How Realm plans to reshape listed investment trusts

Melbourne-based fixed income manager Realm Investment House will list the Dominion Income Trust on March 4th, giving a wider pool of investors access to the firm's income-focused strategies.

Following extensive consultation with brokers and advisers, Realm Managing Partner Andrew Papageorgiou believes the firm has addressed several shortcomings in the existing pool of listed investment trusts.

Papageorgiou says the Dominion Income Trust will deliver greater certainty on returns, and unlike other listed investment trusts that are effectively perpetual, Realm's offering has a six-year maturity upon which investors will have their capital returned.

"So, straight off the bat, that's a shot across the bow. In terms of the listed investment trust structures we've seen up till now, they are generally issued and are perpetual in nature." said Papageorgiou.

"The first thing we did was we decided we were going to do one that wasn't issued forever but was going to be issued for a set term." 

Realm is targeting after-fee returns of 3.5% over the monthly BBSW. On current pricing, that is an annual income of around 7.8%. Whilst this is a target return, the structure also includes an equity reserve that can be drawn to shore up distributions if required.

Established in 2012, Realm manages more than $7.5 billion primarily for financial advice firms and their clients. The Dominion Income Trust, which will be listed on the ASX, is the firm's first venture into the exchange-traded market.

In this Fund in Focus, Andrew Papageorgiou provides an introduction to Realm Investment House and explains how the Dominion Income Trust aims to deliver consistent returns for investors.

Watch the video or read an edited transcript below.

Edited Transcript

Could you tell us what's unique about the firm and a bit about your expertise?

Andrew Papageorgiou: In terms of Realm, I think what's unique about us is that we started up as essentially a small private business that built its identity up on building strategies that could meet the requirements and the needs of the financial advisory community. So essentially, one of the things that's a bit different is that in the better part of $7.5 billion worth of funds that we manage, we have next to no institutional interest or support within that book.

We do have 1100 independent financial advisory groups though that trust us as their fixed income partner, and we've effectively built the whole business around meeting the needs of that constituency. Look, we're through 30 staff now across two locations, 17 investment professionals in that grouping as well. Our strategies have, in general, performed at the top end versus peers as well. We've been awarded by research houses as well. Quite pleasingly, Zenith awarded us the Fixed Income Manager of the Year award in '24. We were nominated in '23. We won it also in 2021.

Essentially for us, the way we see our purpose is meeting needs and outcomes, and we are acutely aware of the fact that when you are a Realm Investment House and you're not a National Australia Bank or a Macquarie or one of these big brand names, there is an existential need to meet outcomes. For us, there's a key focus on designing product and strategy well. And then, just as importantly, if not more so, is delivering on that.

In terms of that journey of delivering on that, where we've been focused is, is on doing more and getting better within that broader credit sphere. So, we invest in pretty much the whole gamut of credit and fixed income, probably with the exception of distressed credit as the one area where we don't really play at all. But outside of that, we're active investors within bank Tier 1, Tier 2, corporate debt, subordinated debt, and we're quite a prominent player within the RMBS and ABS market, and more specifically in the private part of that market as well.

What's the opportunity you've identified for investors?

Andrew Papageorgiou: Well, James, it wasn't so much an opportunity that we identified. It was more around us seeking to deal with the problem. And the problem, from our perspective at least, was how could we come up with a structure that answered some of the key objections around listed investment trusts, and more specifically some of the objections around how these structures performed in bad times where there was a lot of volatility.

So, from our perspective, the journey started around two to two and a half years ago when we engaged, a couple of the brokers were on the syndicate. More specifically, NAB and Morgans were probably the first cabs off rank where we knocked on the door and came to them and asked them the question around how we could potentially construct a better listed investment trust or one that would meet a lot of the concerns that had sprung up through periods like COVID.

What is unique and what's different about the Dominion Income Trust?

Andrew Papageorgiou: Well, I don't actually think there is anything that is incredibly unique about it or ingenious about it. The journey really started, from our perspective, around how we could make it fairer. And again, there's no genius around that, but for us it seemed like there was potentially a better split in terms of how these things were structured and how the economics of them worked.

So, the first thing that's quite unique around the Dominion Listed Investment Trust is that we are issuing this structure for a maximum period of six years. We are likely to call the structure on year five. If we don't, there is a step-up feature within the structure with the final legal maturity of six years. It doesn't have the capacity to move beyond that.

So, straight off the bat, that's a shot across the bow. In terms of the listed investment trust structures we've seen up till now, they are generally issued and are perpetual in nature. There are those that have been wound up along the way, of course, but usually the intent is to keep them outstanding over the long term.

The first thing we did was we decided we were going to do one that wasn't issued forever but was going to be issued for a set term.

The next thing we decided to do was that we were going to actually attach greater certainty around the return to the structure. How we're doing that, and this is where it does get a little bit complex, so hopefully I don't lose everyone.

But ultimately, what we're going to do is where, within this listed investment trust, we're going to buy one asset. The one asset, this listed investment trust will loan, is a floating rate note that is issued out of a credit portfolio. This floating rate note will pay a coupon of 4% over 30-day BBSW. The fee within the management fee within the structure will be 50 basis points, allowing flow-through economics to the end client of 3.5% over 30-day BBSW.

Now again, it should be clear, after those first two points, that we're not reinventing the wheel here, but what we've all of a sudden done is create a certainty around maturity dates and return. Okay? It's still a targeted return but that targeted return has a contractual feature because it does come off one note or a floating rate note that's been issued.

So, now that security has a running yield, now it has a yield to maturity, now it has a traded margin, and it starts to actually exhibit a lot of the features that you would see within a normal security that might trade on the ASX like a hybrid, for example, or like a convertible bond or whatever the case may be.

The third thing we're doing that's unique, as soon as you have a contractual obligation, you need to make sure that you can support that number. So, Realm and associates and staff will provide a layer of support to that portfolio. Realm will provide 4% or $10 million, whichever is the greater, to support this note. It will be co-invested with note holder monies on day one, but it will be used to support coupons in the event there is a shortfall or to support capital for whatever reason if there is not enough capital left to allow the note to be paid back without support.

Now, that 4% number is a reasonably meaningful number, and we can talk about that a little later. But effectively, what we've done now is we've provided, again, not to over labour the point, a maturity set, contractual terms around the economics and a level of support that allows the client to feel some comfort that we have an ability to follow through with those numbers.

So, again, the key objective of structuring it that way was effectively to allow the security to be able to hold up in a period where things become volatile.

What do you see as some of the risks around this note?

Andrew Papageorgiou: Well, look, there are a range of risk. Ultimately, the portfolio that issues the note will be invested in a range of Realm funds. It's likely to be invested heavily in the early stages at least within our Strategic Income Fund, for example. I think it's important to understand what we do, and I'll touch on that, but it's also important to understand what we don't.

In a private credit context, what we don't do, we don't fund single developments and large projects. Our strategic income fund, for argument's sake, are funds that are better part of 78 lending programmes funded through 38 lenders, which includes regional banks and the prominent non-banks within the Australian market. And in our portfolio right now, there are almost 1.1 million points of risk.

Effectively, our private strategy essentially looks at the risk of the whole economic system. We are not funding single enterprises that have a low credit rating with large amounts of exposure. We are not funding large single developments where we have 4 or 5% of our portfolio stuck within one deal. That is not our bag. What we like to say is, we deal with page one risks.

So, the reality is, from a default risk standpoint, we're reasonably well diversified. That doesn't mean that prices can't go down because of course credit spreads can move around basis market sentiment. A bond doesn't have to go broke to drop in price as we know. And that's where that capital that we're providing at the bottom of the structure provides a layer of support.

So, on our modelled numbers, the amount of capital support we are providing would allow us to be able to meet any of the events that have occurred over the last eight years. On our modelled numbers, the proposed portfolio would've seen a mark-to-market of around 2.5%. That's a bad number, but that 2.5% number is less than the 4% of equity that's there.

So, we feel like we've got a lot of the nullable risks covered in terms of how we've structured the security. There's also the question of market value decline. So, in a normal scenario there, where credit markets sell off, we think the greatest protection is the fact that we have a six-year term.

So, if this security is trading at $90 in year three, well, the traded margin to maturity of that security or to call, I should say, will be something like 850 to 900 over. So, you get to a point where it provides a floor on the price because essentially, you know all things being equal and going well, you're receiving a hundred dollars back at the end of the period. That is the greatest protection against this security on the ASX turmoil and getting down to very, very low numbers.

And I should also note that this is a liability for us, so we don't have to pretend that this lit is great value into perpetuity. If we have the ability on market with proper authorizations from the exchange, we have the capacity to buy on market at a price that makes sense for us as well, and we're motivated to do so also. This is where communication is going to be very important.

From our perspective, there is probably a hole there in terms of how much information is provided on some of these structures. We will not only provide the information around the note, but we will provide reasonably comprehensive information on a monthly basis around the portfolio that supports the note, so people can see how much is coming out of the note to us as equity holders, but also what the credit composition of that underlying portfolio looks like.

What does the return profile looks like for investors? What are they getting and where can they access the fund?

Andrew Papageorgiou: Absolutely. Look, just to make it very, very clear, the listed investment trust will loan one asset, which is a floating rate note, which will pay 4% over 30-day BBSW. 30-day BBSW right now is approximately 4.3%, so that will give you 8.3% before fees. There will be a 50 basis point fee at the level that comes out of that number, leaving the client with a net number of 7.8% at current 30-day BBSW rates. That's the targeted return, but as we said earlier, it's a targeted return that's supported by level of contractual certainty given how the deal is structured.

In terms of who to speak to, speak to your financial advisor. And in addition, in terms of the joint leader arrangers and the joint lead managers on the deal, National Australia Bank and Morgans, CommSec, Evans & Partners are our joint lead rangers, and joint lead managers include Canaccord, Shaw Stockbroking, and Wilsons.