10 April 2013

 Dear Investor,

Over the last few weeks, a team from La Trobe Financial has been conducting an investment road show across Australia’s mainland capital cities. We have had discussions with literally hundreds of financial advisers, fund managers and professional investors.

This type of project is always intensely rewarding. We get the opportunity to meet a range of astute and thoughtful investment professionals and present our award-winning fund and unique investment philosophy to them. Just as importantly, we get to exchange views on the state of markets and the economy and how these affect the outlook for investors.

The discussions we had this year revolved around three key themes. In this edition of Investor Insight, we will consider each of the themes in turn.

  1. Moderating return expectations

    Not so long ago, it was common for investors to target double digit returns for their portfolios. Booming equities markets and the liberal use of gearing (borrowing to invest) led some to believe that these sorts of returns were both normal and reasonable.

    As has been discussed in detail over the last five years (not least in Investor Insight), this was unsustainable. Most investment professionals now recommend much more modest targets. The Australian Government’s Future Fund, often considered the ‘gold standard’ in Australian funds management, targets a return of 5% p.a. over inflation, which implies a target return of 7% - 8% p.a. when combined with the Reserve Bank’s inflation target of 2% - 3% p.a. Veteran financial writer, Robert Gottliebsen, takes an even more conservative approach and suggests that a return of just 5% p.a. is realistic.

    There are strong reasons why returns expectations are moderating, and are likely to continue to moderate into the future. Most fundamentally, returns must be generated by some form of economic activity. The key drivers of this activity are people and productivity.

    Like most of the world, Australia’s demographic future is likely to constrain our ability to generate economic activity. The following chart shows our dependency ratio (the proportion of dependents - aged and children - to people of working age) has bottomed out in the early 2000s and is now on an inexorable rise. By 2050, it will be approaching 70%. We are therefore leaving a demographic ‘sweet spot’ and heading into an environment where public and private balance sheets will be severely tested.

    One way of mitigating the negative effect of demographics would be to increase productivity. Unfortunately, after a strong performance in the 1990s and early 2000s, productivity has also decreased significantly.

    Source: Productivity Commission

    With most of the western world now facing an extended, perhaps generational period of deleveraging, the days of easy credit expansion are also over.

  2. Guarding against increased risk

    In our Investor Insight in February, we alerted investors to the dangers of leaping into equities markets in a hunt for income returns. Shares will always be an important part of investment portfolios, but investors must always be aware of the significant volatility risk that they bear. It seemed that some investors were forgetting about volatility in the rush to participate in the stock market increase that commenced in mid 2012.

    Sure enough, after peaking at around 5,150 in early March, the market has since declined consistently and is – at the time of writing – down about 5% (see graph below).

    Source: businessspectator.com.au

    Now, no one can say what will happen next – the market could continue to fall (one pundit predicted a decline to 4,600 by the end of the year) or could start increasing again. However, the investment professionals that we spoke to were very focussed on ensuring that portfolios were not excessively exposed to this market risk. Investors need stable, income-based investments that can provide a ‘performance platform’ in times of market instability.

  3. Importance of diversification

    The market turmoil of recent years has well and truly attuned investment professionals to the management of uncertainty. A range of portfolio-critical risks were discussed, including structural issues in China, the US and the EU, global aging and deleveraging and the threat of inflation.

    A key theme in response was the importance of diversifying portfolios. Diversification continues to be the one true ‘free kick’ in investment. Reliance on any one (or small handful) of investments or strategies is courting disaster

Times change and so do the headlines. But our discussions on the road show only confirm what all our readers probably know well. The basic principles of sound investment are enduring.

 Best regards,
Chris Andrews
Head of Funds Management

The following awards and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Mortgage Fund


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Randal Williams
Chief Wealth Management Officer

t  +61 3 8610 2831
e  rwilliams@latrobefinancial.com.au

Chris Andrews
03 8610 2811
Vice President, Head of Funds Management
Daryl Hill
0408 566 524
Vice President, Head of Major Clients

Michael Watson
0409 419 039
Senior Manager Client Partnerships
Megan Pfab
0408 126 664
Senior Manager Client Partnerships
Jason Gidman
03 8610 2818
Cheree Cain
03 8610 2810
Funds Operations
Richard Anstey
03 8610 2809

Freddy Gong
03 8610 2858
Assistant Portfolio Manager
Helmuth Ewinger
03 8610 2833
Senior Manager Client Partnerships
Stacey Hynes
03 8610 2805
Senior Manager Client Partnerships
Peter Polemikos
03 8610 2834
Senior Manager Client Partnerships
Terrie Simpson
02 9238 2065
Senior Manager Client Partnerships
Jo Ni
03 8610 2803
Investor Administration Officer
Ada Yeung
03 8610 2865
Investor Administration Officer

La Trobe Financial 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 2013 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 be lower than expected. Investors risk losing some or all of their principal investment. The investment is not a bank deposit.
- Past performance is no guarantee of future performance.
- 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. 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.
3. 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.