Mortgage fund sector sharply divided

A sharp divide in the mortgage fund sector remains between the funds which have suffered little or no effects from the global financial crisis (GFC) and those who have been demolished.

This is the main finding of the Zenith Investment Partners 2011 mortgage fund sector review, which saw three of the 29 funds rated making the recommended list and now candidates for client model portfolios.

The three funds receiving the recommended rating were Equity Trustees Wholesale Mortgage Income Fund, Australian Unity Wholesale Mortgage Income Trust and La Trobe Australian Mortgage Fund (pooled option).

Zenith analyst Dugald Higgins said the landscape in the sector was divided ever since the GFC dealt a series of heavy blows through 2008 and 2009, with many funds remaining severely wounded or in the process of withdrawing from the field.

However, he said surviving players have been presented with a window of opportunity.

"Many of the mortgage funds still in existence remain unable to undertake lending operations due to funds being frozen," Higgins said. "These events, combined with the cyclical fall in asset values, have meant that credit margins have been effectively repriced, resulting in higher margins for lower empirical risk than was previously available."

As a result, he said mortgage managers should be able to provide a temporary boost to returns before lending environments stabilise and become more competitive once more.

"In comparison to official interest rates, those mortgage managers with disciplined quality operations have proven their ability to maintain a rate of return with a significant premium during this period of dislocation," Higgins added.