Morningstar removes first mortgage funds from on-hold status

Morningstar has upgraded the first of the on-hold mortgage funds, Challenger’s Howard Wholesale Mortgage Fund, to investment grade status, but has warned investors to be mindful that there are still short-term liquidity challenges for the sector. Challenger was one of many mortgage funds in the sector to be placed on hold after redemptions in many funds were frozen in late 2008.

Chris Douglas, an investment researcher at Morningstar, said that the increasing changes to the structure of the mortgage funds to monthly or quarterly redemptions clearly reflected that the underlying assets in the mortgage funds were not liquid assets.

“The episodes last year reflected that a lot of people really started using mortgage funds as a cash proxy, and that’s clearly not the correct way of using them,” he said.

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The mortgage funds would be more suitable for investors looking for a regular income stream in a longer-term investment horizon, according to the report.

The majority of mortgage funds do have liquidity issues, Douglas said, and investors must understand that short-term liquidity is still an issue. However, mortgage funds could provide an excess return above cash in the longer-term environment.




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