The forced closure of mortgage trust operator, Fund Managers Otago, reflects entity-specific problems rather than any systemic weakness in the sector, according to the Financial Markets Authority (FMA).
“Fund Managers Otago [FMO] is one of five licensed fund managers currently operating mortgage trusts,” a spokesperson for the FMA said. “We regularly receive information from supervisors on these trusts, which indicates that FMO’s issues are particular to that manager.”
Aside from the Auckland-based First Mortgage Trust, which hit $1 billion under management last week, the sector features a handful of small players with the $60 million Midlands Trust (headquartered in Hastings) the largest of this group.
Midlands (the trading name of managed investment scheme licensee Fund Managers Central), is now the last of the regional mortgage funds that emerged out of legal firm loan books. Fund Managers Auckland closed last June while Canterbury Fund Managers shut up shop only in September this year.
FMO, however, is the first to scheme to be forced into wind-up mode by the FMA via a temporary manager – in this case KPMG. The move follows the advice of the scheme’s licensed supervisor, Trustees Executors (TE), which had noted persistent “issues relating to governance, the solvency of FMO as the manager and regulatory breaches”.
In a release, Matthew Band, TE head of corporate trustee services, said: “FMO has been unable to improve its performance to the standard that we expect from a licensed manager, and that which is required under the FMCA. Trustees Executors has an obligation to monitor the management of the funds in the best interests of all investors.
“We believe those interests are best served by the removal of FMO and requesting FMA to appoint KPMG Restructuring Services as the temporary manager.”
With about $20 million under management spread across three funds (two of which were already being wound down), FMO was hardly in growth mode. The FMA likely hastened the manager’s inevitable demise.
Following the regulatory move about 600 underlying investors in the sole open FMO product – the $13 million NZ Mortgage Income Trust (No 2 Fund) – won’t have access to their funds until KPMG tidies up the assets.
FMO, headed by Peter Hutchison, could face further regulatory punishment. Hutchison is also listed on the Companies Register as a board member of Fund Managers Central, the Midlands licence-holder.
“We are considering if any further action is required in relation to Fund Managers Otago,” the FMA spokesperson.
Despite the structural issues highlighted by the FMO case, the NZ mortgage investment sector still has some life in it, as the rapid growth of First Mortgage Trust shows. In a zero interest rate world, advertised annual returns of mortgage trusts (currently in the vicinity of 4.5 per cent) hold an appeal for certain income-focused investors.
And last week the Jarden-backed Pearlfisher Capital baited the hook for a new mortgage fund targeting the property development sector. Unlike the retail offerings of FMO etc, the Pearlfisher First Mortgage Fund is a wholesale product looking to move in on a niche largely abandoned by mainstream banks, according to director, Tony Abraham.
“There has been an observed and systematic withdrawal by the banks following tightening regulation, increased capital requirements and perceived heightened risks as a result of Covid-19, which has made it harder for property developers to get financing,” Abraham said in a release. “Non-bank lenders are looking to fill that gap in the market.”
Jarden took a 50 per cent stake in Pearlfisher in 2017. Founded in 2009, Pearlfisher is a non-bank lender providing a “full range of secured debt and equity funding facilities for small and large property clients”, the group’s website says.