Vulture fund provides discounted exit for mortgage fund investors

A small Melbourne investment management group, ASI Funds Management, has launched a unit trust, with backing from three institutional investors, to buy up units in frozen mortgage trusts.

The Affinity Special Opportunities Fund No.1 will offer retail investors looking for liquidity around 70 to 75 cents in the dollar for their units.

ASI director Martin May said pricing was yet to be finalised and would be set on a fund-by-fund basis.

The mortgage trust industry has been hit hard by the 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.

ASI has based the business case for its fund on the assumption that at least five per cent of unit holders in the $20 billion sector will sell at a discount rather than wait for their fund managers to generate sufficient liquidity to meet the backlog of redemption requests.

The chief executive of the Investment and Financial Services Association, Richard Gilbert, told a hearing of the Senate Economics Committee that it could take three to four years for managers to clear the backlog.

The committee, which is inquiring into the deposit guarantee, held a hearing in Sydney last week. Members of the committee canvassed the prospect of the Government introducing measures to force mortgage fund managers to generate liquidity for investors more quickly.

Gilbert said: "We argued that a forced outcome would not be a good outcome."

ASI will give mortgage trust unit holders two liquidity options. They can sell their units outright or they can do a "repo" deal - sell the units to ASI at 60 cents in the dollar and then buy them back at 64 cents.