Perpetual In A Second Profit Downgrade

Sydney Morning Herald

Friday November 30, 2007

Stuart Washington

FUND manager Perpetual has rattled shareholders with its second profit downgrade in just over a month, revealing a further $13 million loss related to the credit crisis yesterday.

The cut in its profit forecast means Perpetual's operating profit after tax in the first half is likely to fall to about $62 million, less than the $68.8 million it recorded in the previous corresponding period.

The company had been forecasting a 10 per cent increase on the previous first half.

Perpetual's problems have been caused by a guaranteed return within the Exact Market Cash Fund, which has about $1.7 billion of investments.

Perpetual guarantees investors a return of 6.5 per cent from the fund and must make up the difference if the fund is underperforming. At present, the fund is making a return of about 5.75 per cent, forcing Perpetual to top up investors' returns.

At its annual general meeting on October 30, it announced that losses of $5 million from the Exact fund would hit its profits. About $5 million in the fund related to US subprime investments has been written off.

Perpetual chief executive David Deverall said continuing underperformance in the Exact fund was based on its portfolio of investments in credit securities being re-priced as a result of the credit crunch.

Mr Deverall said a further $13 million in losses were likely to be recouped in forthcoming years as the credit securities the fund invested in reached maturity.

He said the Exact fund, made up mainly of Australian residential mortgage-backed securities, was very high quality and had a credit rating of AA.

The news from Perpetual follows continuing ramifications from the credit squeeze that has rocked the world's financial markets since August.

Citigroup and Merrill Lynch both lost their chief executives after revealing billions of dollars in losses related to US subprime mortgages. Domestically, the share price of mortgage provider RAMS collapsed when it lost its ability to roll over short-term funding.

Banks face pressure to lift interest rates because their cost of borrowing has increased.

Perpetual's shares fell 88c, or 1.3 per cent, to $67.40 yesterday, in a market that rose 1.2 per cent.

Perpetual faces broader effects from the crisis as well, since it earns fees on the securitisation of credit market securities - markets which have dried up.

© 2007 Sydney Morning Herald

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