23rd May 2007
A Sheep or a Wolf
The well-known flaw of averages goes like this:
If a swimming pool's average depth is four feet, but the deep end of the pool is eight
feet, non swimmers are presented with an unacceptable risk.
The average would suggest non-swimmers can safely use the pool, but a drowning man finds
out the hard way that the average doesn’t contain the information descriptive of the risk.
On a like basis, where a mortgage fund's advertised returns soar above the market average,
then the true risks associated with that return are not being disclosed to you. If one accepts
that mortgage fund investors are by and large passive investors then investors receiving
extraordinary returns above market are taking extraordinary risks, and perhaps the real risks
are not properly disclosed or described in full.
Since 2000, assets invested in Australian mortgage funds have more than trebled to around $22
billion. With this trend continuing, it is interesting to note that the single biggest historical
risk to investor funds has been investing for return without regard to the risk – specifically a
mortgage fund's exposure to construction and development loans.
For example some funds offer higher returns but in reality you are lending your money to a
development company disguised as a mortgage fund; a sheep or wolf – you decide.
Always establish prior to investing how much of your money is being invested in property
construction and development, and pay attention not only to the advertised rate of return alone,
but also to the commensurate risk of the project failing to be completed, which could leave you
with an unsaleable security. La Trobe's exposure to construction and development funding is
limited to 15%, and we are not a property developer.
La Trobe’s Law: "Investing is not like Olympic Diving ... you don’t get extra points for the
degree of difficulty."
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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