers' profile matters too, their credit history, consistency of income, the repayment track record and the credit report, and their overall financial picture. Even if a borrower is self-employed or has bruised credit, the lender wants to see a reasonable ability to repay these mortgages. As well, exit strategy is huge in private lending. Private lenders want to know how will this loan be paid back. Is the borrower selling the home? Are they refinancing with an A lender? Or are they improving the property for resale? By design, private lending is short-term in nature, usually not more than 24 months. It's a temporary solution intended to bridge a gap to help the borrower move back into a conventional lender with lower interest rates and fees. If the exit strategy isn't clear or realistic, that's a red flag for us. For riskier deals, lenders might compensate with a lower loan-to-value ratio or higher rate, shorter term, or even additional security like a blanket mortgage, a second property. At the end of the day, underwriting is how private lenders filter deals. If the risk return profile isn't right, they'll pass on the application, no matter how strong the yield looks on paper. The best lenders use a dynamic model, adjusting underwriting criteria based on evolving market conditions. This supports smart lending decisions and ensures borrowers are provided manageable, well-structured loans backed by viable exit strategies, even in shifting economic environments. 

[00:37:30] Dean Brown: So the next slide, please. Private lenders rely on loan-to-value ratios as a key risk tool because the loan-to-value helps them assess the amount of equity a borrower has in the property. The lower the loan to value, the more equity the borrower has at stake, which lowers the lender's risk. That buffer is really important because it gives lenders a cushion in case the borrower defaults or the market turns. Loan to value also affects the loan structure. A higher loan to value might mean the lender charges a higher interest rate or asks for additional security or even shortens the term. It also protects the lender if property values decline. If there's enough equity in the deal, the lender is more likely to cover their capital through a sale or a foreclosure if the property borrower defaults. So while loan-to-value isn't the only factor lenders look at, it is one of the most important tools they use to structure sound mortgages. Managing risk post-funding is a very important thing as well. You want to have a team of experts that actively oversee every mortgage through its life cycle. Leading private lenders leverage technology to streamline and automate administration processes and to enhance the monitoring and risk management, including default management and recouping of missed payments. This helps to optimize performance and reduce costs by enabling the servicing of a large portfolio of mortgage loans with minimum overhead. That allows the fund to pass on those savings in the form of higher returns to investors. MIGs generate regular distributions, typically monthly, from the interest and fees collected from borrowers within the mortgage portfolio. Many allocate a monthly cash provision to cover potential loan losses. Though loan losses are rare, the provisions will ensure there is no impact on distributions. So this reserve fund offers an extra layer of protection for the portfolio. The amount of the loan loss provision is typically stress tested by a third-party accounting firm in a rigorous annual audit. The stress test assesses how the portfolio would perform under various economic conditions, ensuring that loans are appropriately priced to preserve investor yields while minimizing default risk at the same time. The model considers all possible factors that could lead to loan losses and tests to ensure that the MIC can cover losses under any or all of these scenarios. Identifying the appropriate cash reserve levels not only helps ensure the consistent distributions, it prevents excess cash from accumulating unnecessarily in those provisions. This approach effectively balances robust risk management with the goal of maximizing yields. 

[00:41:00] Dean Brown: Okay, mortgage distributions are taxed at the highest—the investor's marginal tax rate. So dividends is something that is referred to in the MIC business, but it's really, for all intents and purposes, it's an interest payment. And it means they're not eligible for the dividend tax credit and do not benefit from preferential tax treatment. On the plus side, you can hold MICs in registered accounts like tax-free savings, RSPs, RIFs, which means your distributions are sheltered and your investment can grow tax deferred. Also, many MICs offer the option to automatically reinvest regular distributions through a dividend reinvestment plan, which is commonly referred to as a DRIP. This helps compound returns over time, especially when the MIC is held in a registered account. 

[00:42:07] Chris Baker: Okay, thanks, Dean. So poll number two is ready. Over the past three to six months, which need objective has come up most often in the conversations with your clients? Is it reliable income, portfolio stability, protection against inflation, or attractive yield? Everybody could please give us the answer here. All right, so some interesting results here. It looks like portfolio stability and managing volatility is one of the most common ones right now, followed by reliable income and attractive yield as well. So everybody's looking for a little bit more stability, it seems like, in current times. Thanks to everyone for answering that poll. We'll move forward. 

[00:42:55] Dean Brown: Okay, private mortgage investments are versatile, a strategic solution that can strengthen portfolio construction across income, balance, and growth mandates. And as seen in the previous screen, those are all very important to many of you. With the low correlation to public markets, they can help stabilize portfolios and reduce overall volatility. Even in growth-focused portfolios, predictable income can support total return goals and improve overall portfolio resilience. Compared to traditional fixed income, private mortgages offer higher yields without equity level risks, enhancing overall risk return profiles across all portfolio types, from conservative to growth. Next slide, please. Okay, allocation. You know, mortgage investments can be effective in both short and long term strategies, but like any investment, the ideal allocation depends on the investor's specific goals and circumstances. Generally, alternative investments are being recommended to make up between 10 and 30% of an investor's portfolio. Factors like risk tolerance, financial objectives, and overall investment strategy play a role in determining the right allocation. Next slide, please. Okay, client conversations. You know, how do you position Mix into the everyday investor's portfolio? The key is, you know, to point out that mix, complement. traditional stocks and bond investments. Explain that their unique benefits and how they can add resilience and reliability to help improve overall performance. Some investors might hesitate because alternatives seem complex and unfamiliar, but one way you can really overcome this is by relating mortgage investments to something they already understand, their own mortgages. Emphasize how compared to other alternatives pooled solutions like MIX are straightforward and simple to integrate into a portfolio, that simplicity can make a big selling point. It's also important to look at some of the common misconceptions. So that's the next slide. One of the most common misconceptions that we hear is that private mortgage investments are inherently high risk or only suitable for aggressive investors. When managed professionally and backed by strong underwriting, mortgage investments can offer a very compelling risk board profile, especially compared to other fixed incomes, as we have pointed out many times. Another point of confusion is around liquidity. Investors often assume these investments are locked in for many years, where in fact, generally, it's the 12-month hold period and beyond. As we discussed, the average private mortgage term is 12 months, and that's typically after the 12 months when you can initiate a redemption, if you so need to. Finally, there's a lingering perception that private lending is shady or that private lenders are inherently predatory. While there may have been some bad actors in the past, the industry has matured significantly and it's forced a lot of these less scrupulous players to exit the market. There's increasing regulatory and oversight and today's private lending plays a vital and legitimate role in Canada's financial service ecosystem, bridging the gap for borrowers between traditional lenders and alternative fixed income investments. 

[00:46:01] Dean Brown: Next slide, please. When it comes to selecting a private mortgage provider, not all mix are created equal. So you need to understand certain things, you know, is it a national or regionally focused make is it urban suburban rural, you know, it doesn't have geographic reach all that type of diversification can impact yield. Go beyond the numbers of years the lenders been operating. Assess both lifetime funding volumes and current assets under administration. You want a provider that offers transparency and disclosure with reports, a track record and some experience. You want a company that has a history behind them and has proven effectiveness and consistency. And you also want a private mortgage investor to show that they have a good risk management in place, so that they can ensure that your investor's money is well taken care of. Next slide, please. Okay, liquidity. So like we said, the CMI mix are liquid after 12 months with 30-day redemption period. You always want to make sure that you verify that liquidity upfront with your investors. It's important to point out. Also, Confirm with any of the MIG funds that you're using if there's been any freezing of redemptions. That's called gating. That can be a red flag too. CMI has never gated the funds, just full disclosure. Look for regular detailed reporting and different metrics and performance, full disclosure of fees, all of the above. Understand how and when distributions are paid. I mean, CMI's funds are paid monthly. To many investors looking for income, the monthly return would be something they would probably demand. You want to make sure that it aligns with your investors' needs. Look for providers that have knowledgeable advisor and investor relations teams as well. Next slide, please. 

[00:47:56] Chris Baker: All right. So, yeah, that's over to me. Thanks, Dean. Great overview on all that stuff so far. I know it's been a lot of information for everybody, but just to give you a little bit of information about CMI itself. We're one of Canada's largest and fastest growing private mortgage lenders in the industry. We were founded, we've actually had experience basically deep within the entire mortgage industry for quite some time. We were founded in 2005 as a family-owned mortgage brokerage, and it has grown to become an award-winning leader in the Canadian non-bank financial services market since then, even just as recently as this year, as you can see on the screen. We're focused on providing transparent and flexible mortgage solutions to borrowers. And while we also want to deliver consistent and compelling returns to all of our investors, as well as Dean spoke about earlier. So Canada's largest private lender is basically us. We're based on the—that's all based on the origination volume that we've done so far. We're comprised of four distinct brands that work collectively to originate underwrite, fund and service these private mortgages end-to-end for investors, which makes us pretty unique within the industry. We do that for investors, mortgage brokers, and all of their borrowers as well. So first company is CMI Mortgage, Canadian Mortgage, I think, and that is our company that basically originates our private mortgage deals exclusively through mortgage broker channels and partnerships. We also have our CMI Mortgage Investments, who Dean and I work through, which is a full-service program curating customized private mortgage investment portfolios. We're kind of crossed with the next one as well, which is CMI McFunds, which is a suite of diversified, professionally managed residential mortgage investment portfolios, like Dean was just describing to you a little bit earlier. And our servicing department as well, which is our CMI Mortgage Services, they manage mortgages from origination to renewal to discharge to ensure a hands-free investment experience for our borrowers and our investors. 

[00:50:03] Dean Brown: Dean? Okay, so I'm going to take a few minutes. We've got three MEC funds. I want to go over all three quickly. I will point out that this information is available to be downloaded from our website if you go to the investment section. So if all of this information is available to you at your fingertips. So let's start with the CMI Balance Mortgage Fund. This is our flagship fund in the sense that it is our longest tenured fund. It was launched in July 2015. What's really important to point out is the consistency. In the last 10 years, we have consistently returned between 8 and 9 percent. If you look, the 12-month return is 8.78 and since inception 8.72. That's the Class F series, by the way. These sheets that are available, the dealer sheets that are available on our website, they point out the diversification. I mean, in this case, you can see we're about 21% second mortgages at this time and almost 78% first mortgages. It breaks down, you know, what geographical location. And it points out that CMI is, in fact, you know, a national lender. We have, you know, we don't just stick to one region. So the next slide please. Okay, so the High Yield Opportunity Fund, this would be considered to be our higher risk fund. Once again, though, it was established in October 2019, so we're coming across six years now. Since inception, 10.6% return, 12-month trailing, 10.74, very consistent returns. The difference with this one in the balanced is it's almost the opposite in the sense that a majority of the fund, like almost 74% are second mortgages. Uh 24 first and then we got a really small blip in there with uh some blanket mortgages as well but geographically well diversified um and uh it has performed very well it's very popular fund next slide please okay our prime fund this is our newest fund uh this one here has a five-year track record uh it's 100 first mortgages uh it's designed for the conservative investor uh Maximum aggregate loan-to-value of 65%. This fund has returned since inception 6.97% and the trailing 12-month is 7.48%. This is just an outstanding return for a conservative type of an investment. And I think it hasn't caught on as much as the other ones. And I'm somewhat surprised just because it ticks a lot of the boxes for the conservative type of investor. Okay, on to the next slide. And Chris, I am going to pass this back over to you. 

[00:52:40] Chris Baker: All right. Sounds good, Dean. So this is just talking about our Wealth Advisor Services team. This is a team dedicated to you, to those on this call, to any advisors that are looking to work with us or to work with private alt mortgage investments at all. Dean is obviously one of our regional vice presidents, and we do have a regional vice president near you to help you and support you with tailored client strategies and market insights. We also have a wholesale manager team that's behind us as well that helps with all of the relationship management with you in between. If you can't reach one of our RVPs, they're certainly there to help service things and help you with the administration of anything that's going on with your clients as well that have invested with us or are planning to. And then we, you know, our expert support does streamline the workflow. So it makes it nice and easy for you guys to just reach out to us and we can get your clients started very, very quickly. And smoothly, the whole process is quite smooth. And we're excited to be to be working with everybody on this call. Just in the interest of time, though, I just want to jump to our Q&A. Now we do have a couple of questions that have come in here, Dean, that I think we want to make sure we answer before this, this call is over. So the first one is regarding licensing requirements. So Dean, is it possible to sell this with CERO or MFDA? 

[00:54:01] Dean Brown: Sorry, Chris, I had myself on mute there for a second. No worries. Okay, so good question. So anyone who is an exempt market dealer has done that particular course and is licensed through an exempt market dealer can offer these funds. Now, when it comes to if you are a CERO, you know, what used to be called the IROC advisor, which is a stock portfolio manager, you can offer these to your clients. When you're MFDA, you are not able to offer these directly to your clients. I will point out, though, that one of the things that we're working on right now is we are going to convert the prime fund into a mutual fund trust, which is going to make it available to the MFDA mutual fund dealer advisors. So stay tuned on that one. 

[00:54:53] Chris Baker: Okay. Awesome, Dean. Thank you. Another one we have here is, what is the tax considerations advisors should be aware of when recommending mix? 

[00:55:02] Dean Brown: Yeah. Really good question. You know, interest income has always been taxed at the highest rate with your individual. So, you know, that is that is definitely a consideration for investors who are tax averse. But at the end of the day, when you look at returns in guaranteed investment certificates and the volatility of what bonds may have, mortgage funds offer a nice, a nice rate of return and net of taxes sometimes higher than what you will receive on a GIC fund. That's why, you know. People do look at these closely when they're trying to minimize their taxes. Very well suited inside registered products, as we had mentioned before, but always a tax consideration. 

[00:55:39] Chris Baker: Great. And you mentioned redemption policies earlier. Somebody had a question about that. How do mix manage liquidity, first of all, and what should advisors know about redemption policies for their clients? 

[00:55:50] Dean Brown: I'll speak specifically to CMI. So there's the 12-month hold period. If somebody had redeemed in that 12-month period, there's a penalty. So it is not geared towards somebody who's shorter than 12-month term. After the 12 months is up, the investor has access to those funds with 30 days notice. The reason why we require 30 days notice is we manage the liquidity on a month-to-month basis. Inside the pool of mortgages, I mean, you know, inside a balance fund, there's say 700 mortgages or inside the high yield, there's 1100 mortgages. Each month, we know that there's mortgages that are coming up to maturity. We will make sure that we don't reallocate those funds into the market if we know that there's redemptions coming in. So that is the way that we manage the liquidity inside the pools. 

[00:56:41] Chris Baker: Okay. Thanks, Dean. And let's take one more here. We've got one more that actually is kind of interesting because it talks about some of the recent headlines around growing risks in the private credit market. How does this impact private mortgage investments from what you're thinking? 

[00:56:55] Dean Brown: Yeah. Private credit is one of those things we get grouped in with, but we are very different in the sense that, yes, it is private and it's credit, but uniquely, we are secured 100% against residential real estate property, meaning it's secured against a solid asset in Canada. And when asked, Canadians, typically about 86% of Canadians have a huge amount of comfort in real estate. When you take private credit, they can be, depending on the risk and the return profile inside the private credit, they're often based on unsecured financing that is based on projections of income or, you know, long-term growth of a particular company, which, you know, if that doesn't manifest, it can create, it certainly creates an adverse risk profile for that particular investment. 

[00:57:53] Chris Baker: Perfect. Great stuff. Well, it looks like we're probably pretty close out of time here. So I want to take my opportunity here just to thank everybody for watching and listening. And for Dean. I know we're very grateful to have you. Well, certainly any other questions that have come up, we'll certainly make sure we take offline and answer for you as well. But we'll throw it back over to David. 

[00:58:17] David Kitai: Thank you so much, Chris. And thank you, Dean, for leading us through that really fascinating presentation, giving us all those insights. Thanks, Chris, for facilitating and for offering those great questions as well. Really, really interesting subject. Again, pertinent, timely, and something that I think all of our attendees here have taken away from. My last set of thanks, of course, is to our attendees. Thank you for tuning in. Thank you for taking the time to learn a little bit about this subject today, and thanks for being with us. So with that, have a wonderful rest of your day. Thanks on behalf of WP.