Mortgage fund managers review their options

Fund managers in charge of $20 billion of mortgage trusts are rolling over between 50 and 80 per cent of the loans in their portfolios, as they try to maintain a balance between the demand of investors for liquidity and the need to maintain relationships with borrowers.

The mortgage trust industry has been hit hard by the Australian government guarantee on deposits. Redemptions requests went up sharply following the introduction of the guarantee last year and funds were forced to freeze or limit redemptions, stop taking new money and stop new lending.

Perpetual chief executive David Deverall said his group's $2 billion Monthly Income Fund, which is meeting redemptions on a quarterly basis, allocated $80 million to redemptions in December and $70 million in March.

It paid about 25 cents in the dollar each time. Deverall said redemptions applications were higher than the group had expected.

At a briefing held by the Investment and Financial Services Association yesterday managers said the structure of funds was under review.

Investors had been able to put their money in mortgage trusts at call but they may have to invest for fixed terms in future.

IFSA deputy chief executive John O'Shaughnessy said managers were in active talks with advisers and were waiting for feedback from the market before making changes to their funds.

Deverall said that once the liquidity crisis settled down the sector would get back to normal operations but would see its funds under management reduced by half.

Deverall said credit quality in portfolios was holding up well, as most mortgage fund managers were conservative lenders.

The mortgage fund sector provides finance to small commercial borrowers. The freezing of the funds, which started last October, has added to the credit squeeze in the SME market.

IFSA has been lobbying the government, asking it to make temporary investments in mortgage funds through the Australian Business Investment Partnership.