No sign of mortgage fund thaw

There is no light at the end of the tunnel for frustrated mortgage fund investors in 2010, with both those wishing to exit funds and those waiting for a sector recovery remaining hamstrung.

Standard & Poor’s fund analyst Peter Ward said mortgage funds now face the delicate balancing act of meeting the interests of all investors, “not just the ones who want to get out, and not just the ones who want to stay in”.

Mortgage funds have been in lockdown for 14 months as a result of the credit crisis and the Australian Government’s intervention in the form of the bank deposit guarantee. These funds are now facing the prospect of constrained future returns as a result of being unable to compete in today’s lender-friendly mortgage market, which offers higher margins on loans with more conservative lending criteria.

Ward said as a result, lower margin loans generated in previous years will represent a greater proportion of funds’ loan books in the future, making it more difficult to compete with substitute investments.

A removal of the Government bank guarantee would “reignite some competition” in the lending space and possibly alleviate redemption requests from mortgage funds, Ward said.

But Australian Unity general manager, retail, Adam Coughlan believes while removal of the guarantee “wouldn’t do us any harm”, the sector is now being more heavily influenced by its changed liquidity profile.

For normality to return, the investors “who were using mortgage funds more like a term deposit without a term” must fully exit the sector, Coughlan said. This would leave a stable base of remaining long-term investors, allowing managers to use funds generated from loan rollovers and refinancing to recommence mortgage origination, rather than to pay out exiting investors.

This could take considerable time. The majority of affected funds are still eking out investors’ capital at a limited rate. Ward said some of the larger platform investors are continuing to request fund redemptions, while Coughlan estimated 20 per cent of his group’s mortgage fund investors are still seeking partial or full capital redemptions.

Colonial First State was forced to scale back the withdrawal offer for one of its mortgage funds this month, with a number of loans in the portfolio at risk of default.

An ING spokesperson said the asset class was not yet stable enough to allow for the freeze to be lifted, with ING continuing with its existing redemption windows.

AXA is also continuing to offer quarterly redemption windows in 2010, with a spokesperson saying the timeframe for this method was indefinite.

Colonial has paid $550 million in redemptions across its six mortgage funds since withdrawals were suspended, while AXA paid $520 million in redemptions last year.