A week ago mayhem started to break out in the Australian savings industry funds with fund after fund freezing redemptions. Parts of the industry, particularly mortgage and property funds were running scared that investors would withdraw their money and place it with institutions and funds which are covered by the guarantee scheme.
Watching the situation unfold lead me to think that the same thing would happen here and there could be disastrous consequences for New Zealand’s managed funds industry.
So far only one player has followed suit – AXA. So it seems with things going quiet that maybe the flow of capital won’t be as significant as in Australia.
But it’s worth noting New Zealand’s mortgage fund sector is quite small and many of the funds have already stopped redemptions. The two groups which look most vulnerable are the funds run by the regional groups linked into law firms and possibly the banks.
Maybe one of the reasons the flow hasn’t happened is that Treasury has only just started approving New Zealand institutions for its scheme. We are keeping a list of approved institutions here and will update it daily.
What worries me is that there could still be a massive flow of capital from quality, non-guaranteed income securities to lower quality, guaranteed products.
Already some advisers, well one in particular, is encouraging people to go for the highest returns they can find in finance companies.
My issue with this is sure the return is guaranteed, but what happens if the company does get into trouble and needs to be bailed out under the scheme? I bet it won’t be like Lotto where you go into the shop on the day after the draw and get your cheque. No doubt the government wait for a failed company to go through the process of winding up before any government cheque is written and history shows us these things take some time.
The other point, and one being argued strongly by some in the managed funds sector, is that there should be some look-through provision in the guarantee scheme so funds are covered on a pro-rata basis based on how much of their funds are in government securities.
For instance if a retail PIE is invested 30% in government guaranteed securities and 70% in other securities, then there should be a “look through” that allows the retail PIE investors to benefit from the 30% coverage.
Apparently Finance Minister Michael Cullen will make some comment on this over the weekend. Let’s hope it is a sensible decision.
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