Grosvenor takes icing off fund

Grosvenor has split its Enhanced Income Fund (EIF) in two, shunting off about 80% of the liquid underlying investments to the new PIE-compliant Income Securities Portfolio.

Wednesday, August 20th 2008, 6:45AM

by David Chaplin

According to a letter sent to Grosvenor investors, the move became necessary after about 15% of underlying EIF investments were either frozen by issuers or placed in receivership.

In particular, the closure last month of the Canterbury Mortgage Trust - which comprised 10% of EIF holdings - prompted Grosvenor's decision to split the fund. As well, the EIF holds investments in Dominion Finance, Strategic Finance and Capital + Merchant, which collectively make up about 5% of the portfolio.

"While only a small number of these securities were held in the EIF, it was not appropriate to keep the fund open to new investments given the uncertainties surrounding valuations and liquidity issues for those 'impaired" assets'," the Grosvenor letter says. "Importantly, although the EIF has been closed to new investments since August 2007, it has continued to allow withdrawals as requested by investors throughout this period."

As well as the damaged assets, Grosvenor has also left investments in Marac, South Canterbury Finance and the Auckland Mortgage Trust in the EIF with redemptions in these products either underway or pending.

In total, 19% of funds have stayed inside the EIF with the remainder placed in the Income Securities Portfolio (ISP).

Allan Yeo, Grosvenor CEO, said the EIF would eventually be wound up as the underlying investments pay out.

According to the Grosvenor letter, the wind-down could take "two to three years" but the majority of the EIF funds should be paid out by March next year.

Yeo said neither Grosvenor nor the group's associated financial advisers would collect fees on the frozen EIF investments.

"We don't think you should charge fees on frozen funds," he said.

The Grosvenor letter says the ISP, which promised a daily compounded earning rate of 8.5%, will "have no exposure to illiquid finance company debentures or unlisted mortgage trusts".

"Plans are also under way to offer a term investment option for the ISP which will provide a higher rate than this 'on call' rate – this is expected to be available in September," the letter says.

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