Government deposit guarantee hits mortgage funds

The Government guarantee on bank deposits has had unwelcome effect on Challenger’s mortgage funds, with the group reporting increased redemption requests as investor fears grow around investments outside the scope of the guarantee.

The Challenger Howard Wholesale Mortgage Fund has been placed ‘on hold’ by Adviser Edge, Morningstar and Standard & Poor’s, which also placed the group’s Challenger Mortgage Plus Trust-Professional fund ‘on hold’ Challenger has temporarily amended its distribution process as a result of “an elevated number of enquiries and redemption requests” following the Government’s recent announcement of the guarantee of bank deposits.

Challenger said while it acknowledged the recent Government initiatives are “intended to provide stability in the financial system”, the implementation of the guarantee had created concerns among investors about the security of investments outside this scope.

Research house Adviser Edge supported Challenger’s assertions, saying the Government’s three-year guarantee of bank deposits had created “a temporary distortion in the risk-return trade off in the market”, as well as creating some fear from investors about the health of the sector as a whole.

Adviser Edge has placed its Australian mortgage trust sector ‘on watch’ as a precaution, but said the current fear of the sector is, in its opinion, “unwarranted and likely to be short-term in nature”. It believes investments in mortgage trusts will outperform cash and term deposits with banks and other institutions over the next 12 months.

Challenger’s amendment will see the volume of redemptions processed matched against the liquidity generated by the maturing of the fund’s loan assets. Challenger said the payment of monthly distributions is not affected by the move.

Meanwhile, the Becton Diversified Property Fund has attracted S&P’s attention over its reliance on capital support to meet its target income distributions, with the researcher dropping the fund’s rating from four stars to two in the face of what it considers an “unsustainable distribution practice”. S&P said the degree of capital support in the fund is the highest in its peer group.

“The process of supplementing income distributions with return of unrealised capital gains isn’t considered sustainable,” S&P fund analyst Nathan Bode said.

“S&P would prefer managers to distribute income generated only by the fund’s investments.”