Friday 11th of April 2008

Have you been trying to get your mind around the closure of the TOWER Mortgage Fund? I have and this is my take on it. My immediate question, and the one readers posed to me, was whether this is another finance company or ING credit fund. While some portray it that way I think they are wrong and this is something different. Finance company issues tend to be around asset quality, management and liquidity, particularly getting cash in from retail investors. ING's credit funds are directly related to the international credit crunch, while TOWER’s fund is more remotely related. The biggest relationship between TOWER and the others is that the credit crunch is changing market conditions. TOWER Investments CEO Sam Stubbs described it to me as being like the perfect storm. The fund had weathered 18 years of changing market conditions, but could not get through this one. It's just too big – sort of like the Wahine storm. Perhaps the biggest factor to bear in mind is that banks are aggressively chasing capital. This is great for investors but I wonder whether the pendulum has swung too far. Not long ago risk was repriced and banks were giving away money without charging enough interest for the risk (read US sub-prime crisis and NZ lo-doc lending). Now they are, arguably, paying too much for capital. Just look at the offers from Rabobank, BNZ and ANZ National. Poor old TOWER can't compete with these rates in its mortgage fund, and I suggest not many others can too. Stubbs agrees with me that it is weird for an asset manager to be giving money back to clients, but suggests new funds to keep the money within TOWER are not far away. He also reckons that TOWER will earn big brownie points from customers for taking this stance and acting early. The comments on Monday which most surprised me were the ones relating to the level of arrears. The company said it was just over 9%, which sounded incredibly high for a fund that has a conservative lending profile. It seems, after talking to Stubbs that that is the arrears rate which is actively managed and that the actual non-collection or default rate is around 1% and 2%. He says the 9.1% rate dropped to 8% on Tuesday after just one loan was sorted. The other point which is worth making is that the fund isn’t being closed because of a run on redemptions, as others have reported. “That’s absolutely not correct,” he says.