28th January 2009
Mortgage Funds: Where are they at?
Late last year the mortgage fund sector was adversely affected quite considerably and many investors personally experienced the hardship of that affect, with many still unable to access their funds or their access is limited to a restricted quarterly basis.
As we discussed in our Newsletter on 28 October 2008 "Are all Mortgage Funds the same?" many of the mortgage funds affected were in fact performing as expected prior to the unprecedented request for redemptions. Many products would have been unsustainable under that kind of market pressure. However, these funds created their own vulnerability to their redemption volumes and consequent freeze. This was the result of attracting "short term" investment funds by promising to redeem funds on short notice, a promise on which they could not ultimately deliver.
Nonetheless, in an article that appeared in the Australian Financial Review (AFR) on 21 January 2009, "Mortgage funds look tempting as interest rates fall", it rightly comments that "mortgage funds tend to do better in environments of falling interest rates because the loans are reset every few months, so the rates will lag official rates."
This is a very relevant comment and one which helps investors understand the underlying assets that support an interest rate paid by a mortgage fund that is often greater than 1% over the official cash rate. The article also suggests that as cash rates are falling and the banks are returning little more on their bank bills, term deposits or bank account rates, investors are looking for an alternative. In a market that is so uncertain, what is available to investors who are looking for an alternative in the fixed interest sector?
The AFR article suggests that mortgage funds are once again becoming more favourable as commented by financial planner Scott Haywood who noted that "Historically, mortgage funds usually return 1 to 1.5 per cent more than a Cash Management Trust ("CMT"), so for a conservative investor there are still grounds to have that money spread across different types of fixed interest."
How can investors gain confidence again in mortgage fund investments?
Understand what you are investing in and what are the parameters for investing in the fund. Remember, not all mortgage funds were affected by last October's events (including the La Trobe Australian Mortgage Fund). A mortgage fund is NOT a cash management trust or a term deposit. However, an investment in it should be considered a term investment. And the fund should in our view be able to deliver reasonable certainty over redemption rights on that basis. Most mortgage funds continue to be structured to fail this certainty test.
La Trobe's Pooled Mortgages Option is a 'term investment' with a minimum 12 month investment period. 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 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 both mortgage and investment 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) caused the excessive requests for withdrawals that translated into investor fear. Fear in the majority of cases has caused the suspension of mortgage funds and not mismanagement, although we take the view that they should have been better structured to prevent the contagion of fear.
It all comes down to understanding your investments and being comfortable with the risk and return associated with each investment choice.
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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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