Slowdown threat to debentures

Debenture investment products are looking increasingly risky as the economy heads into a downturn, a top fund manager has warned.

Tower Financial Management chief executive Tony Hildyard said finance companies were leveraged into property and consumer goods and had had "a honeymoon period with low interest rates, a booming economy and all the rest of it".

But finance companies hit back, saying the fund management industry was just lashing out at rivals as figures published yesterday showed investors had continued to take cash out of managed funds.

Hildyard said finance companies' borrowing margins had been pretty low because everybody had been prepared to invest, but he felt risk was starting to build.

"But if interest rates start to push up, and if property prices come off, they haven't provisioned for defaults," he said.

"There haven't been any defaults for the past couple of years. It just feels like there's a bit of a risk starting to build and it's not being priced in the market.

"To me, it's got a bit of a 1987 flavour to it. I don't think it's in the equity market, but where I do think there's potential is in some of the property areas."

But Capital + Merchant Finance chief executive Owen Tallentire said Hildyard's comments were "tripe" and scaremongering from a rival.

"They compete for the same funds as us."

FundSource figures yesterday showed investors were continuing to pull money out of managed funds.

Although retail funds under management reached a record high of $20.79 billion in the September quarter, FundSource general manager Binu Paul said that was because of strong returns rather than offsetting a net outflow of $193.9 million over the period. Withdrawals from managed funds had now exceeded deposits for seven consecutive quarters.

Paul said there was evidence showing "some investors are leaving managed funds to chase the higher yields available from deposit and debenture-type investments".

"This pattern of chasing returns, while typical, is generally not a successful strategy in the longer term when the related risks are not considered rationally."

But Tallentire said: "I don't think there will be a crunch, and if there is, I think we'll find that the finance companies can handle it very well."

He said consumer lending-backed debenture products were riskier than those backed by property lending in tougher economic times.

"You don't pike out on your mortgage but you do pike out on your hire purchase. If there is going to be a crunch it will come in that area."

But he believed most finance companies would weather a downturn.

"Finance companies in that area have had a brilliant run for the past few years and they must have considerable reserves put aside for credit going bung."