3rd January 2008

Dear Investor,

I've read about Westpoint - why would I want to risk my money like that?

It's true that mortgage-based investments can be riskier than they look. But that overlooks the fact that for many years mortgage funds have proved a secure, income-generating investment for many investors. A review of mortgage funds by InvestorWeb Research found well-managed mortgage funds can provide stable income and help to diversify your portfolio. But risks in the sector have increased and it's important to know what you're buying.

So how does a mortgage fund work?

Like any other investment fund, it pools investors' money to invest in a spread of investments. Instead of buying shares or property, mortgage funds lend to borrowers using registered mortgages to secure the loans, much like banks do. Whereas most people think of banks lending against houses, many of the loans held by mortgage funds are secured against commercial or industrial property, or in some cases, against property developments. These types of loans generally carry a higher interest rate than a standard home loan, which means, ideally, that investors in mortgage funds should earn more on their investment.

Does that happen in practice?

In 2006, InvestorWeb found the average traditional mortgage fund returned 6.31 per cent net and 7.14 per cent before fees and expenses. That's above the return on short-term bank bills, which InvestorWeb says is the most relevant benchmark. Researchers did note that performance has been knocked in recent years by lower interest rate margins and increased competition. For a full list of La Trobe’s returns across all four options available in the fund, visit our website on www.latrobefinancial.com.au.

Doesn't seem like a high return for something as risky as lending to property developers?

That's why it's important to know exactly what you're investing in. Industry commentators have noted that traditional conservative mortgage trusts were quite different from the newer high-yielding mortgage funds. They consider high-yield mortgage funds are more likely to have a significant proportion of their loans in construction and development projects and may pay returns of up to 9.5 per cent. More conservative mortgage funds are less likely to provide these types of loans and will generally provide lower returns.

What else can influence returns?

Interest rates are a big influence. InvestorWeb says mortgage funds generally have at least half their portfolio in variable rate loans, although some have close to 100 per cent. When interest rates rise, returns will be bolstered, particularly for funds with high levels of variable rate loans. One problem mortgage funds have faced recently is high cash levels as investors have pumped money into the sector. Managers have found it hard to find quality loans for all this money and the resulting cash has dragged overall returns down. The research group says some managers also have addressed high liquidity problems by introducing blended loans where the mortgage fund lends up to its limit (usually 70 per cent of the property's value) and the rest is funded through an internal mezzanine fund arrangement. But this is still in its early days.

What should I look for in a mortgage fund?

Different types of funds suit different investors. Some investors may want more risk, while others will be more comfortable with a conservative fund. Investors need funds to be clearly labelled and described so that investors can make informed decisions on what they're buying. In its review, InvestorWeb said traditional mortgage funds generally only lend on first-registered mortgages, have an average loan-to-valuation ratio of up to 70 per cent and have no more than 10 per cent of their portfolio exposed to construction assets or assets that are not readily saleable. Anything outside these parameters should be offering higher returns to compensate for the risks. As with any investment, diversification is also important.

Fiscal fact

Not all mortgage funds are the same. Higher-yielding mortgage funds are more likely to be lending to property developers than lower-yielding funds.

Source: The Sydney Morning Herald & The Age
Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

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

* La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
(2) Withdrawal rights are subject to liquidity and may be delayed or suspended.
(3) As at 30/11/10 the La Trobe Australian Mortgage Fund had received a Morningstar RatingTM of 5 stars. The Morningstar Rating is an assessment of a fund's past performance - based on both return and risk - which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. © 2010 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf
(4) 3.75 star rating out of a possible 5 star rating indicates that Adviser Edge believes that La Trobe has performed in line with its peers and exceeded its peers on some fronts.
(5) The Standard and Poors rating of 4 out of 5 stars indicates that S + P has high conviction that La Trobe Financial will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers.
(6) The award was given to the La Trobe Australian Mortgage Fund, Pooled Mortgages Option.
Research Ratings are subject to change. To view the latest research information please visit www.adviseredge.com.au or www.standardandpoors.com.au. Ratings issued by Adviser Edge Investment Research AFS Licence No. 236783 and Standard & Poors Information Services (Australia) Pty Ltd AFS Licence No. 258896 are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. The ratings are only one factor to be taken into account in deciding to invest. Research Houses receive a fee from La Trobe for rating the product. The Adviser Edge rating is generally a measure of the rated entity's capacity to meet its repayment obligations in all market circumstances.
IMPORTANT: This message, together with the La Trobe Financial website (www.latrobefinancial.com.au) and all its contents have been prepared for general information only and should not be taken as legal or financial advice, and as such the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the La Trobe website.