Jan 19

Fund Suspensions -Who, Why, When, How, and What’s next?

Who has suspended?

Please note the following list includes funds that may or may not be on the Guardian FP/ Cameron Walshe/ Standard Pacific Approved Product Lists.

· Alternative Income…numerous funds with exposure to CDOs and lower grade credit

o Challenger High Yield

o AMP Enhanced Yield

· Hybrid Property…effectively all funds that contain both direct property and listed property securities have suspended. Some of those funds include…

o APN Diversified Property Fund

o AXA Australian Property Fund

o BlackRock Combined Property Income Fund

o Challenger Hybrid Property Fund

o Charter Hall Umbrella Fund

o Multiplex Diversified Property Fund

o Orchard Hybrid Property Fund

o Perpetual Property for Income Fund

o Tankstream Property Income Fund

· Direct Property…

o Centro Direct Property Fund

o Centro Direct International Fund

· Fund of Hedge Funds…

o HFA Diversified

o BT Global Returns Fund

o DWS Strategic Value Fund

o GSJBWere Multi-Strategy Fund

o Select Gottex Market Neutral Fund

o UBS Global Alpha Strategies Fund

· Mortgage Securities…

o Australian Unity Mortgage Income Trust

o Australian Unity High Yield Mortgage Trust

o AXA Australian Monthly Income Fund

o Challenger Howard Mortgage Fund

o ING Mortgage Trust No 2

o Mariner Mortgage Trust

o Mirvac Aqua Income Fund

o Mirvac Aqua High Income Fund

o Mirvac Aqua Enhanced income Fund

o Perpetual Monthly Income Fund

Source: Lonsec

Why have funds suspended?

Most of the specific reasons are linked to the global credit crisis in one way or another with…

· Credit Spreads widening …resulting in significant price drops in credit markets, and geared funds like Basis Capital suffered margin calls they couldn’t meet…

· Credit crunch…securitisation markets have been virtually closed, lower than government risk fixed interest investments have found it difficult to raise capital (for example Centro)…this lack of liquidity resulted in credit related funds like AMP Enhanced Yield and Challenger High Yield showed very weak performance results and the credit crunch impacted…

· Highly geared assets such as the listed property sector which sold down rapidly…this resulted in asset allocation and liquidity issues for the hybrid property sector…

· The bank deposit guarantee resulted in a massive shift to bank issued cash and term deposits which were offering higher than government returns at effectively the same AAA-rated risk…the conservative mortgage fund sector along with enhanced yield funds suffered most with this

· Declining credit and equity returns during 2008 resulted in hedge funds delivering their worst returns in years and failing to deliver on their “absolute return in any market” promise…redemptions have been large globally in hedge funds

· Foreign-based fund of Hedge Fund managers split their assets into liquid and illiquid trusts whereby redemptions are funded only from the liquid trust. For the Australian hedge fund manager, like HFA(Lighthouse) or BT (Grosvenor), the outcome is that Australian investors are increasingly be exposed to the illiquid trust and according to the Corporations Act some of these funds fail to satisfy its definition of a liquid fund…and…

· Only Deutsche Strategic Value Fund has suspended due to a change in the portfolio management team.

When are suspensions being lifted?

The length of time each of the funds will be suspended varies from fund to fund.

· Some funds, like some mortgage funds, suggested a 3 month suspension with redemptions available early this quarter

· Deutsche Strategic Value may change from suspension as early as February 1 as long as their portfolio management team are settled

· Others have suspended from 6 months to 12 months and some indefinitely.

How are redemptions being treated?

· It appears there are 3 ways that redemptions are being treated…

1. Redemption requests are not being accepted. This includes HFA

2. Redemption requests are considered on a first-in first served basis. Obviously some requests may be rejected.

3. All redemptions requests are being treated equally. This may result in a scaleback, meaning that only a proportion of the redemption request is received.

Given so many are suspended please check the websites of the respective fund manager for further information in terms of when suspensions are and how they are being treated.

What is research thinking?

Whilst the suspension is in the best interest of the investor, the suspension has effectively changed the perceived risk profile of the fund. Most investors and advisers did not realise the extent of the liquidity risk they were taking on and there is every expectation that many funds will be flooded with redemptions as soon as their redemption window opens.

As a result, irrespective of their return potential, it is expected these funds and the sub-sectors to which they belong will be out of favour for a long time to come….maybe years for some.

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