As the Federal Government turns to the issue of meeting the income needs of retiring Australians, one sector of the managed funds industry designed to do exactly that is crying out for a review and reappraisal.
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Mortgage funds, for so long the darlings of the income-and-capital-stability set, but more recently the scourge of investors whose money has been frozen, are beginning to thaw.
The mortgage fund sector fell spectacularly from favour during the global financial crisis (GFC), and in many cases through no fault of their own. Now, observers of the sector are starting to see positive signs in mortgage markets, as borrowers begin to re-emerge, and signs that product manufacturers have learned the lessons of the financial crisis and its ramifications.
Standard & Poor’s suggested back in May 2011 that “the future of the mortgage fund sector remains under a cloud, but there are some glimmers of light breaking through, which could help those funds continuing to suffer from redemption pressure”.
It pointed out that all of the funds that it rates had continued to meet their investment objectives of monthly income and capital stability.
However, it said that “the status of the sector is only slightly more positive than that at the time of our last review”.
“Managers of liquidity-constrained funds continue to face significant dif- ficulties in balancing the competing interests of investors,” it said.
“They need to accommodate those who want their capital returned, while also delivering an appropriate return to others who wish to remain invested.”
Alex Francois, head of distribution, investments, for Provident Capital, says the fundamentals of the asset class have not changed, and that it was issues related to product structures that caused the greatest problems.
“Mortgage funds had a lot of support pre-GFC, and that was driven by the fact that as an asset class they were seen as being able to provide retirees with good, reliable income, with capital stability,” Francois says.
“And in a lot of ways we still see that that’s exactly the same now. The fundamentals of the asset class haven’t changed.”
