9th January 2008

Dear Investor,


We’ve all read the newspaper advertisements where the claim reads something like, “EARN UP TO 8.50%p.a.”, or “9.75%, 11.25%; even up to 18%p.a.”. With these kinds of returns you know there must be a catch somewhere, but it’s also these returns that make an investment opportunity seem so attractive. After all, you are investing your hard earned dollars, so don’t you deserve the highest possible rate of return on your investment?

You may be wondering why a high income fund was not part of your recommended investment portfolio from your accountant or financial adviser. It is important that we explain the reasons for this, especially because of the recent popularity of such products.

Risk and Reward

You’re no doubt aware that with most forms of investment, there is a trade off between risk and reward; low risk products such as cash investments offer lower returns than high risk products which offer higher returns, such as shares.

Background to higher income funds

Let’s take a look at higher income funds. In general, these income funds are mortgage funds, utilising slightly riskier mortgages. How does an investor in an income fund generally earn a return? As its name would suggest, an income fund pays income or distributions expected to be at regular intervals, monthly or quarterly. Essentially, the income to the investor is generated by the fund holding mortgages over land and properties of borrowers. These borrowers need to repay borrowed monies plus interest.

In another way, think about the income paid to investors being less than what the fund manager and/or product provider would be receiving. You would expect the difference to be around 1.5 to 2%p.a.

The risks

High income funds are influenced by a number of factors, some of which differ and some may be outside of the control of the manager. Potential risks can impact on the future level of income and the proportion of capital returned to the investor at the conclusion of the investment term.

Some of the risks include:

  • Macroeconomic risks such as:
    • national growth levels,
    • interest rates and inflation
  • Industry risks
  • Specific risks in the operation of the fund, including:
    • possibility of loan defaults by borrowers,
    • inaccurate valuations,
    • falls in the value of properties used as security
  • Furthermore, with development loans there is the risk of project non completion.

Some common themes in high income funds

Looking at product specific risks, let’s now consider what sort of assets - the types of mortgages are brokered – that fill this high income product space. The telling statistics appear when you look behind the “EARN UP TO 8.50%p.a.” offers. A quick survey among the Product Disclosure Statements and monthly fact sheets of high income funds display a number of common themes:

  • Relatively high average loan sizes of at least $2.5 million to $3.0 million.
  • A surprising proportion of mortgages over vacant land, sometimes as high as a third of the portfolio.
  • Little or no mortgages over commercial properties, industrial or retail properties. If there are, then tourism and hotels are most common.
  • Normally, the greatest proportions of mortgages are over residential developments, canal complexes and apartment building dwellings.
  • The final defining feature of such mortgage funds is their regional concentration. For Example, Southeast Queensland can occupy over 70% to 80% of the fund manager’s mortgage portfolio.

The bottom line

When you consider these features, you can begin to get a clearer picture of why high income funds are not normally part of an ‘approved product list’ for financial planners. Such products can display many risky features that may result in an increased probability of capital loss to the investor.


  • High risk products: risk of capital loss from default; risk of under-performance.
  • Average loan to value ratios are allowed to balloon to 80%, (normally kept to 66% by mainstream fund managers).
  • Loans are generally concentrated in one region.
  • Mostly, these products have a high proportion (up to 80%) of loans to residential development projects.
  • Few product providers, mainly small localised organisations that are often not researched.
  • Some product providers have claimed zero default ratios. Can this history continue in different market conditions?
  • Some of these products only offer select (as opposed to pooled) mortgages, which are riskier by construct due to lack of diversity in the loan portfolio.
  • Some of these products offer >15%p.a. returns from select first and second mortgages. Second mortgages have another added layer of risk.
  • Boutique mortgage managers may lack adequate corporate strength, robust administration and back office support, and high customer service standards.

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.
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(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.
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(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.
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