1 March 2012

Dear Investor,

Building an Investment Portfolio

Last month's Investment News started from the premise that in unpredictable times, it pays to return to basic principles. We discussed the importance of investing, rather than merely saving and explained how the Rule of 72 could assist investors plan their investments.

In this month's edition, we consider the issue of 'building an investment portfolio.' Most investors just want to achieve a reasonable return on their investments, but the range of products and alternatives in the investment market can often seem overwhelming. And the situation is not helped by investment 'experts' who frequently seem to specialise primarily in jargon and the creation of new TLAs (Three Letter Acronyms).

Thankfully, the basic principles of investment are not complex. In fact, they are generally common sense. All you need is a willingness to learn and an ability to avoid emotional attachments to your investments.

Risk profile

The driving principle of investment is risk and return. Risk can mean many things, but in general it means the chance of a loss on your investment. In investment theory, an investment's return should be in proportion to its level of risk. Higher risk investments should generate a higher return as compensation. Lower risk investments should generate only a lower return.

Of course, because markets are not perfectly efficient in pricing risk, the theory is not always reflected in reality. Some high risk investments generate only low returns and some relatively low risk investments can generate higher returns. However, as a general organising principle, the risk and return paradigm is fundamental.

If you cannot tolerate losing any money, then you are probably a 'risk averse' or 'conservative' investor. On the other hand, if you agree that a reasonable amount of risk is necessary to achieve a higher return, you might be described as a 'risk tolerant' or 'assertive' investor.

Of course, virtually no one is 100% 'conservative' or 'assertive'. Most portfolios will have a mix of investments suitable for conservative investors and investments suitable for assertive investors. The key issue is the proportion in which the different types of investments are held.

Constructing your portfolio

Once you have determined your risk profile, you will be well placed to begin choosing your investments. At this stage, there are a number of factors you should consider:

  1. Asset allocation

    Asset allocation determines how you will invest your funds amongst the available asset classes, which can include fixed interest, shares, property and cash. This process is driven by a number of issues, including your risk profile and time horizon.

    For example, an investor nearing retirement often cannot afford to run the risk of the capital losses that can arise on the share market. Consequently, he or she may choose to allocate a higher proportion of their portfolio to capital stable, income producing assets in the fixed interest or cash asset classes (more conservative investments).

    For more information on the importance of your investment lifecycle to your asset allocation, see our earlier Investment News 'Volatility and Lifecycle Investment'.

  2. Income vs growth assets

    One way investments can be categorised is by whether they are 'income' or 'growth' assets. Income generating investments are in most cases considered to be more conservative and typically aim to protect investors' capital, whilst generating an appropriate income stream. Examples include term deposits and the La Trobe Australian Mortgage Fund.

    By contrast, 'growth' assets seek to generate capital returns for investors. Typically, they are more volatile, producing periods of strong returns, but with an increased chance of capital losses. Examples of growth assets include shares and property.

  3. Need for diversification

    Whatever your asset allocation preferences, you should be wary of holding "all your eggs in one basket." Diversification of investments spreads risk, so that losses or underperformance in one investment are made up for by strong performances in others.

    This is not always as easy as the theory makes it sound. As we have seen in the GFC, at times of economic stress, the performance of most asset classes tends to converge (becoming 'highly correlated'). Thus, many investors who thought they had highly diversified portfolios found that all or most of their assets experienced losses or underperformance simultaneously. The chart below shows how so many asset classes converged in the GFC and how La Trobe Financial's Pooled Mortgage Option (PMO) was one investment that retained its own (uncorrelated) asset performance profile.

  4. Understanding your investments

    The final lesson of the GFC is to invest only in those assets that you understand. Even large institutions with massive financial analysis and legal capabilities were found to be investing in assets that they simply did not understand and could not properly assess.

    The rule is simple. Do not invest in what you do not understand.

La Trobe Financial Update

SQM Research/Adviser Edge awards its highest ever rating in the mortgage sector to La Trobe Financial's Pooled Mortgages Option

La Trobe Financial's Pooled Mortgages Option ("PMO") has been awarded a 4 star research rating by SQM Research/Adviser Edge. This rating is another significant achievement for La Trobe Financial, as the 4 star rating is the highest ever given by the ratings house to a mortgage fund.

In releasing the report, SQM Research's Managing Director, Louis Christopher, stated:

"We have enough conviction to put our reputation on the line for this fund. It is one of the very few mortgage trusts that made it through 2008 without having to freeze. It has delivered returns which have outperformed most other asset classes over this time and its management team have been successful in managing its loan book through difficult times. In short, it would be a miscarriage if we did not give the proper rating this fund deserves. I congratulate the management of La Trobe in achieving this rating.

We have always said that the mortgage trust sector does have a future and that future is here with us."

SQM Research's media release and the ratings report itself can be accessed by clicking the icons below.


Best regards,
Chris Andrews

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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

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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 145 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. The PDS is available on our website www.latrobefinancial.com.au or by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
* 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.
- Withdrawal rights are subject to liquidity and may be delayed or suspended.
- The award and ratings were given to the Pooled Mortgages Option within the La Trobe Australian Mortgage Fund.
The rating is only one factor to be taken into account in deciding to invest.
1. Zenith's "recommended" rating indicates that it has high confidence in the manager meeting its objectives. The Zenith. Investment Partners ("Zenith") ABN 60 332 047 314 rating referred to in this document is limited to "General Advice" (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product (S), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. To view the relevant research information, please visit www.latrobefinancial.com.au The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective.
2. Standard and Poor's (4 Stars - Research Rating) "The S&P rating of 4 out of a possible 5 stars indicates that Standard & Poor's has high conviction that the manager will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers. Ratings are subject to change. To view the latest research information please visit www.standardandpoors.com.au. Ratings issued by Standard & Poor's 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. Research houses receive a fee from La Trobe Financial for rating the product."
3. SQM Research - 4 stars to 4.25 stars - superior, suitable for inclusion on most Approved Product Lists. To view the relevant research information, please visit www.latrobefinancial.com.au This rating will not take into account your, or your clients' objectives, financial situation or needs. It is up to investors to consider whether specific financial products are suitable for your objectives, financial situation or needs. Research houses receive a fee from La Trobe Financial for rating the product.
4. Lipper Leaders Rating Total Return (Score – 5) Lipper Ratings for Total Return reflect funds’ historical return performance relative to peers. The ratings are subject to change every month. The highest 20% of funds in each peer group are named Lipper Leader or a score of 5 for Total Return. Lipper Leader ratings are not intended to predict future results and does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright, All Rights Reserved.