Realm's long game: Why today's income returns were built years ago

In credit investing, the best outcomes come from years of patient groundwork - building relationships, structuring deals, and positioning for the right moment in the credit cycle. That’s the philosophy driving the team at Realm Investment House.

Realm Strategic Income Fund - Enduring Units delivered an impressive 9.31% return in FY25, making it one of the top-performing unlisted Australian fixed interest funds. But for Portfolio Manager Theodore Calligeris, this result had little to do with the past 12 months, and everything to do with years of groundwork.

“Returns don’t get made in the year you’re trying to make them. They’re built in the years leading up to it," he says.

That long-term approach underpins Realm’s strategy of providing stable funding to high-quality non-bank lenders, enabling them to grow their loan books and eventually sell into the public market. It’s a philosophy that prizes patient relationship-building paired with robust risk management.

In this Q&A, Calligeris explains how Realm generated FY25’s standout return, how they manage risk in varying credit environments, and why stability remains their core focus.

FY25 was a standout year for the Strategic Income Fund. What were the key drivers behind the 9.31% return?

There were a couple of key drivers. We saw a bit of a tailwind with public markets compressing. A small portion of our lending book, around 25-30% over FY25, sits in public assets. So, as public markets compressed, many of those positions appreciated from a capital standpoint.

The other side of the book is a little harder as its value gets built up over quite a few years. In this part of the market, we lend money to non-banks who, for the most part, use that money to lend out for mortgages and auto loans. These issuers generally look for long-term stable capital.

A lot of the return this year actually came from the warehouse credit facilities we added over the last few years. Each of those new positions has been used by issuers to build up their portfolios to a large enough size to sell them into the public market.

Returns don’t get made in the year you’re trying to make them. They’re built in the years leading up to it.

Fixed income markets have had their share of volatility in recent years (notably in 2022). How do you think about risk management in a way that protects investors while still allowing you to capture opportunities?

These warehouses are very documentation-heavy, which is key to our risk management. Every warehouse has two or three critical pieces of documentation.

Firstly, we have the eligibility criteria. We define precisely what loans we are happy to lend into a warehouse, ensuring they fit our scope. For instance, loans must be Australian denominated, with LVRs below a certain point (e.g., 90%), and specific rules for interest-only loans or first home buyers.

Secondly, you have portfolio parameters. This specifies how much of each eligible loan type you can have. You might allow first home buyers and investors, but investors only up to 10% of the book. A common control is a weighted average loan-to-value ratio, say less than 75%.

Finally, there's performance governance. If a warehouse stops performing as expected, it closes off and can no longer be used by that issuer to fund new loans. These nice documentation sets protect our position.

Funnily enough, you often get paid more in the private side where you have these documentation sets around you than in the public side, where you don't have these protections at all. 

When you buy something in the public market, it’s already been generated in the private market. As a public market investor, you only get to say yes or no to loans; you don't get to design the volume, type, or structural protections around them.

So, there's quite a bit of risk management embedded in how we want the book to look, what loans we allow, and how many we allow. There are multiple layers of protection in the private part of the market.

As part of the process, do you conduct due diligence on the non-bank lenders you work with?

Absolutely - and we have a pretty heavy screening criteria. There are quite a few lenders in the Australian market, but Realm generally works only with those who meet our criteria. If a lender has minimal tangible equity on their balance sheet, we screen them out. We’ve seen many who come to us with just an idea, no capital, and no staff. 

How's the health of the loan book and your overall portfolio in the context of the RBA cash rate still remaining quite tight and global economic uncertainty?

The Australian book has been performing really well; I think it’s surprised a lot of people. Two to three years ago, many thought it would be disastrous looking forward, with a lot of fixed-rate loans rolling off. 

It's actually performed very differently - the health of the Australian borrower generally remains in quite good condition. If you use that as a benchmark for how the performance of the underlying assets is tracking, it's around its five-year average.

For instance, prime arrears were at their lowest of 0.66% in October 2022 and are now sitting at about 0.93%. The highest they ever got was close to 2% during 2008-2009. The five-year average for that trend line is probably about that 1% mark, so 0.93% is a pretty healthy representation.

I think when you look at how Australia compares globally, and it’s probably one of the reasons we’re competing with so many international players at the moment, Australia is generally seen as a really low-default economy. 

Many international investors are happy to be here, even if yields are compressed. 

For example, BBBs for RMBS generally trade around 250-300 basis points over bills; the widest we have seen them trade in 10 years is 500-550 over; they're now into about 180 over bills. Even with how tight they are relative to history and the number of players, you have many international investors coming into the space because of the low credit risk. 

Australia is viewed as a safe haven for people to park their money.

Capital comes here, waits until another financial market starts to become stressed, and then pivots away. We seem to be in that period now where people are happy to take on risk at tighter margins because they know they're well sheltered in this economy compared to others.

Finally, how should investors evaluate and gain comfort around Realm's strategy and sustainability of those high yields of the fund?

It's quite interesting because 'private credit' almost gets thrown around as a buzzword, and you have so many different managers doing something a little different. At Realm, what we want to focus on is banking good quality, long-term system risk.

We're not looking at taking pockets of idiosyncratic risk here or there, or single loans to specific corporates. All we really want to be funding is generally the health of the entire Australian economy. That's the hallmark of what we want to do.

We haven't strayed from that strategy; we haven't begun to add more portions of the market. We feel very comfortable in this niche. To feed the pipeline, we really want to be working more and more with the issuers we already engage with. 

At the moment, we have about 28 issuers on our panel, up from 25 last year. So, only about three new issuers, but the book size has almost doubled. What we're actually doing is just doing more and more with the same issuers we like – the ones we know have quality lending programs, and who have been able to do this through cycles for a number of years. 

That’s basically where we’re going to focus our attention for the future as well: continue to work with the same, deeper strategic relationships we’ve already built.

 In terms of the underlying number of loans in the portfolio at the moment, there's the better part of about 640,000 underlying mortgages alone. So, it's quite a large diverse book, which is what we want to be exposed to is that good quality system risk rather than single loans that are starting to come through the book and have the potential to affect a larger portfolio.