19th November 2008

Dear Investor,

How suitable is cash for the risk averse?

Investors who are choosing cash in the bank over cash-paying or fixed interest investments from non-bank institutions may not be making the most of their portfolio's investments. With the exception of capital preservation as the main consideration, investment in cash in the long term may not be the most appropriate strategy.

Term Deposit rates may appear to be attractive now, but they are unlikely to stay at the current rate when many term deposits come due in three, six or twelve months time. A risk of Cash and Term Deposits is that inflation erodes the real return**. For example:

If a cash or term deposit rate earns 6.00%p.a. and is taxed at the top marginal tax rate of 45%, this generates an after-tax return of 3.3%p.a. As the current rate of inflation in Australia is currently at 4.5% the real after-tax return is actually negative.

In past newsletters we have discussed defensive strategies such as: diversify your investments, don't put your eggs all in one basket, stick to your long term investment plans and goals, growing rich slowly will never go out of fashion.

If we consider a long term investment strategy, with investing for the longer term and avoiding switching investments when the market is in a downturn, the average rate of return you can receive from your investment is likely to be in a positive position. However, similarly if you invest in cash either longer than you need to or without real reason to, you could potentially be missing out on a more reasonable rate of return. Consider this example:

Investment of $100,000.00

Term Deposit

Fixed Interest Investment
i.e. Mortgage Fund

12 months
Rate
6.00%p.a.
7.95%p.a.
Return
$6,000.00
$8,175.00**
Difference $2,175.00
3 months
Rate
6.00%p.a.
7.95%p.a.
Return
$1,479.00
$1,995.00**
Difference $516.00

 

As you can see from the examples above, to leave funds in cash unnecessarily can affect your return and capital growth over an extended period. This applies even if the term of investment is relatively short 3 to 12 months which is not really considered a 'long term investment horizon' when planning for your future. If you are nearing retirement consideration must be given to the affordability of foregoing possible extra income that can be earned when the market is at a low, especially when experts are suggesting retirees or nearing retirees should consider delaying retirement to make up any loss incurred by the market downturn. This could be a way for those considering retirement or retirees to make up reduced income when cash rates fall.

** Real Rate of Return - is the market rate of return with the rate of inflation taken away. ***Interest reinvested
Source - partly sourced from the Australian Financial Review - Portfolio - Wednesday 12 November


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.