By Jason Spits
RESEARCH group Zenith Investment Management has warned the rush to mortgage funds in an effort to gain better returns than cash trusts carries high risk, particularly with property prices rising.
Zenith analyst Ben Davis says both advisers and retail investors are replacing cash funds with mortgage trusts, but are not aware of the associated risks.
“Aside from issues such as exit fees in mortgage trusts, they have higher risk than cash trusts and are exposed to credit and liquidity risk,” Davis says.
The group says these risks will grow if the underlying property values inside the mortgage trusts retract, which is more likely given the rise in property values over the last two years.
According to Davis, the mortgage trust market has quickly expanded and many of the newer funds are paying large yields, which combined with a stable unit price has attracted investors.
However, he says these funds may also face problems in a market downturn if they do not hold a wide range of investments, which would in turn wipe out short-term returns.
Zenith has recommended that advisers use experienced managers that can show solid credit assessment procedures and a loan book diversified by region, sector, loan size and total number.
Zenith says in the case of conservative investors, instead of blending multiple mortgage trusts they should consider holding income-focused short duration diversified fixed interest funds as an alternative.
Last week the group gave the market’s largest mortgage trust, the $3 billionChallengerHoward Mortgage Trust, a ‘recommended’ rating. It says the fund suits conservative investors with a two to three-year investment time frame and seeking capital stability and consistent income.
