04 July 2013

 Dear Investor,

Interested in fixing?

So what is an investor to do?  In last month’s Investor Insight, we discussed some worrying signs that investors might once again be over-exposing their portfolios to risky assets like equities.  We considered the question of volatility and the implications of the recent stock market falls.  We also reviewed some research indicating that investing when stock market values are relatively high exposes investors to a significant risk of long term investment underperformance. 

But what else is there to invest in?  To read the financial press, one would think that the only investments worth considering are shares and (possibly) investment properties.

The truth, of course, is that there are far more options than those.  Professional money managers and advisers know the importance of balancing exposures to ‘growth’ assets, like shares and property, with solid exposures to more capital stable, income producing assets.  This type of investment is frequently described as ‘fixed interest’. 

In this month’s Investor Insight, we will briefly consider the world of ‘fixed interest’ investment and the benefits it can bring to any balanced portfolio.

Types of fixed interest investments

The term ‘fixed interest’ covers a diverse range of investment products.  As a general rule, these products provide investors with increased capital stability and less volatile returns than those produced by the ‘growth’ assets.  Some key examples of fixed interest investment products include:

1.     Bonds;

2.     Term deposits;

3.     Hybrid products; and

4.     Mortgage funds.


In essence, a bond is an undertaking by an ‘issuer’ (classically a government or corporation) to pay the bondholder (the investor) a principal amount plus interest (generally paid at fixed intervals).  The investor in a bond is effectively a ‘lender’ to the bond issuer.  This provides an important advantage in the event that the bond issuer enters financial difficulty – the bondholder will be a creditor and will therefore have the right to recover his or her debt before shareholders receive anything.

At least in theory, bondholders pay for the increased security of their investment with a lower rate of return.  Thus, bonds are generally considered to be at the safer end of the risk spectrum, with significant protection from the volatility of equities markets. 

It should be noted, however, that bonds are also sold on secondary markets.  For investors who wish to trade on these markets, the capital value of their bonds is exposed to market volatility.  For example, fixed interest bonds decrease in value when interest rates go up and increase in value when interest rates go down.  Floating rate or inflation linked bonds can protect against the risk of market price changes caused by interest rate movements.

Term Deposits

Most investors are familiar with term deposits.  They are deposits with banks that pay a fixed rate of return for a set term. Term deposits may range in term from one month to ten or more years.

The most pressing consideration for investors today, of course, is the low rates of return being paid by term deposits.  In many cases, the rates of returns paid on term deposits are barely above the inflation rate – meaning that they are simply not producing enough money for investors to live on without diminishing the purchasing power of their portfolio.  With significant inflationary risks still threatening Australia, this issue is likely to become even more pressing in the near future.


Hybrid products are products that have features of both debt and equity.  In some ways they are like bonds and in some ways they are like equities.  Unfortunately for most investors, these products are extremely complex and are the subject of an enormous number of variations. The golden rule when looking to invest in any hybrid product is to understand the product and BEWARE!

For more information on hybrid products, visit https://www.moneysmart.gov.au/investing/complex-investments/hybrid-securities-and-notes

Mortgage funds

Mortgage funds operate by receiving investments from investors and investing them in loans to borrowers.  The payments made by the borrowers generate the returns for investors and investors also benefit from the mortgages taken over the borrowers’ security properties.

The La Trobe Australian Mortgage Fund’s Pooled Mortgages Option is designed to offer some of the strongest characteristics of the other fixed interest product categories.  For example, like a bond, it is a debt product. Unlike a bond however, the debt is diversified among over 1,000 borrowers. Like a term deposit, it pays a variable interest rate monthly and is for a fixed one year term.  Unlike a term deposit, it pays a return well in excess of the inflation and official cash rates. It should always be noted, however, that an investment in a mortgage fund is not a bank deposit and is not subject to the current government guarantee on bank deposits.

The above mix translates to a history of performance competitive with any other fixed interest investment. 


In summary

We emphasise again that this does not mean that investors should avoid share markets. It simply means that they need to be very careful about choosing their investments and their level of exposure to those investments. It is doubly important that investors at or near retirement consider carefully whether they are over-exposed to shares. After all, six years after the GFC, the All Ordinaries remains around 25% below its peak in real terms.

For this reason, you should consider whether you are sufficiently exposed to fixed interest investments.  They are unlikely to produce the stellar returns that the share market produces in good years, but they may play a powerful role in ‘de-risking’ portfolios and protecting portfolios from the volatility of equities markets.

 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.