Frozen funds push for redemptions thaw

The Federal Government will face renewed pressure to inject new flexibility into bank guarantee arrangements in the face of the Australian financial services industry having started 2009 in the unprecedented position of having more than 70 funds in which redemptions remain frozen.

The chief executive of the Investment and Financial Services Association (IFSA), Richard Gilbert, acknowledged the high number of funds in which redemptions remain frozen represents an unfortunate way to start the New Year, but argued the situation had been stabilising.

He said the majority of funds affected were in the mortgage trust sector and pointed to the fact that a number of those funds had moved to assist investors by switching to quarterly redemptions.

“The industry is not being inundated with complaints or enquiries and I believe, for many people, mortgage fund exposure was just one facet of a broader investment portfolio,” he said.

Gilbert also said IFSA was continuing to lobby the Federal Government with a view to injecting more flexibility into its bank guarantee regime.

It was the bank guarantee that placed liquidity pressure on mortgage funds as, in the so-called ‘dash for cash’, many retail people sought to redeem their investments and shift them to ‘government guaranteed’ bank products.

According to data compiled by ratings house Morningstar, 71 funds have frozen redemptions, although a number had moved to allow quarterly arrangements.

Commenting on the impact on institutional investors such as superannuation funds, Mercer Human Resources Consulting worldwide partner Russell Mason said the situation had created liquidity issues and made funds more reliant on the superannuation guarantee inflows.

“What is concerning is that there appears to be a number of managers who are simply not making great speed in terms of altering their redemption positions,” he said.

Mason said the problem was undoubtedly more pressing for retail investors with exposure to mortgage funds.

“How do you retire if you can’t redeem your money?”

The deputy managing director of Frontier Investment Consulting, Kristian Fok, said it was a question of whether investors regarded their exposure to particular funds as being liquid or illiquid.

He said if superannuation funds were prepared to regard the investments as illiquid and were prepared to hold them to maturity then they might obtain the original value of their investments.