Gryphon Capital Income Trust (ASX: GCI) Review

May 10, 2024

Gryphon Capital Income Trust (ASX: GCI) is a listed investment trust (LIT) designed to provide investors with regular monthly income through an actively managed portfolio of Residential Mortgage Backed Securities (RMBS) and Asset Backed Securities (ABS). The Trust is managed by Gryphon Capital Investments Pty Ltd (the “Manager” or “Gryphon”), a specialist fixed income manager wholly owned by Barings, a global investment manager specialising in public and private markets in fixed income, real assets and capital solutions. The portfolio is typically positioned predominantly to RMBS with a focus on Prime RMBS, however exposure to ABS is becoming an increasing part of the portfolio due to increased
opportunities available in the market. In August 2021, the Manager amended the mandate to allow for a greater allocation to ABS with 60%-100% of the portfolio able to be allocated to RMBS and up to 40% allocated to ABS, up from previous maximum of 30%. As at 29 February 2024, 72% of the portfolio was invested in RMBS and 26% in ABS. 57% of the RMBS exposure was to the lower risk Prime RMBS and 15% to Non-Conforming RMBS. As is evident from the changes in the portfolio over time, the portfolio is actively managed with the Manager rotating the portfolio to attractive risk-adjusted opportunities identified including secondary market transactions, with capital preservation being front of mind for
the Manager. The Trust has consistently met or exceeded its return target of the RBA cash rate + 3.5%p.a, net of fees and expenses, with the Manager providing a diversified portfolio of RMBS and ABS across the credit rating scale to achieve the target return. The Manager invests in all but AAA tranches in an issuance with the Trust having at least 50% of the portfolio invested in Investment Grade securities (AA through to BBB). Over the life of the Trust, on average the portfolio has had a 65% allocation to Investment Grade securities and 33% to Non-Investment Grade securities with an average of 2% cash.

The Trust is designed to provide unitholders with a monthly income stream and as such is suitable for those seeking a regular income stream. This is an income focused product and therefore is not appropriate for investors seeking capital gains. We view GCI to be at the lower-end of the risk spectrum for ASX-listed public and private debt vehicles, given Australian Prime RMBS has been loss remote and the exposure to Investment Grade securities. RMBS has been a mainstay of the Australian fixed income landscape for several decades and there are key structural protections (borrowers’ equity, Lenders Mortgage Insurance (LMI), excess interest and bond subordination) that make Australian RMBS loss
remote. We view the Trust as an investment option for investors seeking an enhanced return on cash with downside capital protection.

Independent Investment Research (IIR) has maintained the Recommended Plus rating for Gryphon Capital Income Trust (ASX: GCI). The Trust provides a unique investment opportunity in the listed managed investment universe being the only LMI that is focused solely on RMBS and ABS. The Trust is managed by a highly experienced team with the acquisition of the Manager by Barings only improving on the resources at the Manager’s disposal. In its nearly six years, the Trust has consistently delivered on its return objectives with the Manager delivering a distribution yield that has consistently met or exceeded the target return through the allocation to a portfolio of securitisation issues across the credit rating spectrum. The Manager’s diligent and robust investment process is considered among the best of breed with access to the loan level data combined with the Manager’s database of transactions providing the Manager a significant advantage when constructing the portfolio to the benefit of investors. The increased size of the Trust has provided investors improved liquidity without being dilutive to NAV and has provided the Trust increased scale to participate in the market. The market dynamics have changed markedly in recent years with the inflationary environment and increase in interest rates leading
to an increase in 90+ day arrears in the portfolio. While 90+ day arrears have increased they remain low. Increased macroeconomic risks has led to the Manager increasing the allocation to Investment Grade securities providing increased levels of protection through bond subordination.

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