Why MIC is an Effective Portfolio Diversification Tool

Every investor knows that diversification is necessary for long-term financial success. By investing in multiple types of investments, you can balance risk and return, increase stability, and avoid extreme ups and downs. Timing the market and picking a winner mostly results in failures, stress, and anxiety.

Nowadays, a standard 60/40 diversified portfolio of bonds and stocks may not be enough to generate desired returns. According to Bank of America, 60/40 portfolios are facing their worst returns in 100 years. Also, depending on how it’s calculated, Canada’s inflation rate is between 7% and 15%, and your investment needs to generate at least that amount to get a positive return and maintain the purchasing power of your savings. As a result, many investors today view alternative investments as a key component of a well-diversified portfolio. This is where MICs come in handy. If you ask why MICs are an effective portfolio diversification tool, the answer lies in cooperation with CANGUARD.

MICs as the Best Portfolio Diversification Tool

Low correlation with equities, bonds, and other public markets makes MICs an attractive portfolio diversification tool. MICs pool funds from multiple investors and lend those funds as private mortgages. In this way, MICs are similar to mutual funds, but instead of stocks or bonds as underlying assets, the funds consist of carefully curated mortgages. Investors who deposit funds in a MIC become preferred shareholders. MICs generate revenue by collecting interest and fees from borrowers. These fees are typically passed on to shareholders in the form of monthly dividend payments.

The Diversity of MICs

MICs are diversified in several ways. While the overall investment is not a traditional stock or bond mix, individual MICs are diversified according to various criteria:

  • Geography

    MICs seek to diversify their holdings by investing in a wide range of geographies. Some focus on a single region or province, while others invest nationwide.

  • Management Style

    As a private lender, a MIC can have different management styles. Some repeat borrowers prefer to focus on high-risk, high-yield loans. Others may take a more balanced approach, with a team of experienced professionals managing the entire MIC portfolio.

  • Type of Investment

    Canadian income tax law requires MICs to invest 50% of their assets in mortgages. The remainder may be invested in commercial or residential mortgages.

  • Loan-to-Value (LTV)

    The loan-to-value ratio compares the value of the property to the amount of the mortgage. For example, if the property is $500,000 and the mortgage is $400,000, the LTV ratio is 80%. Generally speaking, the higher the LTV, the higher the risk for the lender, but the higher the interest rate for the borrower, so the higher the potential return. Well-managed MICs seek to balance risk and reward to produce consistent returns.

  • Borrower

    All borrowers are subject to rigorous screening. When deciding whether to make a mortgage payment, it is important to consider things like creditworthiness, income, and debt levels. This reduces the risk of default for investors.

  • Length of Mortgage

    Private mortgage terms range from 6 to 36 months, with 12 months being the norm.

  • Type of Mortgage

    MICs can also invest in 1st, 2nd, or 3rd mortgages.

Mortgages are one of the fastest growing areas of alternative investing, offering investors stable cash flow, risk-free real estate exposure, and broad diversification beyond just equities and bonds. Mortgage investing fulfills one of the core aspects of diversification, which is low correlation with public markets. Within this category, the Mortgage Investment Corporation (MIC) is one of the easiest ways to gain direct exposure to Canada’s mortgage market and is a prime mover in the country’s historically strong real estate market.

Why MICs Are an Effective Portfolio Diversification Tool: FAQ

What is the effectiveness of portfolio diversification?

Portfolio diversification helps balance exposure to individual positions and protects investors from sudden fluctuations in key sectors. Traders typically diversify by trading both stocks and bonds.

What is a MIC?

A MIC provides a way to invest in the real estate market while reducing the risk and time required to invest in individual mortgages. Investors pool their funds by purchasing shares in a MIC to create an alternative bond-like investment.