Article in The Australian by Stuart Wilson:
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paragraph)
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Deposit guarantee can't please everyone
SHAREHOLDER: Stuart Wilson | October 28, 2008
THE idea of a deposit guarantee was always going to put the Government between a rock and a hard place.
The guarantee is necessary because, like it or not, we are in a global financial marketplace. The know-it-alls that are criticising the decision to offer a guarantee are ignoring the fact that others, including Britain and several European countries, had already stepped up to the plate. This effectively took the decision away from us. Imagine where the Australian dollar would be now if there was no guarantee -- the fund outflows from Australian banks would be similar to, but on a much grander scale than, those being experienced by mortgage trusts right now.
There was always going to be an issue over which investments fell under the guarantee and which were left out in the cold.
Australia has had a robust and highly competitive finance industry for many years. That competition has led to product differentiation resulting in a spectrum of investments people can choose from with different risk and return combinations.
That means that wherever the Government draws the line, there will be a bunch of investments that just miss out on the guarantee, and will whinge about it. Their complaints will centre on the fact that the guarantee has materially changed their risk profile, and that this will in turn see an increase in redemptions.
Mortgage trusts are one of the asset classes that fall just outside the guarantee, and reports are filtering through that up to $25 billion worth of these funds have already been frozen -- all to stop a mass exodus in favour of guaranteed products. Within a week this could easily spread to all mortgage funds. Why wouldn't it?
This does not automatically mean that the Government should extend the guarantee to these funds, because there will always be those on the wrong side of the line drawn in the sand.
There are a number of property funds that have suspended redemptions for the very same reason as the mortgage trusts, including some provided by Mirvac and Macquarie Bank. Should the guarantee be extended to them, too, using the same logic? What about listed property trusts, which simply have a different structure? It is easy to see the danger of having a creeping guarantee.
The mortgage trusts need to look elsewhere to find a solution to their predicament. Some, such as Axa, Colonial First State and Perpetual, have relatively strong issuers behind them. Perhaps, for a fee of its own, the manager's parent could offer its own guarantee to stem the tide of outflows. They could even consider short-term funding in order to facilitate a smooth redemption process.
But perhaps they should avoid any inclination to follow the Octaviar Premium Income Fund down the road of making the fund close-ended and listing on a minor stock exchange. Investors who fell for the manager's line that this would provide liquidity and give their fund a better alternative to liquidation, are unlikely to confront the truth -- there has been just $900 worth of trades since the fund listed two weeks ago. If they were to sell at market now, they would receive just 10c in the dollar, if they are quick.
Stuart Wilson is the chief executive of the Australian Shareholders Association
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direct link:
http://www.theaustralian.news.com.au/business/story/0,28124,24561201-36418,00.html