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Speaking in Sydney this week, Australian Unity's head of mortgages, Roy Prasad, said the Select Mortgage Income Fund is designed to avoid some of the pitfalls of pooled mortgage funds that saw mass redemptions during the GFC.
Mr Prasad said he can vividly remember the Sunday in October 2008 when he watched then-Treasurer Wayne Swan step up to the lectern to announce the government’s guarantee on bank deposits.
He turned to his wife and said, “This is really bad for my business”.
“That week, I did a ring-around to Perpetual, Challenger and the others to ask them how it was going, and redemption rates were up,” Mr Prasad said.
“By the Thursday, our $1 billion main fund had $600 million in redemption requests — in four days,” he said.
The redemptions continued, and Australian Unity eventually closed its high-yield pooled mortgage fund in December 2011 and its conventional pooled fund in November 2012.
“We’re up to our last six loan accounts; with a bit of luck [we will finish winding the funds up] by the end of 2016,” he said.
But despite the fate of the pooled funds, Mr Prasad convinced the board of Australian Unity to purchase two existing contributory mortgage funds from Melbourne legal firm Owenlaw in December 2014.
The resulting Australian Unity product, the Select Mortgage Income Fund, avoids some of the main criticisms of pooled funds, said Mr Prasad — namely, that “you don’t know what loans are in there or how you can get your money out”.
A contributory mortgage fund, on the other hand, is made up of a number of individual loans in ‘sub-trusts’ that investors can choose themselves.
Each sub-trust has a relatively short duration of between 12 and 24 months, which investors can choose to roll over to another loan, Mr Prasad said.
The majority of loans in the fund are construction loans for boutique developments in the larger Australian cities.
At the moment, there is no shortage of applicants for loans like these, he added — primarily because prudential regulations and addition capital requirements being imposed on the banks make it difficult for “perfectly good developers” to get funding.
On the investor side, returns average between 7 and 7.5 per cent with the average duration sitting at 14 months — making the fund pretty compelling for retirees seeking income, according to Mr Prasad.
Australian Unity has been actively managing the contributory mortgage fund for 18 months, during which time it has increased the funds under management from $50 million to $90 million.
The fund will be capped at $150 million, because it takes “quite a lot of work behind the scenes” to source the constant flow of loans required, Mr Prasad said.
Australian Unity is looking to expand the fund, in part through arrangements with boutique financial planning groups, he added.