1st July 2009

Dear Investor,

Investing Rule #1 - Diversification

Previously we have written about the three (3) immutable rules of investing;

  1. never put all your eggs in one basket;
  2. a higher rate of return always equals higher risk; and
  3. getting rich slowly will never go out of fashion, don’t rush, and ask questions.

This week's Investor News looks at the first rule of investing. Investment diversification is often referred to as ‘spreading your investments so as not to have all your eggs in the one basket’. This then leads to the question, does it mean spread your investments across several Investment Managers with differing investment classes or spread your investments across the same type of asset class?

It can mean both and more. Diversification is important. Our Mortgage Fund, the La Trobe Australian Mortgage Fund (‘the Fund’), is diversified at several levels.

At the first level of diversification, the Fund provides investors more choice by accessing four (4) diverse investment options to give investors flexibility to manage their investments, and to meet their individual needs and risk appetite.

The Fund’s four investment options (including indicative rate of return) are:

  1. Cash & Mortgages Option - paying 5.25%p.a.1
  2. Pooled Mortgages Option - paying 6.95%p.a.1
  3. Select Mortgages Option - paying from 8.50%^p.a.1
  4. Special Situation Mortgages Option - paying from 12.00%^p.a.1 (primarily second mortgages)

The La Trobe Fund therefore affords investors with a high level of initial choice, and the opportunity to invest either on an active investment basis, where the investor chooses the underlying mortgage investment from a list of available mortgages (Investment Options 3 & 4 above), or a passive investment basis where the investor lodges funds and receives a monthly rate of return from a pool of mortgages chosen by La Trobe (Investment Options 1 & 2 above).

At the second level of diversification, each of the four (4) Investment Options present in the La Trobe Fund carries a different risk profile ranging from low risk for the Cash & Mortgages Option, low to medium risk for the Pooled Mortgages Option, medium risk for the Select Mortgages Option, and high risk for the Special Situation Mortgages Option. The rate of return for each of these separate Investment Options reflects their level of risk. Investors can therefore obtain a higher rate of return commensurate with a higher disclosed level of risk if required, or they can minimise risk and receive a lower return. High risk assets are separated out into separate classes for investors and not embedded into a Fund Portfolio over which they have little or no control.

At the third level of diversification, each Investment Option has its own internal loan diversification requirements set down to ensure no concentration or unnecessary risks leak into the underlying Investment Option Portfolio in which you invest. We aim to diversify each Investment Option by security type (commercial, residential…), interest rate type (fixed or variable), geographic location, and loan size for each of our Fund options. These Portfolio metrics, or credit gateways to the La Trobe Fund, have been carefully constructed based on our 56 years of mortgage lending and loan management, to optimise the return for investors and minimise the risks associated with mortgage investment. The Fund metrics are published monthly on our website (see link below) and give investors the ability – with their monthly investor’s statement – to measure how their investment option performs to the Portfolio standard and the agreed benchmark returns of the USBA Bank-Bill rate.

At the fourth and final level of diversification is the underlying nature of the two different rates of return offered. Both Investment Options 1 & 2 provide a variable rate of return to investors, giving them a natural hedge against inflationary effects of a rising rate market. Alternatively should the investors decide they want rate of return certainty, then Investment Options 3 & 4 provide a fixed rate of return at time of the initial investment.1

With our two “select” Options (Investment Options 3 & 4 above), diversification benchmarks and allocation limits become less important because it is the investor who chooses which mortgage to invest in. Consequently under those Investment Options the investor may invest in only one mortgage or may create their own “pool” by investing in several mortgages. In this way, the investor creates his or her own pool of diversified mortgages again giving a high level of choice, which has been very pleasing for many DIY Super Funds.

Next week we will look at Investment Rule #2 - “higher rate of return always equals higher risk.”


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.