Colonial to shut frozen funds

The decision by Colonial First State comes just months after it had to reinstate a freeze on the flagship mortgage fund, and will come as a fresh blow to more than 200,000 investors that have been locked out of dozens of mortgage funds since late 2008.

The $852 million Colonial First State Mortgage Income Fund has been hit by rising lending losses in its underlying investments, forcing it to stop paying distributions.

The fund, like others, suffered a liquidity squeeze after attempts by investors to pull their cash out because of nervousness about mortgage funds.

Colonial chief executive Brian Bissaker said the decision to shut down the fund was intended to protect investors' initial capital.

"The logical conclusion is to give investors their money back as soon as we can while the fund is a going concern," Mr Bissaker told BusinessDay.

But it could be up to four years before investors are fully paid out. Colonial yesterday advised investors they would be paid quarterly as the underlying loans in the funds started to mature.

Mr Bissaker could not guarantee that investors would be paid 100? in the dollar. "It's our intention to pay back the capital," he said. "I can't say what will happen in two years' time as those mortgages mature where we are today, the impact has been on the income, not the capital component."

Colonial will also close a second, but much smaller fund. The $13 million Wholesale Guaranteed Mortgage Fund invests in a separate pool of mortgages that has not been affected by bad debts. But this fund has also been flooded with redemption requests.

Mortgage funds are pooled investments with exposure to a portfolio of mortgages, largely in the form of mortgage-backed securities. Colonial's fund is mostly exposed to commercial property, which has been hit harder than traditional mortgages.

Perpetual, a major player in the mortgage fund market, was last year forced to slow redemptions from several funds that had about $2 billion invested in mortgage securities.

A Perpetual spokesman said last night there were no changes to the mortgage funds it operated. "It's business as usual. We've been paying out redemptions on a quarterly basis," the spokesman said.

Up to $25 billion worth of mortgage funds were frozen, affecting more than 200,000 investors, after the bank deposit guarantee that was introduced in late 2008 sparked a mass rush to safety.

As conditions improved, some funds allowed investors to request money in small amounts several times a year, in an attempt to prevent a liquidity crunch.

The pace of these requests has slowed, but analysts say delays in redeeming money will remain until market confidence in the assets improves.

Large funds operated by groups such as Perpetual, AMP and AXA Asia Pacific are moving towards quarterly withdrawals for redemptions.