Challenger Financial's Howard Mortgage Fund

Australian Diversified Financial company, Challenger Financial Services Group (ASX:CGF) has proposed to make $850 million, or 40 percent, of funds from the Howard Mortgage Fund, which was frozen in October 2008. The proposal, if approved by fund members on 28 October 2010, will see the capital made available to investors by December 2010.

The proposal plans to offer the 30,000 Howard investors with smaller balances ($10,000 or less) the option of up to 100 per cent immediate liquidity. For all other members, there will be no cap on individual redemption requests, but this will be subject, however, to conditions such as when total redemptions exceeds available liquidity.

The Howard Mortgage Fund, run by Challenger Financial, is a $2.3 billion fund (in 2008, it was worth $2.8 billion) and is one of the oldest and largest mortgage funds in the financial sector. CGF froze redemptions in 2008 after the Australian government introduced the bank deposit guarantee, which guaranteed all cash or cash-related deposits in banks, but not in mortgage funds. This decision prompted all the major mortgage funds to freeze redemptions and it is only in the past year that other key mortgage fund players, such as CFS and Australian Unity, have started improving their liquidity and redemption rules.

In the year to August, the wholesale fund returned 3.39 per cent against the benchmark's higher 4.21 percent. However, in the five years to August, the fund returned 5.96 percent.

Challenger Financial Services Group shares closed trading at $4.15 yesterday. CGF shares are in cum dividend status, meaning that the purchaser of these shares until the ex-dividend date is entitled to the dividend of 8.5 cents per share, unfranked.