29th October 2008
Are all Mortgage Funds the same?
There has been much written in the press over the last week in relation to the financial markets and mortgage funds, which has caused great concern amongst investors. It is important, once again, to understand your investment type, the terms and conditions, the underlying investments and of course the investment manager who is looking after your money.
As discussed in last week's Investment News, mortgage funds fall into the defensive category of the fixed interest sector, with a low to medium risk profile and a medium to long investment term. Most mortgage funds that have suspended or slowed redemptions in the last two weeks are in fact performing well. This industry event has been caused not as a result of any damage in mortgage fund performance but specifically by the Federal Government announcing a guarantee on bank deposits. This is an external event to the mortgage fund industry.
Unfortunately, the media has not assisted in alleviating investor concerns but has contributed to investor fear by not reporting accurately. Rather than acting contrary to investors' interests, in most cases the majority of funds have suspended or "frozen" redemptions to preserve investor funds and to protect the interests of all investors concerned. Some funds have also not suspended redemptions completely but have put in place a 'tiered access' to funds. Fund Managers have moved to this extreme in the desire of honour what a mortgage fund is there to do and that is to protect capital value and provide a steady income.
How did so many mortgage funds get into this position?
The underlying basics of a mortgage fund are the same across the industry whereby investors invest their money for an income return and those investor funds are pooled and invested in mortgages over real property. However, the structure and features differ between mortgage funds. Many of the mortgage funds which have moved to suspend redemptions had very short redemption periods - in some cases daily withdrawal facilities. However they can range from 5 days, 30 days, 6 months, 12 months and greater. The average is 30 days.
When markets are buoyant, as they have been over the last 10 years or so, having short redemption periods is manageable by a mortgage fund. It is only with a substantial and rapid sentiment change, as we have experienced since the 12th October, that this is particularly exposed as unsuitable for this type of asset class. As investors become increasingly concerned by a real or perceived issue and requests for redemptions increase, many mortgage fund providers cannot or in many cases currently decide not to honour all redemptions as the funds are still invested in long term mortgages. Therefore they suspend redemptions to protect investors' capital.
What about my investment in the La Trobe Australian Mortgage Fund - Pooled Mortgages Option?
La Trobe Financial has been a non bank mortgage lender, across Australia, for over 50 years. Mortgage lending is all we do and we pride ourselves on our experience and expertise in this area which is substantiated by our survival through many market cycles, over our continuous years of service. We have not suspended our redemptions and we continue to redeem funds as requested by investors as the investments reach their maturity date.
Why is La Trobe's Pooled Mortgages Option different?
La Trobe's Pooled Mortgages Option is a 'term investment' with a minimum 12 month investment term. It has been
La Trobe's philosophy for this Option not to have an investment period less than 12 months as we believe that an investment type such as this, with nearly 100% of funds invested in mortgages, requires more of a term commitment by investors in order to align expectation with the realities of the underlying investments. Mortgage funds are invested in mortgages with terms from 12 months and longer - therefore high volume redemptions over a short period of time cannot be sustained. By requiring investment terms from 12 months and spreading maturity dates across the year, a mortgage fund is better able to match underlying mortgage terms (although we note that even this is not perfect matching). The term investment (12 months) is one reason why mortgage funds pay (or in our view, should pay) a higher rate of return than say a daily transaction account at the bank because those accounts are and should be more liquid than a term deposit or term investments such as a mortgage fund.
Unfortunately an event completely external to the mortgage fund industry (the government bank deposit guarantee) has sparked withdrawals that have been turned into fear. Fear in the majority of cases has caused the suspension of mortgage funds and not mismanagement. In an article "What you should know when... Funds are frozen" in the Australian Financial Review October 25-26, 2008, it was noted that "... [e]ven the most conservative funds are now freezing or have the move under consideration as they attempt to preserve equity between their unit holders." Mr. Louis Christopher, Head of Property at Adviser Edge (a research and ratings company) is quoted as saying "... that even if there was a large scale increase in defaults, investors in these conservative mortgage funds would more than likely get their principal and interest back. A lot of the larger players have fantastic management, good administration, good controls over the quality of the loans and well diversified loan books." He was also quoted as saying that "Adviser Edge expects the mortgage fund sector to out-perform over the next year as the margin the funds pay over 90-day bank bills widens. The consolidation in the lending market means that the remaining funds could charge higher rates, making returns to investors quite competitive."
It all comes down to understanding your investments and being comfortable with the risk and return associated with each investment choice.
Note: Mr Louis Christopher has just led an Adviser Edge team in releasing a rating on the
La Trobe Australian Mortgage Fund - Pooled Mortgages Option in October 2008, which is available on our website or by phoning La Trobe on 1800 818 818.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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