28th January 2009

Dear Investor,

Mortgage Funds: Where are they at?

Late last year the mortgage fund sector was adversely affected quite considerably and many investors personally experienced the hardship of that affect, with many still unable to access their funds or their access is limited to a restricted quarterly basis.

As we discussed in our Newsletter on 28 October 2008 "Are all Mortgage Funds the same?" many of the mortgage funds affected were in fact performing as expected prior to the unprecedented request for redemptions. Many products would have been unsustainable under that kind of market pressure. However, these funds created their own vulnerability to their redemption volumes and consequent freeze. This was the result of attracting "short term" investment funds by promising to redeem funds on short notice, a promise on which they could not ultimately deliver.

Nonetheless, in an article that appeared in the Australian Financial Review (AFR) on 21 January 2009, "Mortgage funds look tempting as interest rates fall", it rightly comments that "mortgage funds tend to do better in environments of falling interest rates because the loans are reset every few months, so the rates will lag official rates."

This is a very relevant comment and one which helps investors understand the underlying assets that support an interest rate paid by a mortgage fund that is often greater than 1% over the official cash rate. The article also suggests that as cash rates are falling and the banks are returning little more on their bank bills, term deposits or bank account rates, investors are looking for an alternative. In a market that is so uncertain, what is available to investors who are looking for an alternative in the fixed interest sector?

The AFR article suggests that mortgage funds are once again becoming more favourable as commented by financial planner Scott Haywood who noted that "Historically, mortgage funds usually return 1 to 1.5 per cent more than a Cash Management Trust ("CMT"), so for a conservative investor there are still grounds to have that money spread across different types of fixed interest."

How can investors gain confidence again in mortgage fund investments?

Understand what you are investing in and what are the parameters for investing in the fund. Remember, not all mortgage funds were affected by last October's events (including the La Trobe Australian Mortgage Fund). A mortgage fund is NOT a cash management trust or a term deposit. However, an investment in it should be considered a term investment. And the fund should in our view be able to deliver reasonable certainty over redemption rights on that basis. Most mortgage funds continue to be structured to fail this certainty test.

La Trobe's Pooled Mortgages Option is a 'term investment' with a minimum 12 month investment period. It has been
La Trobe's philosophy for this Option not to have an investment period less than 12 months as we believe that an investment in mortgages requires more of a term commitment by investors in order to align expectation with the realities of the underlying investments. Mortgage funds are invested in mortgages with terms from 12 months and longer - therefore high volume redemptions over a short period of time cannot be sustained. By requiring investment terms from 12 months and spreading both mortgage and investment maturity dates across the year, a mortgage fund is better able to match underlying mortgage terms (although we note that even this is not perfect matching). The term investment (12 months) is one reason why mortgage funds pay (or in our view, should pay) a higher rate of return than say a daily transaction account at the bank because those accounts are and should be more liquid than a term deposit or term investments such as a mortgage fund.

Unfortunately an event completely external to the mortgage fund industry (the government bank deposit guarantee) caused the excessive requests for withdrawals that translated into investor fear. Fear in the majority of cases has caused the suspension of mortgage funds and not mismanagement, although we take the view that they should have been better structured to prevent the contagion of fear.

It all comes down to understanding your investments and being comfortable with the risk and return associated with each investment choice.

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.