Little improvement in mortgage fund sector

There has been little improvement in the lagging mortgage fund sector, with redemption pressures, difficulty lending and sluggish inflows still causing problems, according to the Standard & Poor’s (S&P’s) mortgage fund sector review.

All funds continued to deliver monthly income distributions and capital stability but a lack of positive net fund flows as well as ongoing redemption pressures forced managers to balance the interests of investors who wanted to redeem with the interests of those who wished to remain invested, S&P stated.

There was no uniform approach or uniform timing to implementing permanent, more sustainable redemption structures among managers, which led to greater product differentiation and performance outcomes, S&P noted.

The performance among conventional mortgage funds ranged between 3.1 per cent and 6.6 per cent for the year to 28 February 2011, reflecting significant differences within the peer group, the report found.

Ability of a fund to lend was also crucial to performance because if a fund cannot lend, its ability to re-price its portfolio is significantly restricted; the funds that were able to lend outperformed to a greater extent than those that could not, the report stated.

This review included six conventional mortgage fund products, two hybrid funds, and one high-yield mortgage fund, which was a smaller peer group compared with the 2009 group of 17 funds, largely due to a number of withdrawals.

Funds from La Trobe and Australian Unity both received upgrades, the La Trobe fund being the only product to receive four stars. Ratings on five funds were affirmed, and S&P was able to resolve the ‘on hold’ ratings on products from Challenger and OnePath after the managers to the fund redemption process.

Overall the status of the sector is only slightly more positive than that at the time of the last review, said S&P Fund Services analyst Peter Ward (pictured).