Big players blamed for shrinking mortgage fund sector

Perpetual and AXA's decision to wind up their mortgage funds would result in increasingly limited choices for investors in this sector, according to Equity Trustees portfolio manager, mortgages, John Terlikar.

The mortgage fund sector is still on a rocky road to recovery from the impact of the global financial crisis, but Terlikar said that recent developments, such as a watering down of the bank guarantee and rating reports indicate that mortgage funds should be considered again.

Earlier this month, AXA has announced that, "after careful consideration", the National Mutual Funds Management - a responsible entity for AXA's mortgage funds - had decided to wind up the funds.

Perpetual has also shut down its $1 billion mortgage fund last month, but has announced a new series of funds for retail investors.

Terlikar believes that the reasons why mortgage funds were attractive in the first place were forgotten.

"Investors have always liked the diversity that mortgage funds can add to a portfolio, they like the stability of an investment backed by mortgages, they like the regular income and, in the current environment, they like the better rate of return than other options such as term deposits," Terlikar said.

He added that falling returns and risk considerations in other forms of fixed interest investment also point to the need for mortgage fund consideration.

"This, combined with the declining returns from term deposits offered by banks, means that investors need to look for alternatives to help maintain their income."