In a better place

A sector that learnt its lessons the hard way remains focused on preserving investors’ capital and providing a reliable income

- DARREN SNYDER

The coronavirus and its economic effects sent shockwaves through financial markets in the first quarter of 2020, and the impact on investors will be felt for months if not years.

At the height of volatile sharemarkets in March, and in the weeks that followed, comparisons were drawn (and will continue to be drawn) between the 2007-08 GFC and the global Covid-19 pandemic.

The GFC was started by the collapse of the US housing market. Once this ripple hit Australia, the crisis was more of a tsunami and investors rapidly moved their money out of higher-yielding investment products – mortgage trusts included.

GFC versus Covid-19

Several mortgage trusts survived the GFC and several folded. There were trusts that continued to pay investors monthly or quarterly income (loan repayments from borrowers) but had to limit or suspend redemptions because of significant liquidity issues (i.e., investment units in mortgages couldn’t be sold and converted to cash quickly). Skip to 2020 and you haven’t heard about these same problems during the coronavirus.

Louis Christopher, managing director at SQM Research, says its view going into the pandemic was that the bulk of the more recognised mortgage trusts were well placed.

“They came into this period with fairly conservative lending policies and during this current crisis a number of them have tightened up their lending criteria [including peer-to-peer lenders],” says Christopher. “This is a good move and quite a contrast to the GFC, where mortgage trusts were bashed. Many of the mortgage trusts went into the GFC with a liquidity mismatch where lending standards were looser, and we’re not seeing it this time around.”