25th July 2007
We have previously written about the three (3) immutable rules of investing;
- never put your eggs in one basket;
- a higher rate of return always equals higher risk; and
- getting rich slowly will never go out of fashion, don’t rush and ask questions.
This week's Investor News looks at the first rule of investing. Investment diversification is often
referred to as ‘spreading your investments so as not to have all your eggs in the one basket’. This then leads to
the question, does it mean spread your investments across several Investment Managers with differing investment
classes or spread your investments across the same type of asset class?
It can mean both and more. Diversification is important to La Trobe and so our Mortgage Fund, the La Trobe
Australian Mortgage Fund (‘the Fund’), is diversified at several levels.
At the first level of diversification, the Fund provides investors more choice by accessing four (4) diverse
investment options to give investors flexibility to manage their investments and to meet their individual needs and
The Fund’s four investment options (including indicative rate of return) can be classified as:
- Cash & Mortgages Option - paying 6.10%*p.a.
- Pooled Mortgages Option - paying 7.25%*p.a. rated 4 out of 5 Stars by PIR & 3 Stars by S&P†
- Select Mortgages Option - paying from 7.75%*^p.a.
- Special Situation Mortgages Option - paying from 12.00%*^p.a. (primarily second mortgages)
The Fund therefore affords investors with a high level of initial choice, and the opportunity to invest either on
an active investment basis, (the investor chooses the underlying mortgage investment from a regularly updated list
of available mortgages to La Trobe – investment Options 3 & 4 above), or a passive investment basis (the investor
lodges funds and receives a monthly rate of return from a pool of mortgages chosen by La Trobe – investment
Options 1 & 2 above).
At the second level of diversification, each of the four (4) Investment Options present in the Fund carries a
different risk profile ranging from low risk for the Cash & Mortgages Option, low to medium risk for the Pooled
Mortgages Option, medium risk for the Select Mortgages Option, and high risk for the Special Situation Mortgages
Option. The rate of return for each of these Investment Options is reflective of their level of risk. Investors
can therefore obtain a higher rate of return commensurate with a higher disclosed level of risk if required, or
they can minimise risk and receive a lower return.
High risk assets are separated out into separate classes for
investors and not embedded into a Fund Portfolio over which they have little or no control.
At the third level of diversification, each Option disclosed in Product Disclosure Statement (“PDS”) has its own
internal loan diversification requirements set down to ensure no concentration or unnecessary risks leak into the
underlying Investment Option Portfolio in which members invest. We aim to diversify each Investment Option by
security type (commercial, residential…), interest rate type (fixed or variable), geographic location, and loan
size for each of our Fund assets. These Portfolio metrics or credit gateways to the Fund have been carefully
constructed based on our 50 years of mortgage lending and loan management, to optimise the return for investors
and minimise the risks associated with mortgage investment. The Fund metrics are published monthly on our website
(see link below) and give investors the ability to – with their monthly investor’s statement – measure how their
investment option performs to the Portfolio standard and the agreed benchmark returns of the USBA Bank-Bill rate.
At the fourth and final level of diversification is the underlying nature of the two different rates of return
offered. Both investment Options 1 & 2 provide a variable rate of return to investors giving them a natural hedge
against inflationary effects of a rising rate market. Alternatively should the investors decide they want rate of
return certainty then investment Options 3 & 4 provide a fixed rate of return at time of the initial investment.
With our two “select” Options (investment Options 3 & 4 above), diversification benchmarks and allocation limits
become less important because it is the investor who chooses which mortgage to invest in. Consequently under those
Investment Options the investor may invest in only one mortgage or may create their own “pool” by investing in
several mortgages. In this way, the investor creates his or her own pool of diversified mortgages again giving a
high level of choice, which has been very pleasing for many DIY Super Funds.
Next week we will look at Investment rule 2 - “A higher rate of return always equals higher risk.”
> About Us
> PDS - Want to invest?
> Subscribe Free
> Independent Ratings
> Mortgage Shopping List
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.
Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer