Mortgage Funds Put Up The Shutters

The Age

Tuesday October 28, 2008

ERIC JOHNSTON, FINANCIAL SERVICES EDITOR

MORE than 61,000 investors have been locked out of a clutch of mortgage funds operated by Commonwealth Bank-backed Colonial First State, marking the largest manager to be swept up in the funds freeze.

The move by Colonial, which affects $3.3 billion worth of mortgage funds, has increased pressure on the Federal Government to provide some support for the retail funds sector, with analysts saying the entire sector could freeze.

"The sudden actions of other fund managers have had a roll-on effect on Colonial First State's mortgage funds, causing an increased level of redemptions in the last few days," Colonial First State said yesterday.

But assistant Treasurer Chris Bowen yesterday stood firm against extending the Government's deposit guarantee program.

"It has never been our intention to guarantee market-linked investments, there is an important distinction there ... a market linked investment, obviously by its nature, involves some level of risk," Mr Bowen said.

However he said the Government would respond "decisively and flexibly" to the issue as talks continued with the industry.

Colonial, the nation's biggest fund firm, said it planned to process withdrawals quarterly from the available proceeds.

The funds affected include the flagship Colonial First State Wholesale Income Fund and the Managed Investment Mortgage Income Fund.

A second fund, APN Funds Management, said yesterday it would suspend its two property funds with $147 million under management, until further notice. Colonial follows Perpetual, Axa Asia Pacific and Challenger, which last week froze redemptions across more than $8 billion of savings in mortgage funds to prevent a rush on withdrawals, a move that mostly affects retirees and small investors.

"When you have negative sentiment across the sector, it doesn't matter how big you are but the managers are acting in the best interests of the investors," said Lonsec head of research Grant Kennaway.

Since the deposit guarantee program was announced two weeks ago, about $12 billion has flooded out of mortgage funds, mostly into high-yielding term deposits that the Federal Government guarantees.

Industry fund managers believe the $1 million threshold on banks had been set too high given that most mortgage fund investors were retirees who had much less tied up in the funds.

Meanwhile, some fund managers have privately expressed concern that the Federal Government could direct the Australian Securities and Investments Commission to use its "modification powers" to force funds with a freeze in place to pay out some investors claiming hardship.

A second manager yesterday said that most mortgage funds already had provisions covering hardship payments, but this needed to be balanced against the need for funds to preserve capital to protect all investors.

Despite the lockdown, fund managers continue to generate income for investors.

Ratings agency Standard & Poor's yesterday suspended the ratings of several more mortgage funds, including ING's mortgage funds, citing the move to freeze redemptions.

© 2008 The Age

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