Re: Octaviar MFS Premium Income Fund PIF
Article in today's Australian
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Marketed mortgage funds carry unseen risk
by Anthony Klan and Sara Rich | October 25, 2008
ABOUT 180,000 Australians now hold a combined $22 billion of funds frozen in the mortgage trust sector.
And in the current turmoil many investors are likely to begin heavily scrutinising where they parked their money during the good times.
What most don't know -- and what mortgage funds are not eager to advertise -- is that many of those funds now hitting the wall have their roots in the solicitors mortgage scandal of the late 1990s.
Many of the smaller mortgage funds -- those holding tens or hundreds of millions of funds rather than billions -- were created by small law firms seeking to make a buck by borrowing funds from clients and on-lending them at a higher rate.
Most of the funds were on-lent to property developers seeking cheap debt.
The practice ballooned during the 1990s but in the second half of the decade poor lending decisions -- and under-regulation -- meant many collapsed, with investors owed close to $1 billion.
Reacting to the failures, and media scrutiny, corporate watchdog the Australian Securities and Investments Commission required the solicitors -- largely unregulated -- in 1999 to become managed investment schemes if they were investing clients' money.
The result is that many of those former small law firms are now the major fund managers steering billions of dollars of investors' funds in the stormy market.
The Government's guarantee on certain bank and building society deposits has dramatically increased the pressure on the sector, with spooked investors bolting for the exit doors.
Yesterday the $1.5 billion MacarthurCook Mortgage Fund, managed by listed property group MacarthurCook, and the $70 million St George-managed Advance Mortgage Fund became the latest funds to freeze redemptions.
But the problems facing the sector are not new.
Several mortgages collapsed or were frozen many months before the Government's October 12 decision to guarantee deposits.
Poor lending by some funds, exacerbated by the downturn in property construction, has meant many funds have come under pressure.
In January the MFS Premium Income Fund froze the funds of 10,000 investors, worth a combined $770 million.
Two months later fellow Queensland-based borrower City Pacific suspended withdrawals from its $1 billion First Mortgage Fund.
Then, in July, property giant Mirvac -- which had boasted returns of up to 9.5 per cent per annum -- was forced to freeze more than $240 million of funds belonging to hundreds of ordinary investors.
The failed multi-billion MFS investment empire was one of those mortgage funds born in the fallout of the solicitors mortgage scandal.
MFS founders Michael King and Phil Adams were partners in minor Gold Coast law firm McLaughlins solicitors until 2000, when they formed MFS.
The pair went to the market raising billions of dollars from investors and buying up assets as diverse as ski fields and aquariums, often paying premium prices.
When the company collapsed many investors claimed they had no idea of the high risks involved with investing in the company.
One such investor is Christopher Cole, who sold his New Zealand home last year and invested the entire $600,000 proceeds in MFS PIF at the suggestion of a Gold Coast financial planner.
He had placed that money in the fund while searching for a new home. "I was going to buy a house with it but now I can't afford to and I'm living in a caravan," Mr Cole said.
"I did exactly what you're not supposed to do and invested it all in the one place, but the planner said it was a good idea.
"It's pretty devastating but you've just got to get on with your life."
The gap between consumer expectation and the products marketed is widespread, according to experts.
Mortgage funds attract investors by either advertising to the public directly or paying financial planners to sell their product.
Unlike many financial planners, Neil Kendall, of financial planning firm Tupicoffs, said he refused to steer clients into mortgage trusts, which he said were "fundamentally flawed".
"They are often promoted as a safe liquid investment (but) in essence they are tied to the property market and they are not liquid," Mr Kendall said.
"If a lot of people want their money back, the mortgage fund doesn't have the ability to pay it back quickly."
He said mortgage funds were "fundamentally flawed" because they typically borrowed funds for periods much shorter than the loans they wrote. "Mortgage trusts and unlisted property trusts both have this issue that if any number of people want their money, they are clearly not going to be able to generate it quickly."
But mortgage funds were not all bad news, according to Property Investment Research associate director Dugald Higgins.
He said that although many more conservative mortgage funds were offering annual returns at 6 to 7 per cent -- similar to or less than risk-free bank deposits -- banks were not always the best option. Conservative mortgage funds typically made loans to a range of borrowers, rather than focus on lending predominantly to property developers, as many of the higher-risk funds did, he said.
He said mortgage fund loans were typically made at fixed rates over several years, which meant some mortgage trusts would become more attractive to investors, depending on their risk profile.
"Quite often superannuation funds like to invest in conservative mortgage funds because they have a very predictable income stream, even if it is a bit lower than other investments," Mr Higgins said.
In April, ASIC announced it would have a second crack at reining in the mortgage fund sector as part of its broader crackdown on borrowing institutions in the wake of the fall of the Fincorp and Westpoint property empires.
Over coming months mortgage funds will be required to report against a set of eight benchmarks -- such as the liquidity of the funds and withdrawal arrangements -- or explain to investors why they are unable to do so.
The plan is expected to go some way to improving transparency in the often cloudy sector, but for many investors it will be, like many ASIC initiatives before it, too little too late.
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direct link:
http://www.theaustralian.news.com.au/business/story/0,28124,24547993-5017996,00.html