21st January 2010
What is 'longevity risk'?
The good news is that, on average, we are living longer today than at any time in history. Most people would regard this as an excellent development. But economists can see a downside. And on this occasion, the rest of us would do well to listen.
As people live longer, the time spent in retirement increases. And as the time spent in retirement increases, so does the likelihood of a person outliving their retirement savings. This is known as 'longevity risk'.
How can I protect myself against this risk?
There are generally no shortcuts to prosperity. In previous editions of Investment News, we have discussed the three (3) immutable rules of investing:
- Do not put all your eggs in one basket.
- A higher rate of return always equals a higher risk.
- Getting rich slowly will never go out of fashion.
Underlying these rules is the understanding that investment should be carried out in a rigorous, balanced way.
To that end, there is little doubt that the compulsory superannuation scheme introduced by the Keating government has improved the retirement prospects of many Australians. However, the
asset allocation of the scheme has also introduced a new imbalance into the investment options of Australians.
As The Age reported on 22 November 2009, on average, 57% of Australian pension assets are in equities. This compares with an average of 36% in other OECD countries and raises the possibility that pension assets are overbalanced towards equities. It is worth noting that, as a result of the global financial crisis, Australia suffered the third-worst decline in pension assets of all OECD nations.
All this suggests that all investors, including those with self-managed super funds, should always be reviewing their portfolios to ensure that they have a balance with which they are comfortable.
Mortgage funds - an alternative investment to balance your portfolio
Obviously, each investor needs to make an individual decision as to the appropriate alternative investments with which a portfolio can be balanced. However, there is no doubt that many investors find that investing in a mortgage fund helps them achieve their investment objectives. One significant benefit is that the performance of a mortgage fund traditionally has had a low correlation to equities. In simple terms, this means that the performance of mortgage funds does not track the highs and lows of the stock market rollercoaster. For example, while the stock market plummeted in the wake of the global financial crisis, investors in La Trobe's Pooled Mortgages Option kept receiving stable monthly payments (currently 7.35%1) with no capital losses.
Are all mortgage funds the same?
One key lesson of recent years is that not all mortgage funds are the same. Over the last eighteen months, the press has covered many mortgage funds which have been forced to freeze redemptions. Unfortunately, the press coverage has led to a number of misconceptions. Some key points that should be remembered are as follows:
- Many or most of the frozen funds are, in fact, performing well. They have written solid loans and are not experiencing any 'blowout' in arrears.
- Much of the damage to the industry was caused by the government bank deposit guarantee. Some panicked investors feared a financial catastrophe and
attempted to move their money out of mortgage funds and towards banks as a 'safe haven'.
- Accordingly, many fund managers moved to
protect investor funds by freezing or restricting redemptions.
Nevertheless, it cannot be denied that some mortgage funds left themselves open to criticism by adopting a model that advertised shorter liquidity for investors (sometimes even daily) underpinned by longer term investments in loans to borrowers. Unsurprisingly, when an unforeseen event like the bank deposit guarantee caused some panicked investors to review their portfolios, they took advantage of this feature. This, in turn, meant that other investors, who were otherwise prepared to 'stay the course', were forced into requesting redemptions to protect their own capital.
In short, the investment model adopted by these funds had a fundamental flaw leaving them vulnerable to mass redemption requests in tough economic times.
La Trobe's Pooled Mortgages Option is different
La Trobe has always understood the importance of an appropriate match between investor and borrower terms. That is why the Pooled Mortgages Option is a 'term investment' with a minimum 12 month term. The benefits of this for investors are obvious:
- Liquidity: The 12 month term means that investors do not need to fear a 'run' on the La Trobe Pooled Mortgages Option as only a small portion of investors are eligible to redeem on any given day.
- Higher returns: La Trobe does not need to keep such high levels of cash on hand to meet possible redemption requests and can instead invest a higher proportion of funds in mortgages that will contribute to investors' returns.
These are some of the reasons that the La Trobe Pooled Mortgages Option has continued to:
- meet all redemption requests in accordance with the policy outlined in the Product Disclosure Statement3 (no freezes or restrictions3); and
- outperform its competition for Best Mortgage Fund whether on a one year or three year investment period (PMO currently paying 7.35%1 p.a or 7.60%1 with reinvestment of earnings).
You can access independent research reports on the Pooled Mortgages Option (Adviser Edge - 3.5/5 stars2, S&P - 3/5 stars2) from our website or call our Investor Liaison team on 1800 818 818 to request a copy.
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Head of Funds Management
t +61 3 8610 2811
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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