21st January 2010

Dear Investor,

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:

  1. Do not put all your eggs in one basket.
  2. A higher rate of return always equals a higher risk.
  3. 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.

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.