Excessive fees plague mortgage sector
Australia’s mortgage fund industry is plagued by excessive, inefficient or outdated fee structures, according to a fresh sector report.
The report, by boutique research house Zenith, also found an increased competition in sourcing and pricing of loans and a dangerous tendency to invest in asset classes outside a manager’s area of expertise to try and boost returns.
While noting the fundamental attractions of the sector, such as monthly income distributions, consistency of absolute returns and capital stability, Zenith criticised the diminishing scope of excess returns produced by mortgage managers for the level of risk they take on.
“The average management fees range between 0.7 per cent and 1.3 per cent per annum for wholesale mortgage funds. These fees are on average higher than Australian and international fixed interest funds. As mortgage funds can operate relatively efficiently in terms of costs relative to actively managed funds in these competing sectors, Zenith believes there is the scope for a reduction in fees,” the report said.
The researcher also said the formation of a joint ventures between two of Australia’s largest mortgage originators, Balmain and Ashe Morgan Winthrop with JF Aqua and Mariner respectively, could stem the supply of mortgages to other funds.
“Competition in the pricing of loans across most sectors, especially as a result of aggressive pricing from banks, has also increased significantly. This has resulted in lower margins being achieved by the mortgage managers, which has diminished the scope for excess returns.”
Out of the 15 funds in the sector rated by Zenith only four scored a strong ‘recommended’ rating. These were Australian Unity Wholesale Mortgage Income Trust, JF Aqua Income Fund, JF Aqua High Income Fund and the LM Wholesale Mortgage Income Fund.
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