Money flooding into mortgage funds

The managed funds which get the most public attention at the moment are hedge funds, share funds and it could be argued United Kingdom based Open Ended Investment Companies (OEICs).

Tuesday, April 9th 2002, 11:13AM

The managed funds which get the most public attention at the moment are hedge funds, share funds and it could be argued United Kingdom based Open Ended Investment Companies (OEICs).

However, the funds which get the most money are mortgage backed funds.

According to data from managed fund research house FundSource the funds flow into this sector has accounted for more than 100% of net funds flow in the past two quarters.

It says total net industry funds flow in the three months to December 31 was $116.94 million, however $154.2 million (132%) went into mortgage funds. A similar picture emerges in the previous quarter where mortgage funds accounted for 165% of funds flows.

Another of the interesting statistics is that the flows have been dominated by bank offered funds, as opposed to those from other organisations.

For instance WestpacTrust and ASB Bank have been getting major inflows, while others like Royal & SunAlliance and AXA have been seeing outflows or have remained static.

While all the public attention is on the so-called sexy fund groups, the real interest is in mortgage funds. The reasons behind that are probably that they are seen as a 'safe haven' in times of uncertainty, plus they have been marketed aggressively by some of the organisations.

This raises the question of how sticky in the money in mortgage funds? There is no hard and fast information in this area because managers don't disclose this data.

In the past many mortgage funds had lock-in periods, but these have been phased out.

There is some speculation within the industry that although some managers have been successful at getting money to switch from term deposits into mortgage funds, they are having difficulty keeping it there, simply because the returns for people on low margin tax rates aren't spectacular.

Because a unit trust is being taxed at 33% it may be disadvantageous for people on lower marginal tax rates to use such products. However, investors in mortgage funds that are packaged up as group investment funds (gif), as opposed to unit trusts are taxed at their own marginal tax rate.

ASB Bank chief manager investment services, Roger Perry says the unit trusts aren't tax disadvantaged because investors get imputation credits which they can use in their annual tax return.

However, he acknowledges that this system is administratively cumbersome for investors.

Perry says ASB's mortgage fund has a turnover rate which is "much, much higher" than growth funds, but he isn't prepared to publicly name a figure.

Part of the reason for this turnover is that people park large sums of money, such as proceeds from the sale of a property, into the fund. With retired investors ASB encourages them to put enough money to cover three year's living expenses into the fund, and any other money into a growth fund. These investors then regularly draw down living expenses from the mortgage trust.

ASB a small upfront fee on the fund to dissuade people from 'churning' money for cash needs.

Perry says ASB Bank has considered establishing a gif-based mortgage fund but concluded there "was not a lot of pressure" on the bank to do so.

A new trend that is developing in the industry is that mortgage funds are starting to replace contributory mortgages. Money Managers has an Australian based series of mortgage funds which has attracted large volumes of money and Wellington-based group Lombard recently closed its contributory mortgage business and launched a mortgage fund.

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