So, is there any simple, easy to understand investment for people wanting stable and reliable returns?
Among the four asset classes - Cash, Fixed Interest, Property, and Shares - cash investments are considered to carry the lowest risk, and will generally pay the lowest return. Shares, on the other end, are regarded as the highest risk investment, but have the potential to provide a much higher return.
So, if investors are looking to get their money working a bit harder for them, and getting more than the interest paid by the bank, but they don’t want to take up as much risk as with buying an investment property, they may place their money in a fixed interest investment. That’s where mortgage funds fit in.
Yes – their asset class has a lower risk profile than property investment!
Mortgage funds are less volatile than some other investments: that means that they are designed to provide reliable income payments, preserving the initial capital invested. Not all fixed interest investments can do the same. In fact, despite the name, fixed interest can fluctuate in value: for example, as interest rates go up, bonds value goes down, and so do returns of fixed interest funds invested in bonds. Mortgage funds behave exactly the opposite way: as interest rates go up, returns also go up. So, rates going up become something to look forward to, for a change!
Let’s not forget the importance of diversification: some people do want to take extra risk and invest in property or shares, but how to insure against times when markets are not doing so well? There is no such insurance policy out there, but keeping part of the portfolio invested in a mortgage fund may provide a solution to that.
For example, the graph below shows the performance of a mortgage fund (The La Trobe Australian Mortgage Fund), against the downturn periods of the Australian stock market, over a 10 year period. The mortgage fund had strong positive returns, at the same periods when the Australian stock market was experiencing negative returns.
An article in the Australian Financial Review (October 2008) headed "Cash, property shine as shares crash and burn", suggested that investments in cash or property over the last 10 years had come close to, or even potentially outperformed, the return from equities over the same period. The volatility in the share market that we have seen in recent times has eroded many of the gains made in equity investments prior to the 'global financial crisis'.
On the other side, it has also been argued that over a very long period of time – 25 or 30 years – investing in shares provides superior returns, even with market downturns like the one we have just experienced.
But what if you just don’t have another 30 years to invest? What if you are close to retirement and may need to delay it if the market goes down? Or what if you are saving, for example, for your children’s education? They can’t just “wait a couple more years” to go to school!
In that case, a more conservative option may be more suitable for you.
So, what about the recent debate about mortgage funds?
The word “mortgage”, in investments, hasn’t had very good publicity recently. But it is important to clarify a couple of things, when talking about them.
First, mortgage funds are not those mortgage-backed securities that you have been hearing about! Mortgage-backed securities are much higher risk investments, which have been linked to the GFC.
Second, not all mortgage funds have frozen redemptions in the past year. The ones that did were offering investors the option of taking money out at anytime. They effectively borrowed short and lent long. When the government issued the bank guarantee, many investors felt safer with the banks, and they all tried to get their money out of mortgage funds at the same time. However, investors’ money is used to offer finance for mortgages, sometimes lasting 30 years. As a consequence, managers had to refuse redemptions requests. The lesson learned here is that mortgage funds should match as best as possible the investment term with the mortgages term. Those that did, are still open and continue to provide stable monthly returns.
Intellichoice has a working relationship with La Trobe to offer our clients the opportunity to invest and growh their wealth in a safe manner. The La Trobe Australian Mortgage Fund Pooled Mortgages Option, for example, has never restricted redemptions, has always had only a one year term option, and is currently returning 7.50%, monthly income. That’s why it has been awarded “Best of the Best” in Money Magazine.
For more details about mortgage funds and whether it is a suitable investment tool for you, speak to one of the financial planners at Intellichoice on 1300 55 10 45 or email info@intellichoice.com.au. Alternatively, visit www.intellichoice.com.au.
