What is a participation mortgage bond?

09 Feb 04 Liz Still

Investors do not like financial scandals. The first thought that invariably comes to mind is 'How are my investments affected?' or 'Could this happen to my unit trusts?' The recent Financial Services Board and consequent media scrutiny of Fedbond further highlights the safety of unit trust investments.

Participation mortgage bonds have nothing in common with unit trusts other than the fact that they are regulated by the same legislation, the Collective Investment Schemes Control Act of 2002. Unit Trusts are more transparent and have far stricter compliance and reporting requirements.

Participation mortgage bonds are not priced on a daily basis, and they do not have to report on their underlying investments to the Financial Services Board in the way that unit trusts do.

Also known simply as 'part bonds', participation mortgage bond used to be popular investments for retired people as investors are paid interest income, usually a couple of percentage points below the prevailing prime rate so it tends to be better than most money market funds. The interest rate is usually fluctuating, not fixed.

Investors contract into an arrangement where a third party raises money from investors that is in turn lent to individuals or companies to purchase or develop properties - mainly commercial and/or industrial. The investors' money is pooled and placed in a 'portfolio of loans' to reduce the risk to each individual investor.

The initial investment requires a lump sum that is inaccessible for a five-year term except under unusual circumstances. In terms of the law, a participation mortgage bond company may not lend more than 75 percent of the value of a property if both interest and capital are redeemed on a regular basis; and not more the 66.6 percent if only interest is being repaid.

Participation mortgage bonds, normally considered low-risk investments, are governed by the Collective Investment Schemes Control Act, which also governs the unit trust industry. The Act is administered by the Financial Services Board.

According to Absa Participation Bond spokesman Kelvin Bell, companies administering participation mortgage bonds are obliged to report their figures to the Reserve Bank on a quarterly basis. 'This is to fulfill a monitoring rather than a compliance purpose,' he said.

He said that managers of participation mortgage bonds were bound by certain restrictions and requirements, including the insurance of underlying property investments. He estimated the value of the participation mortgage bonds to be in the order of R3.8 billion.

Unit Trusts are obliged to be priced daily and report on their underlying investments on a quarterly basis. There are strict rules governing mandates and overexposure to single investments. Furthermore, unit trusts are always held 'off balance sheet', meaning that they are never part of the assets of the unit trust management companies.

http://www.equinox.co.za/article_592.html

Note the date of the article and the country in which the article originated.

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