Funds management: Commonwealth Bank closes Colonial First State fund
As the credit crisis bit, investors in funds started to demand their money back. All over the world, fund managers froze repayments - called "redemptions" in the industry. But as property prices have recently shown an upward trend, some would think it was safe to go back into the water. That's not a universally held opinion, as the decision to close Colonial First State's Mortgage Income Fund shows. Or is Commonwealth getting a jump on the regulators?
There is a widespread feeling in the funds industry in Australia that the government is to blame for poor liquidity in funds.
The argument goes that the deposit guarantee scheme - which, unlike the guarantee for bank borrowings, will not expire shortly - has shifted the balance between risk and reward. Now investors who would have placed capital they considered at risk in banks, being above the deposit guarantee threshold, have decided that a little interest with no risk is a better idea than a potentially higher return with greater risk.
Some property-based funds have achieved returns of as much as 5% even during the past year - but liquidity remains an issue.
Some have told investors that they will not allow redemptions; some have told investors that they can get their money back, pro rata to their investment, over periods of as long as 18 months.
Amongst the frozen-redemption category is Colonial First State's Mortgage Income Fund - and now it's decided to wind up (or wind down, depending on who one listens to) the fund and pay out all of its investors.
Colonial First State describes itself as the "wealth management" arm of Commonwealth Bank. The MIF has about AUD850 million under management.
In a statement, the company said "Colonial First State, as Responsible Entity of the Colonial First State Mortgage Income Fund (“the Fund”), today announced it has completed a review of the Fund and has concluded that it is in the best interests of investors as a whole to terminate the Fund and begin the process of returning capital to investors...The termination of the Fund will be effective 1 March 2010. From this date we will start paying investors their proportionate share of the net proceeds from Fund assets. We expect the first payment to be at least 10% of investor account balances. We will aim to make payments every three months.Total funds terminated represent less than 1% of Colonial First State’s total funds under management. Importantly, no other publically available Colonial First State Funds are impacted by the decision to terminate this Fund."
The winding up of such a large mortgage income fund may hint at a fundamental review of the products that were blamed for being at the heart of the currency crisis that led to global depression.
After all, it was the realisation that mortgages in arrear are poor investments that led to the collapse of the derivative instruments that were, in effect, packages of poor quality lending secured on property purchased during a spiralling market - hardly prudent.
We might speculate that, as a mainstream bank, Commonwealth may be looking at the future of regulation and deciding that risky investment strategies do not sit well with retail banking and that the wealth management industry must take steps to distance itself from those strategies - or be hived off.
As Colonial has many other funds which are of a more traditional nature, and which generate profits for the bank, one could not criticise Commonwealth if this was indeed their reasoning.
And if they are, then they may just be getting a jump on regulators before they start demanding a divesting of certain asset classes or even investment vehicles.
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