“The status of the sector is only slightly more positive than that at the time of our last review. Managers of liquidity constrained funds continue to face significant difficulties in balancing the competing interests of investors. They need to accommodate those who want their capital returned, while also delivering an appropriate return to others who wish to remain invested,” said S&P Fund Services analyst Peter Ward.

• The ability to improve performance is inexorably linked to a fund’s capacity to lend in a less competitive environment than before the GFC, on more conservative terms, and at higher margins. Of the nine funds we rated, five are undertaking new lending. If a fund cannot lend, its ability to re-price its portfolio is significantly restricted. Those funds that have been lending have outperformed to a greater extent than those funds unable to undertake new lending.
• Portfolio credit quality has again been patchy. Some funds have seen an improvement in portfolio credit quality, although others have reported deterioration.
• This sector review includes six conventional mortgage fund products, two hybrid funds, and one high-yield mortgage fund. In our review, we resolved two ‘On Hold’ ratings, but three managers withdrew their funds from the rating process, resulting in a smaller rated peer group.

The Australian Fixed Interest – Mortgages Sector Report published today covers nine capabilities offered by eight managers. This report, together with reports for all funds rated as part of the review, are available on S&P’s subscriber website www.fundsinsights.com