16 January 2014


“Risk comes from not knowing what you’re doing” – Warren Buffett

The investment world is one of ritual and tradition. For an industry that prides itself on ruthless devotion to empirical research, it is surprisingly attached to countless little customs.

One such custom is the annual ‘review of your investment strategy’ that occurs at the beginning of each new year. Most commonly, the review involves a consideration of whether investors should tilt their investments towards growth assets, like property or shares, or lean instead towards fixed-income assets, like bonds and credit (including mortgages). Often, a brave soul will even hazard a guess as to what returns the various markets will deliver in the twelve months ahead.

Now, do not get us wrong, this custom is entertaining and, at its best, illuminating. Reading the experts’ views on the outlook for our portfolios certainly provides food for thought. If we’re honest, we’ll also admit to enjoying a harmless bit of schadenfreude when, inevitably, the vast majority of predictions turn out to be incorrect.

Unfortunately, for many investors, this yearly ritual simply does not go far enough. As we discussed in last month’s Investor Insight, there is more to investment success than simply understanding markets. First and foremost, investors must understand themselves, the way that they approach investment decision making and – fundamentally – their bedrock investment philosophy.

At La Trobe Financial, we are no different. As fund managers, we have to walk the talk. So we devote this month’s Investor Insight to a high-level consideration of our own investment philosophy.

At the outset, we concede that our approach is not for everybody. Our view of investment is that, for most people, it should be boring. As Nobel laureate, Paul Samuelson, once said "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."

We do not completely exclude the possibility that there could be complex theoretical approaches to investment that can usefully be put into practice by highly trained experts. However, for the most part we believe that investors are better off sticking to some simple, straightforward and commonsense principles that have been proven over time.

  1. Keep it simple, silly!

    As the great investor Warren Buffett once observed, investment is not Olympic diving; you don’t get bonus points for degree of difficulty.

    The financial world today is groaning under the weight of its own complexity. Every investor and every fund manager is looking for an innovation that can give them the edge. Every trading house is searching for a new product to increase profitability. This ceaseless search results in ever-increasing complexity of products.

    Meanwhile, regulators are furiously trying to keep pace. Disclosure obligations on investment managers become ever more onerous and the length and sophistication of disclosure documents increases as a result. The hapless investor is forced to wade through weighty tomes, filled with technical language.

    So what can an investor do?

    Our answer is simple. If you do not understand an investment structure, you cannot understand its risks. Perhaps you could simplify your life by making a firm decision to invest only in those things that you understand. At the very least, you should exercise extreme caution in approaching more exotic investments without full legal and financial advice of your rights and obligations.

    This will, of course, reduce the ‘universe’ of investments available to you. But is that such a bad thing? Are there not enough, more straightforward investments to meet your investment needs?

  2. Diversify your investments

    The principle of diversification is one that makes intuitive sense. Many of us learnt not to “put all our eggs in the one basket” at our grandmother’s knee. Yet we still hear on the news from time to time of people losing their life savings in the latest investment fraud or collapse.

    To be sure, diversification does have its critics. Even the great Warren Buffett has been heard to question whether diversification makes sense “if you know what you are doing.” And perhaps he has a point, if by “know what you are doing” he means “if you have the skill and temperament to build a multi-billion dollar fortune by stock picking.” If you are blessed with this ability, perhaps you should pay less attention to diversification and simply focus on the investment opportunities that will yield the best possible results. A time machine would be particularly useful in this endeavour.

    But back in the real world, where mere mortals like us are forced to live, diversification is an important protection against the consequences of choosing an investment that underperforms (or worse, loses our money!). After all, his doubts notwithstanding, even Mr Buffett diversifies his investment choices across dozens of individual holdings. And if it’s good enough for him, then it’s good enough for us.

    A final note here is that investors should never confuse ‘diversification’ with ‘diworsification’. Diworsification is a term coined by the legendary investor, Peter Lynch, to describe businesses that diversified so widely that they lost sight of their original business. When applied to investment, diworsification describes the tendency of some investors to diversify unintelligently. Unintelligent diversification can be either into so many investments that investors have neither the time nor the ability to understand and monitor each appropriately, or into investments that are highly correlated and so outperform and underperform in unison.

    So how does La Trobe Financial, an asset class specialist, apply the principles of diversification?

    First, we have built our fund with four investment options so that investors can diversify their exposure to our asset class. Two of the investment options are pooled options, which have been fundamentally built around diversified portfolios. The other two options are contributory in nature, so that investors can choose the individual loans in which they are investing and so construct their own diversified portfolios.

    Second, the various investment options all have a different maturity and asset/risk profile. By spreading investments across the options, investors can diversify their cash flows and exposures to individual investments.

    Third, our unique ‘co-investment’ model means that the various options within the fund can co-fund individual assets. This means that individual options and investors can increase the number of investments they hold, decrease the size of each of these investments and so diversify their overall portfolio.

    Fourth, we diversify our portfolio by primarily targeting smaller assets. This massively increases the number of holdings in each of the options and decreases the effect that the performance of any one asset can have on the performance of our portfolio. The value of this approach has been highlighted in recent years, with many competitor funds suffering substantial losses because their portfolio was excessively concentrated into a small number of large assets. When one or two of these large assets stopped performing, the entire portfolio suffered. This is the outcome that La Trobe Financial’s investment philosophy is designed to overcome.

    Fifth, we source our assets from across Australia, broadly in line with Australia’s population and economic activity. This geographic diversification mitigates the effect that specific regional factors have on overall portfolio performance. Again, recent years have shown the value of having a geographically diversified portfolio. A common feature in the collapse of regionally-concentrated fund managers in recent years has been the serious effect that this has had on the local population. Frequently, the fund manager will enter difficulties at a time the local economy is struggling, meaning that investors are hit with the double blow of living in a poorly-performing economy at the same time that they incur investment losses.

    Sixth, we diversify our loans by sector, investing in assets secured by residential, commercial and light industrial security types, among others. This mitigates the effect that any one sector can have on overall portfolio performance.

    By these six means, La Trobe Financial applies the principles of diversification to our portfolios. That is why Zenith Investment Partners, in its most recent ratings report, state that the Pooled Mortgages Option “...has the highest level of diversification in the mortgage fund sector.”

  3. Getting rich slowly never goes out of fashion

    One of the absolute classic books on investment is Winning the Loser’s Game: Timeless Strategies for Successful Investing, by Charles D Ellis. An expanded version of the thesis he first published in an article in 1975, this book summarises investing as follows:

    "As all grandparents and most parents know -- and as most grandchildren will come to know -- the real test of a good driver is simple: no serious accidents. And as all flyers know, safe, dull -- even boring -- is the essence of a good flight. The secret to success in investing is not in beating the market any more than success in driving is going 10 MPH over the posted speed limit. Success in driving is being on the right road and moving at a reasonable speed."

    That paragraph resonates strongly with La Trobe Financial’s approach to investment. We don’t aspire to outperform any particular market in any particular year. We avoid outlandish promises about future performance potential. Instead, we focus on sourcing sound assets as the basis of conservative portfolios that deliver consistent and repeatable performance over time. Whilst past performance is never a guarantee of future performance, we believe that this approach has delivered outstanding capital stable, low volatility returns over time (see graph below of the Pooled Mortgages Option’s performance since inception in 2002) and we remain committed to maintaining our core investment discipline into the future.


    Whatever our stage in life, wherever we are on our investment journey, we can all benefit from stopping to consider what our own investment philosophy is.

STOP PRESS: La Trobe Financial Quarterly Investment Teleconference

Scheduled: 25 February 2014 - 12:00pm AEST

Invest 30 minutes of your time to hear from our quarterly investor teleconference.

We will discuss the domestic and international economy, with our “headwinds and tailwinds” overview. We will also update you on developments for the manager and our Fund.

Event Details

Date: Tuesday, 25 February 2014  



12:00pm - 12:30pm
  SA 11:30am - 12:00pm  
  QLD 11:00am - 11:30am  
  NT 10:30am - 11:00am  
  WA 9:00am - 9:30am  

Further details will be provided on registration.

Click here to register your interest in participating

We hope that 2014 is a safe and prosperous year for you and your loved ones.

Whatever market you’re in... hope it’s profitable.

Best regards,
Randal Williams, Chief Wealth Management Officer &
Chris Andrews, Head of Funds Management
La Trobe Financial Wealth Management & International Division

La Trobe Financial is one of Australia's leading independent credit specialist Fund Managers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 123 staff and has managed over AUD$10Billion covering over 100,000 investment grade assets 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

The following awards and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Mortgage Fund and may be viewed on our website

Ratings And Awards

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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.

La Trobe Financial Services Pty Limited - Australian Credit Licence Number: 392385
La Trobe Financial Asset Management Limited - Australian Credit Licence Number: 222213

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.
4. Australia Ratings (AFSL 346138) makes every effort to ensure the reliability of the views and rankings expressed in its reports and those published on its websites. Australia Ratings research is based upon information known to it or which was obtained from sources it believed to be reliable and accurate at time of publication. However, like the markets, it is not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each rating for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Australia Ratings and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Australia Ratings hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.