3rd January 2008
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.
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
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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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