cba freezes colonial mortgage fund

Colonial closes major mortgage fund
By finance reporter Sue Lannin for The World Today

Posted 14 minutes ago


The Commonwealth Bank owns Colonial First State, which has frozen an $850 million mortgage fund (ABC News: Karen Barlow, file photo)
One of the country's biggest investment houses has closed its major mortgage fund which holds $850 million.

Colonial First State, which is owned by the Commonwealth Bank, says it cannot make interest payments to investors and they will now have to wait up to four years to get their money back.

Mortgage funds invest in assets such as home loans and cash but, after the Rudd Government guaranteed bank deposits in late 2008, there was a run on local investment funds which were not guaranteed.

Many were forced to suspend or limit redemptions.

Now the wealth management arm of the Commonwealth Bank, Colonial First State, has closed its Mortgage Income Fund.

"It is a big move for a fund manager. I think anytime a fund manager chooses to give back money to investors and close down a fund is a big decision," said Chris Douglas, the co-head of fund research at investment house, Morningstar.

Colonial First State is the biggest player in the mortgage fund market, and Mr Douglas says he is surprised at the move.

"Always surprised when a fund manager decides to return money back to investors," he said.

"The issue here is just the uncertainty that has been surrounding the mortgage fund sector and so they have frozen redemptions in 2008.

"Now Colonial First State has decided to make a decision about the future of their retail mortgage funds. I guess it just shows how difficult things have been over the last few years."

In a statement, Colonial First State says it cannot make payments to investors because of a small number of bad debts. It says the Mortgage Income Fund is the only one affected.

The company's chief executive, Brian Bissaker, was not available for comment.

The closure of the fund has sparked fears that other mortgage funds may be shut down as well. Chris Douglas says he does not think that is likely.

"But you never know exactly what is going to happen in the current environment. People are looking at the structure of these products and there is a degree of uncertainty that is happening in the industry," he added.

"There has been no uniform acceptance of how these mortgage funds should be structured going forward."

Research by Morningstar late last year shows that more than 70 funds froze or limited redemptions.

They included funds run by the big players - Colonial First State, Perpetual and Axa Asia-Pacific.

Chris Douglas says no major fund has allowed investors to make daily withdrawals.

"The problem being the mismatch between unlisted assets - many of these loans that are within the fund are two, three, four, five years in duration, and clients are wanting their money straight away," he said.

"When you have a large number of clients [who] want to pull their money out, the fund manager always seems to look after existing investors and makes sure they are not penalising them in any way by some members or some clients willing to pull their money out. So it is a very difficult situation."

Mr Douglas sees a continued future for mortgage funds, but says long term changes will need to be made to make it harder for investors to pull their money out quickly.

"Anytime an investor is trying to receive a return that is above what you can receive [from] a cash rate you are taking on risk by doing that, and certainly when you are looking at mortgage funds, we do believe there was a mismatch between the actual liquidity of the investments and the daily liquid mechanism that many of these funds had," he explained.

"We still believe there is a future for mortgage funds, but I think industry needs to come together and work out exactly how liquid these assets need to be for investors to redeem them."

He says it is understandable that it will take four years for Colonial to wind-up the fund.

"Again, it just comes back to the fact that these assets are not daily priced assets, and they are not liquid assets you can sell immediately," Mr Douglas said.

"Unfortunately, with Colonial First State winding this fund up, they will have a number of loans in their loan book which they will want to see through to maturity and make sure they can get back to clients as much money as they possibly can so that will take some time to roll through."

Morningstar has clients who invest in Colonial's Mortgage Income Fund.