Standard & Poor's Fund Services (S&P) has pointed to an uncertain future for mortgage funds in its latest review of the sector.
The research house said the sector's future remains under a cloud as four of the largest mortgage funds continue to languish under ongoing redemption pressure.
The funds under pressure include the AXA Australian Monthly Income, Challenger Howard Mortgage, ING Mortgage Trust and Colonial Wholesale Income, S&P Fund Services analyst Peter Ward said.
As part of the report, S&P released ratings on 15 conventional, hybrid and high-yield mortgage funds. Most funds were either on hold or maintained a three-star rating.
The Sandhurst Select Mortgage Fund was downgraded to three stars from four. The MacarthurCook Mortgage Fund's rating was restored to three stars after being on hold.
"Rated mortgage funds have continued to deliver consistent monthly income distributions, although there is a clear gap between the risk/reward characteristics of government-guaranteed bank term deposits and mortgage funds," Ward said.
"Liquidity constraints continue to be a major issue for many mortgage funds, but there are exceptions.
"Investors' ongoing redemption demands and limited fund inflows continue to restrict funds' ability to lend or, in many cases, renew existing loans. As loans are repaid and redemptions met, loan diversification diminishes."
