8th April 2009

Dear Investor,

When money in the bank is outperformed by fixed interest investments

The Reserve Bank of Australia at its April meeting yesterday reduced the official cash rate by 0.25% taking some more of the shine off online savings accounts and term deposits. In contrast, it is already confirmed that banks are partly or completely withholding this reduction from mortgage borrowers. This sets the benchmark for the whole mortgage investment industry and indicates banks' potential intent through this final reduction phase of the interest rate cycle.

And it is not expected that the official cash rate will stay where it is for long. If and when the official cash rate does go lower, even the most conservative of investors are expected to start looking around for higher rates of return, albeit towards the other end of the risk spectrum, moving up the risk pole, through fixed income and bond funds, mortgage funds to equities.

Shane Oliver, AMP Capital Investors' Head of Investment Strategy and Chief Economist, says the most likely place for cash investors looking for a reasonable rate of return with little or no risk will be in the asset category loosely called 'fixed interest' investments including cash funds and bond funds (with variable rates). Then, those investors seeking higher and more stable rates in the form of regular income, and yet seeking to stay within the fixed income type asset class, will look to mortgage funds. Finally, as confidence is restored, investors will cautiously re-enter the equities market.

Time for Defence

Investors have been defensive because of the uncertainties surrounding the economy and the investment markets. Oliver says that the latest data from the Australian Bureau of Statistics which show household savings at their highest rate since the last recession demonstrates that investors are motivated by being defensive rather than by looking for returns. "Most of the savings are precautionary should people lose their job. People are being defensive. There will be a time when people are motivated by returns again especially as the cash rate gets lower and lower," says Oliver. Oliver is predicting the official cash rate to reach 1.5 per cent in the second half of 2009 which means term deposits will return about 2.5 per cent.

When returns on term deposits fall to this level, investors will look to other investments to generate a higher return consistent with the risk that they are prepared to take.

Moving up the risk pole

As economic conditions stabilise and investors gain more confidence, they will be inclined to 'move up the risk pole'.

The first step up from term deposits are bond funds. Darren Langer, head of portfolio management at Tyndall/Suncorp Investment Management is expecting bond funds to return between 4.5% and 6% in 2009, depending on how corporate bonds perform in the current environment. He expects the best returns to come from Australian-dominated bond funds with allocations to Government, semi-government and corporate issues. IPAC Securities Jeff Rogers says if the economy eventually stabilises, Government bond yields would start to increase, and returns will come down, making the riskier corporate bond sector a source of better returns.

Investors seeking higher risk-adjusted returns will start to look at mortgage funds. In particular however, mortgages are also now effectively 'outperforming' on risk-adjusted investment returns as official cash rate reductions are not passed on to borrowers by banks and mortgage funds. Paul Wells, Head of Funding and Strategy at La Trobe is expecting that mortgage funds will continue to deliver returns that are above bond funds, between 5% and 7% in 2009.

Notwithstanding liquidity issues with many mortgage funds in 2008 and continuing, mortgage funds play an important part in the provision of credit, particularly in the commercial sector, and are likely to be in a position to generate good returns.

Mr Wells believes that properly managed mortgage funds that better match asset and liability maturities have proven their investment model by not 'freezing' redemptions and are now enjoying considerable success by having funds available when most competitors do not: resulting in quality deal flow with relatively high returns. Mr Wells noted that the La Trobe Australian Mortgage Fund was one of the few mortgage funds to be unaffected by the liquidity issues of last year, and its Pooled Mortgages Option is currently returning 6.95%1, well above the bank bill index and having reduced only 1.30% in the period that official cash rates have now declined 4.25%.

In a final note, we re-affirm La Trobe's view that investors should always obtain professional advice in deciding on their investment strategies and they should always consider the risks, as well as the returns, in making investment decisions.

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.