05 April 2012

Dear Investor,

Asset Allocation

Following on from the last two months' “return to basics” theme, in this edition of Investment News we will focus on one of the key considerations when constructing your portfolio: asset allocation.

Investments can be categorised into specific asset classes according to a range of factors such as:

  • the type of investment (shares, property or bonds)
  • whether they provide potential income or capital growth, and
  • the risk/return profile of the investment.

A diversified investment portfolio should include asset allocations across several asset classes:

Cash - includes investments like term deposits, bank bills, commercial paper and other short-term money market instruments. It is often considered to be one of the most stable asset classes because the returns are among the most predictable, but it also earns the lowest rate of return. Generally, cash does not offer investors the potential for capital growth.

Fixed Interest – includes loans and ‘loan like’ investments such as bonds. In either case, the performance of the asset depends on the ‘borrower’ meeting its repayment obligations. Some fixed interest investments, such as loans, generate returns purely as income as the borrower makes its repayment. In such cases, the capital value is fixed and stable. Other fixed interest investments, such as bonds, are subject to capital fluctuations in response to a variety of factors, including changes in market interest rates.

Property – includes investments in direct property and listed Real Estate Investment Trusts (REIT) across residential and commercial sectors. Property not only generates rental income but also provides capital growth potential.

Shares - also known as equities, give you part-ownership of a company. Shares generally provide returns as dividends (income) and offer the potential for profit (or loss) through changes in their price on the share market. In the long term shares are expected to provide higher returns than cash, fixed interest or property, but there is an associated higher risk, that can result in negative returns.

Getting asset allocation right

The investment world and media has recently been focussed on the question of Australia’s ‘over-exposure to equities.’ Certainly, by world standards Australian portfolios seem disproportionately invested in the equities markets.

Sources: Tower Watson

The GFC showed the risks entailed in such an ‘overweight’ equities allocation. Investors saw portfolios hit by the stock market plunge of 2007-08 and many had their retirement plans thrown into jeopoardy. And now, five years later, the pain is still not over with shares continuing to trade at around 2005 levels.

Sources: Westpac

In this context, fixed interest continues to grow in popularity. Once seen as ‘boring’, its regular, stable performance profile is becoming increasingly attractive.

The La Trobe Financial Mortgage Fund is classified as a fixed interest investment and provides exposure to perhaps the largest asset class in Australia, the residential mortgage sector. As the following chart shows the Australian residential mortgage sector alone is larger than the Australian share or bond markets.


Investors may choose from four investment options with the La Trobe Financial Mortgage Fund:

  1. Cash & Mortgages Option
  2. Pooled Mortgages Option
  3. Direct Mortgages Option
  4. High Yield Mortgages Option

The first 2 Options - Cash & Mortgages and Pooled Mortgages - are what are commonly referred to as "pooled" investment options - that is, investors' money is "pooled" together, and invested collectively in a number of mortgages chosen and managed by La Trobe. Investors in these two Options benefit from the diversification that comes with an investment in a range of mortgages with different investment characteristics such as geographical location, sector type, loan maturity time lines and interest rate profiles.

The investment objective of the Pooled Mortgages Option is to provide investors with regular monthly income with a low level of investment risk and volatility. The fund invests in a diversified portfolio of domestic Australian residential mortgages, supported by a targeted spread of retail, commercial, industrial and rural properties and other income producing assets. As the following chart shows PMO has provided investors with a stable and competitive return since inception in November 2002.

If you invested funds in the Pooled Mortgages Option in November 2002 and re-invested all of the distributions your investment would have almost doubled as the following graph shows:

The other 2 Options - Direct Mortgages and High Yield Mortgages - are what are commonly referred to as "contributory" investment options, where investors select the mortgage in which they want to invest, on the basis of information provided by La Trobe about the mortgage. One investor may be the sole investor in a selected mortgage, or there may be a number of investors in the mortgage. Investors are likely to enjoy greater returns on their investment in either of these 2 Options, but with a higher exposure to risk as the investment trade-off.

To achieve a diversified investment portfolio, investors should invest across several asset classes, including fixed interest. 

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.