KEY POINTS:
Financial advisers are being warned not to recommend mortgage trusts to their clients because of a rising number of problems for investors wanting to get their money out.
Yesterday NZX-owned fund monitoring and research firm FundSource took the unusual step of putting a hold on its recommendation for mortgage trusts and sent out an alert to hundreds of advisers.
Its move came after research which found investors have pulled close to $300 million out of mortgage trusts and property funds in the last quarter alone and follows decisions by three mortgage trusts to freeze withdrawals in the last two weeks.
Fundsource spokeswoman Leonie Gordon said climbing redemption rates and the difficulty mortgage trusts had in liquidating assets meant it was not prudent for the firm to be recommending them. "We have put the sector on hold at this point in time."
The firm monitors 11 mortgage trusts and says across the wider mortgage sector there is $3.3 billion invested.
Auckland Mortgage Trust general manager Bruce Rasmussen said the move had the potential to cut funding to trusts but he was not worried about his trust because its investor base through financial advisers was very small.
He said it appeared to be mainly larger mortgage trusts that were being affected by the problems in the industry.
"It's fair to say anybody in the property sector is being touched by what is going on. But those that are having problems at the moment are larger."
Rasmussen said he continued to see a future for mortgage trusts. "At the end of the day they are there as an alternative to the trading bank system. What is lacking is confidence in the market."
Fundsource's quarterly report on retail managed funds shows despite strong in-flows into KiwiSaver funds the entire sector continues to shrink with funds under management dropping from $18.85 billion to $18.35 billion between March and June.
Net fund outflows were $391.5 million, significantly more than the previous quarter which saw net outflows of $46.8 million.
A driver was mortgage trusts and property funds. Mortgage trusts saw a net outflow of $213 million during the quarter, more than double the outflow of the first quarter of this year of $85.3 million.
New Zealand property funds also saw a significant increase in net outflows, from $40.4 million in the first three months of the year to $85.3 million for the June quarter.
Gordon said given the tough time for the markets the continued drop in funds under management did not come as a surprise.
But the money flowing out of property and mortgage funds was particularly high and she linked it to poor performance and negative investor sentiment.
In April Tower announced it would close its $242 million Mortgage Plus fund and in the last week and a half the Canterbury Mortgage Trust, Totara First Mortgage fund and Guardian Mortgage Trust have put a stop to investors taking their money out.
The mortgage trust sector is estimated to be worth around $2 billion of which $750 million is now frozen.
