Four Fund Providers Suspend Withdrawals As Redemptions Soar

The Age

Friday October 24, 2008

By Ruth Williams

AUSTRALIA'S mortgage fund industry has dramatically succumbed to a flight of money to government-guaranteed bank deposits, with four of the biggest five fund providers suspending immediate withdrawals.

AXA Asia Pacific, Australian Unity and Perpetual Investment Management last night suspended or amended redemption rules on a string of mortgage-backed investment funds, in an unprecedented series of announcements. They followed a similar move on the Challenger Howard Mortgage Fund - the country's biggest - earlier this week.

The latest three come after what has been described as a dramatic spike in redemptions from mortgage funds after the Government moved to guarantee bank deposits almost two weeks ago.

But the rate of investors switching - from the mortgage funds to guaranteed bank deposits - rapidly gained pace in the past two days, after the Challenger move and as the scope and nature of the guarantee was hotly debated by the Government and Opposition in Canberra.

"In the sales release just issued for the last nine months, the fund was cash-flow-positive," an AXA spokeswoman said. "(Yesterday) we received redemptions almost 20 times our daily average."

Richard Brandweiner, general manager, investments, at Perpetual, said the move was prompted by a "very material spike" in redemptions over the past 48hours, and was aimed at protecting the fund's assets.

He warned that the problem could have an impact on the wider economy unless a solution was found.

The funds in question invest in mortgages - usually commercial or business - and provide returns to investors by distributing the interest payments on the loans.

Industry sources warned that if the rate of redemptions continued to be high, the funds might not be able to refinance some mortgages, leaving the mortgagors to try to refinance with banks.

The industry wants the Government to stem the move from the funds to bank deposits by providing some sort of guarantee for mortgage funds - perhaps along the lines of a Treasury program for money market funds in the US, where eligible funds pay to participate.

Australian Unity chief of investments David Bryant called on the Government to extend the guarantee quickly, predicting cash management trusts would face the same issues as mortgage funds unless the Government acted.

"(Investors) have been subjected to a lot of bad news this year," Mr Bryant said. "The lure of a government guarantee is obviously too much to resist at the moment." Distributions from the funds are not affected, and the groups said their capital positions remained sound. Depending on the fund, redemptions will be allowed at three or six-monthly periods. Another much smaller fund run by Everest Capital also suspended redemptions.

AXA's chief investment officer, Mark Dutton, said the approach was designed to provide equity between unitholders. But the Government last night appeared unable to resolve the cascading problem.

Treasurer Wayne Swan said he was willing to take suggestions from the industry, but said the Government was not in a position, "and never can be in a position", to provide the same guarantee to "market-linked investments" as to the banking system.

Deposits at banks, credit unions and building societies are covered by the Government's guarantee, which was put in place on October 12 in response to turmoil in world banking systems.

Withdrawals are now suspended on four of the five biggest mortgage funds in the country - all save one offered by ING. Those suspended are worth more than a collective $7billion, according to data from research house Lonsec. Based on an average investment of about $40,000, more than 180,000 people may be unable to access their mortgage fund investments. ING said last night that its fund was still open for deposits and withdrawals, and a spokesman said the group was reviewing the situation.

Mr Bryant rejected suggestions mortgage funds were "market-linked investments", saying they were backed by solid assets.

"The fundamentals of a mortgage trust are no different to a bank," he said.

Investment and Financial Services Association chief executive Richard Gilbert said he was "encouraged" by the Treasurer's stated willingness to take ideas from the industry. "We believe this needs attention now," he said.

"We have been working on this for 10 days. It will take time. Hopefully we are getting very close to an end."

© 2008 The Age

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