29th April 2009

Dear Investor,

Australian Fixed Interest as an asset class – an appealing option in volatile times – Part 2

In last week's Investment News, we looked at Australian fixed interest as an asset class. As we noted, we include mortgages in this class. This week we look at how investment portfolios can be constructed for investors with different goals and objectives.

Allocating to fixed interest as an investment category

The ideal allocation for any investor will be determined by their need for liquidity, income, capital preservation as well as the amount of capital they are prepared to risk in order to achieve their desired investment objective. In general, the more risk averse an investor is, and the more defensive they are in their investment approach, the higher the allocation to fixed interest. That said, there is evidence particularly in major market corrections such as at present, that some components of fixed interest fail to perform in their capital preservation and diversification function. Some care is therefore required in understanding the respective performance profile of the individual fixed interest assets, e.g. mortgage investments versus listed corporate hybrid instruments, and instrument structure, e.g. first registered mortgage versus collateralised debt obligation.

Defensive Investor

A defensive investor focused principally on long-term capital preservation will usually maintain at least 70% of their portfolio in a mix of cash and fixed interest. The allocation to fixed interest may be broken further down between Australian fixed interest and mortgages and International fixed interest, and with the addition of each level of segmentation comes more diversification. The broader the diversification, the less likely your portfolio is to be subject to the underperformance of a single investment.

Source: Morningstar

Moderate Growth Investor

In contrast, an investor who maintains a reasonable degree of capital protection, but is prepared to risk some capital for moderate long-term growth might make a 30% allocation to cash, fixed interest and mortgages, and the rest to growth assets. However, unlike our defensive investor, the moderate growth investor is likely to have a lesser allocation to cash (only 10%) and a higher (perhaps 20%) allocation to fixed interest - again split between Australian fixed interest and mortgages and International fixed interest.

Source: Morningstar

Aggressive Growth Investor

Aggressive growth investors typically have a high pain threshold for risk and are focused on capital growth rather than capital preservation. As a result, the aggressive growth investor is prepared to adopt significant portfolio volatility and will usually allocate up to as much as 85% of their portfolio to growth assets like equities (Australian and International) and property, with only 15% exposure to defensive investments split between cash, fixed interest and mortgages. In this case, the allocation to fixed interest is typically designed to improve portfolio diversification and to mitigate the extreme volatility within a higher risk portfolio.

Source: Morningstar

Selecting the right investment mix

Ultimately nobody likes to lose money, but unfortunately this is often the most effective way for investors to accurately measure their risk tolerance. A simpler and less expensive method is to ask yourself out of every $100 you invest, how much would you be prepared to lose over a selected timeframe in order to achieve your investment goal? Risk means different things to different people, so if you can't explain the risks of an investment to someone else, you shouldn't be investing in it in the first place.

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.

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