Mortgage fund investors need to be ‘vigilant’
Investors in Australian fixed-income mortgage funds “need to be vigilant that they are being adequately compensated for risk”, according to Standard & Poor’s fund analyst Peter Ward.
Some conventional mortgage funds have reported increased defaults and, in some cases, minor loan losses, and there have been some warning signs, Ward said.
“The performance of conventional mortgage funds continues to be affected by loan-margin compression caused by fierce competition for commercial mortgages,” he said.
“In contrast, high yield funds face less competition, and have been able to deliver their performance by taking higher-risk lending positions.”
Ward was commenting on the release of an S&P sector report, entitled ‘Sector Report: Australian Fixed Interest — Mortgage Funds.
It found essentially that rated retail conventional mortgage funds have increasingly underperformed the UBSA Bank Bills Index, while rated wholesale conventional mortgage funds’ outperformance has decreased.
Before considering an investment in a mortgage fund, investors should determine whether the fund has been rated, according to Ward.
“If it has been rated, investors should (nevertheless) read the research, and consider the rating and opinion on the fund,” Ward said.
If it hasn’t, he added, they should be “wary of mortgage funds displaying high-risk characteristics, including excessive gearing against ‘on completion’ values for development finance”.
“Other warning signs to look out for are questionable liquidity, and cash-flow management practices, or low diversity, either at the geographic, sector or loan level.”
Yet others are “inexperienced lending personnel or high turnover of investment staff, and high management fees diluting fund distributions”.
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