Research houseAssirthas issued a warning for the mortage funds sector claiming it is suffering from capacity constraints and a high weighting towards cash which has resulted in decreased quality of the portfolios and a drop in returns.
Assirt says the mortgage funds sector has ballooned in the past 12 months with $3.1 billion flowing into the sector in the year to December 2002, an increase of 63 per cent over 2001.
These figures have not died away either into 2003 with $1.63 billion invested in the sector to the end of the June quarter of this year with the sector having a total assets under management figure of $13 billion.
Assirt investment analyst and author of the report George Lin says the size of the inflows over the past 18 months, driven by the flight from equities based managed funds, has caused the sector to shift towards larger cash holdings which sits at about 40 per cent for the sector.
“If the funds are being held in cash it defeats the purpose of being in the fund as they charge an active management fee, and if that is the case clients should look directly at cash funds,” Lin says.
However Lin says the large cash positions being held by the sector is indicative of the difficulties managers are facing in sourcing high quality mortgages and turning the cash holdings into loans.
The reasons for this according to Lin’s report are the moves by banks to regain market share in the property loan market through introducing a greater range of products with aggressive pricing strategies.
“Given this Assirt is asking if some funds are compromising their choice of investments given the pressure to loan out the funds from investors,” Lin says.
Assirt rates mortgage funds from seven fund managers -AXA,Australian Unity,Colonial First State,Challenger Howard,IOOF,PerpetualandSandhurst Trustees- offering nine funds into the market which Lin says accounts for 80 per cent of the sectors assets under management.
Of the cash holdings of each manager AXA holds the lowest position at 12 per cent while ING holds the highest cash position at 53 per cent.
Weightings for other managers were Australian Unity at 14 per cent, Challenger Howard at 21 per cent, Sandhurst at 40 per cent, Colonial at 47 per cent and Perpetual at 52 per cent.
