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Podcast – Fixed Income Credit Investments

Would you lend your money to Business Owners, SMSFs and even some Developers? OR Maybe you're interested in dabbling in a bit of Peer to Peer Lending??? In this episode, Stefan Angelini is Joined by Chris Andrews, the Chief Investment Officer at LaTrobe Financial, to discuss investing into Fixed Income Credit Investments. Where you can pool your fund together with other people, to lend out for a fixed term and achieve a stable income return better than what you're getting as a Term Deposit.


Stefan Angelini

Hey everyone it's Stefan Angelini here from the Investor Types podcast and YouTube channel thanks a lot for joining me for another episode we're here to talk about non banks and how non banks may invest your money if you have invest with them but even getting loans from them what that means so we're here talking to Chris Andrews from La Trobe financial Chris thank you so much for joining me mate


Chris Andrews

Great to be here Stefan thanks for having me


Stefan Angelini

Now amazing so so Chris is the chief investment officer at La Trobe La Trobe has probably

been one of the biggest names that's popped up around Australia in the last few years now touted as a really big lender to both individuals who might be business owners or developers as well who are getting getting funding but they've really released a lot of lines of let's say credit term deposit life products not quite term deposit but earn the fixed-income space but we're here talking to Chris to give us just a little bit more insight into what that all means Chris mate we're in the coronavirus at the moment and I have not seen someone's face pop up more than yours for presentations hats off to you why do you keep doing so many presentations in the current environment


Chris Andrews

Oh Stefan look it's a it's a fundamental conviction for us and one really that we learnt a lot from from from our experience in the global financial crisis which is when markets are

volatile when there's turmoil in a global economy in global markets investors have an absolute hunger to know that their managers are focused that their managers are constantly

checking their portfolio stress testing their portfolios was so really really we just want to be as transparent as we possibly can and I think you Stefan I know you'll be familiar and

if your investors of the media with our monthly portfolio reports which we've been doing for many many years I'd like to think that those are probably the most transparent reports in the market in terms of giving a great amount of detail about all of our portfolio holdings so really it's a it's a continuation of that same strategy of being as transparent as we possibly can

for all of our investors


Stefan Angelini

Yeah no doubt no doubt that would keep you super busy as it does with me keeping all my clients updated but being in your role as a CIO it would require a lot of work but I'd love to know so how did you get to that position be CIO of La Trobe Financial


Chris Andrews

Yeah I actually joined La TroBe in 2006 Stefan and so it was it was not too long before the global financial crisis


Stefan Angelini

On your time


Chris Andrews

We also have yes I would look this fascinating time but also this is difficult time for financial markets


Stefan Angelini

Yeah


Chris Andrews

And it was really interesting to see up close the consequences of poor decision-making by managers and by investors and that's around funding models around liquidity mentoring we

were in fact in some ways you talked about how we enjoyed some success in recent years to large to a large extent that was born in our experience through the global financial crisis we were one of the few managers to get through that period with a flawless record of liquidity return of capital and so on so look at that time I was in a legal role but I moved over to head up the credit fund in 2009 so it's been a you know peak of journey


Stefan Angelini

Alright and so as a CIO what are your main roles what do you do


Chris Andrews

Really good question if I think about La Trobe Financial our approach to investment is is not about one person whether it's me or anyone else making big bets on the direction of the economy


Stefan Angelini

Yeah


Chris Andrews

It's instead what we do is we build really rigorous industrial-strength processes that's at the core of what we do and what we're looking to do is generate highly diversified portfolios are

really really high quality or always mortgage secured loan assets so you know we've been in operation since 1952 so across that time obviously we've seen an incredible array of economic environments so we keep refining improving our approach and and our insights as as markets evolve so really a CIO my focus is working to ensure that all of our investment that all of our portfolio construction disciplines if you like that they're all in place and that our portfolios are continuing to perform for our investors


Stefan Angelini

Okay so when people give you money you you are the one responsible for making sure it's

secure safe and they're going to get the return they're promised who are these people what kinds of people do you manage money for people and institutions


Chris Andrews

Yes oh yeah that's that's right and it's a really good point Stefan so we well recognized I think is having the most diversified funding base in our sector and and and what we do is we apply the same asset selection disciplines across our entire board so you know really our focus whoever the investor is we want to be we want to be an excellent steward of their investment capital so when we think about who these investors are we manage 3.6 billion in investment funds under institutional mandates so that's three of the big four banks two regional banks three household name global banks all of these have been excellent long-term supporters and investors in the business in some case for many decades our credit fund well that's what most of your investors will be familiar with that holds about five billion in assets under management we manage funds therefore all for variety of investors and fund managers family officers only working individuals right through to every day they feel like mom and dad investors we manage for global institutional investors so I'm thinking here of pension funds sovereign wealth funds fixed income managers through our capital markets programs so we have four point four billion dollars outstanding in residential mortgage-backed securities we've attracted a bit of attention in that sector because we've recently settled the largest securitisation transaction globally so that's 1.25 billion since the coronavirus began and that's on the back of the really strong interest that these institutional investors have in our loans as safe harbor assets if you like in terms of market volatility so we line is a very different


Stefan Angelini

Those three this sort of three different types of 3 key buckets 3 key buckets in big institutions funds the everyday person family wealth groups essentially


Chris Andrews

Yes that's correct look I say again whoever the investors are in in one sense when we were

recruiting assets we're agnostic to all of that


Stefan Angelini

Yeah


Chris Andrews

Our approach is to be absolutely rigorous in our asset selection regardless of where the funds are going


Stefan Angelini

Yeah


Chris Andrews

And look none of our investment portfolios that work for any of those institutional investors are in the 48 hour the 90 day the 1 year the full year accounts in our credit fund none of them have ever lost a cent to invest capital and you know for a manager across seven decades that's a rare accomplishment and one that we take very seriously


Stefan Angelini

Yeah so tell me you've got the banks that invest into a non-bank is that right


Chris Andrews

Correct


Stefan Angelini

Alright that's interesting


Chris Andrews

Well well


Stefan Angelini

Let's chase it


Chris Andrews

Yeah I guess at first question might seem so Stefan but we have a particular expertise we special we are credit specialists we focus on borrowers who don't neatly fit if you like that

the primarily automated credit assessment processes that the big banks like to operate and that allows them to generate scale and then that's been a really effective and efficient model for them for many many decades


Stefan Angelini

Yeah


Chris Andrews

But it does mean that there are many many cohorts of really good-quality borrowers think of

SMSF borrowers for example but figure the self-employed think of borrowers who are not resident in Australia there are a whole cohort of borrowers who don't get good service from those mainstream banks just because you need to dive deeper into their credit to give them

understanding of whether very good credit prospects so that's how we differentiate associate and that's why we get such terrific support from from the banks as you say


Stefan Angelini

Yeah and look I don't want to say that I'm a good lender but I've I've had tried had to use La

Trobe many times I'm self-employed therefore the big banks don't like me I'm I've tried to borrow money through my self-managed super fund big banks wouldn't do it La Trobe hey John thank you very much but also from developing property as well La Trobe have a very have built up a very sweet spot or a niche in that market which has been fantastic for because over the last say five years developers a fund of very difficult to get the traditional method of funding and La Trobe is a non bank has starting there very nicely


Chris Andrews

Yes so that's you're articulating really well Stefan what we try to do in the market which is to find those really good quality borrowers like yourself who are who are good credit prospects who from an investor's perspective present a really strong risk return profile


Stefan Angelini

Yeap


Chris Andrews

And by targeting those borrowers we can deliver service to the barrels which is

outstanding we can we can assist borrowers and and play a role in that market but also leverage those borrowers to generate really good returns for investors so it's a it's if you like if everyone wins under that model


Stefan Angelini

So when I want to borrow my money from La Trobe whom I borrowed from a my borrowing from all those investors that you spoke about before


Chris Andrews

Yeah all the well any borrower who comes to La Trobe Financial will have their loan ultimately funded by one or more of those investment banker


Stefan Angelini

Yeah yeah


Chris Andrews

It is important to remember you know to keep the legal structures clean and simple and and certainly transparent La Trobe financial is the lender so when investors trust us with their funds


Stefan Angelini

Yeap


Chris Andrews

Our role is to ensure that we maintain consistently high standards of asset selection and and honestly really high levels of service to our borrowers so they keep coming back and we can keep building our portfolios


Stefan Angelini

So La Trobe now not only La Trobe got bought out a few years ago but quite a large company


Chris Andrews

That's right so we're 80 percent owned by the Blackstone Group out of the U.S. so they've got five hundred and eighty five billion U.S. in assets under management they've got particular expertise they're known as a private equity fund hence their investment in

La Trobe Financial


Stefan Angelini

Yeah


Chris Andrews

They also have a really deep expertise in property and in credit so it's a really good strategic

alignment for us their instructions to ask if you like they said we invested in this business because we love your approach you're disciplined approach to credit so whatever you do don't go changing your credit jaw so we've certainly said meeting it's been really good


Stefan Angelini

Yeah


Chris Andrews

It's been a really strong partnership for us


Stefan Angelini

It's been a really strong partnership for us and I could imagine just from how much I've seen your name everywhere and how much I've seen you pop up La Trobe would have been growing all over the last few years probably getting to be one of the largest non banks in

Australia if not the largest non bank in Australia what are some of the main investments that you manage over at La Trobe


Chris Andrews

Yes so the first point I'll make and I just want to go back to some observations you were making earlier Stefan about you know the difference between the La Trobe financial and the banks so firstly we're not a bank


Stefan Angelini

Yes


Chris Andrews

We're regulated by ASIC


Stefan Angelini

Yes


Chris Andrews

Not by APRA


Stefan Angelini

Yeap


Chris Andrews

Our investments are not subject to the federal government's bank deposit guarantee I've got to say we've got no ambitions to become a bank either


Stefan Angelini

Of course


Chris Andrews

So I really clear about that so you know so that being said we all know that bank deposit rates have been very low for years well below inflation and we don't and I think most

commentators don't see that changing anytime soon so that means as an investor if you've got money in the bank you're actually losing ground and inexorably month after month year after year and in our view that sounds sustainable what we do is build diverse portfolios high-quality assets as I said they're loans it's really simple in many ways they're loans to

borrowers secured by a registered first ranking mortgage and through these assets we aim to preserve capital and generate reasonable returns from month after month so we've got a variety of investment offerings that let investors choose the duration if you like that suits them so I mentioned before that you know for the 48 hour account the 90-day notice account a one-year accounts and a four-year account none of those have ever lost a center capital as I said before so we've focused on consistency that's been our hallmark and we're absolutely focused on that for investors we also have for more active investors we have Australia's largest and most robust peer to peer offering so that's an offering that lets investors select individual loans so you know they could potentially invest Stefan in one

of your developments if they if they decided that that suited their own needs and objectives and they could build their own portfolios of mortgage secure assets if we were to think about the current returns on offer just deserve to give an indication of where we place so the one year account or 12-month term account isn't sometimes called that's currently paying a headline rate of 4.7 percent per annum it's a variable rate of return but it is one that we manage over time to be pretty stable so you know I guess we'll this boils down to Stefan on what we're trying to do through this type of offering is giving investors a genuine alternative source of income


Stefan Angelini

Yeah beautiful and when you've got term deposits that are not returning what investors would hope for I guess the best thing about the La Trobe is you've got the reputation the reputation of being able to consistently deliver on what you promised which is good and you know your rates don't always stay as high as they have been they have dropped and queries


Chris Andrews

In the last


Stefan Angelini

In the recently they've dropped is that right


Chris Andrews

Yes yeah so they are variable rates so they will over time reflection what's going on in interest rate markets but we do hope always to be hold that sort of premium level of return and we do that by targeting those borrowers as a as I've said before who don't get good

service


Stefan Angelini

Yeap


Chris Andrews

From the big banks so we have found you know look we've been in this business for four seven decades and our fundamental proposition has been the same so whoever whoever the investor is whether it's an institutional investor or an everyday mom and dad investor for

us that's irrelevant our value proposition is the same first preserve capital secondly generate a consistent reliable monthly income that's at a premium to what they can get from other other income sources


Stefan Angelini

Yeap so so Chris just so just so I can get my head around it so let's say I've got a million dollars or a hundred thousand dollars and I want to give it to La Trobe say La Trobe I'd like my fixed return for this period please use my money as you wish Chris I've got all my faith

in you and then you say alright well so that money's going it's going to go into a full full of funds with everyone else yes everyone's all in the same bucket and then you determine who it gets lend out lent out to so it could be both two people wanting to develop property people wanting to purchase who would be who business owners as well as people who purchasing through their self-managed super funds is that is that sound about right


Chris Andrews

Yes it does so what you're talking about is yes we have an investment mandate what that investment mandate does is ensure that we don't over expose ourselves for example to construction and development bonds


Stefan Angelini

Yes


Chris Andrews

We love construction and development loans but you know in our 12-month to an account our maximum exposure is 15 percent of the portfolio we may want to build a diversified

portfolio not load up in one particular sector that mean I might for whatever reason into difficulties so so that's where we start our starting point is to build with select yeah yeah exactly and what we want to do then is select individual loans


Stefan Angelini

Yeap


Chris Andrews

The highest quality to generate the portfolios and then it's a classic 5 C's of credit that we apply then so we look at a borrows character for those who've been involved in in credit in the past if this really is the decades-old approach that


Stefan Angelini

Yeap


Chris Andrews

That a really good credit organization will focus on so we look at an applicant's character are they good credit risk do they have a strong repayment history we look at their skin in the game their capital


Stefan Angelini

Yeap


Chris Andrews

We require a minimum of 25% equity from all of the borrowers in our credit fund we look at their capacity or their ability to service the loan to make their repayment obligations now now that's a very regulated activity in Australia like the banks we hold a credit license and Australian credit license from Massey and we're bound by the obligations the responsible lending obligations of the National Consumer Credit Protection Act so yeah when we think about a borrower's capacity that's a very regulated activity


Stefan Angelini

Yeap


Chris Andrews

We think about the conditions that we can put on the loan and and and the purpose there is to better secure investors position


Stefan Angelini

Yeah


Chris Andrews

And then finally and and this is this is the area Stefan that that investors often look to first they think about the collateral security now collateral is certainly critical it's one of the five

C's but I often remind investors and advisors it's only one of the five C's


Stefan Angelini

Yeap


Chris Andrews

What's our approach to collateral when we lend to a maximum of 75 percent of the value of the security property we like a strong margin for safety we don't do large loans we don't take

specialized assets as security properties we prefer assets that we can sell into a really broad and deep market in the event that we're required to take possession and of course Stefan that can happen if a borrower defaults on their repayment so look I say in seven decades

has shown us that we really disciplined in the execution of this strategy we can deliver outsized returns for investors and we can do that with an incredible resilience to what's going on in other markets so it's been a very successful approach this sort of bottom up you feel like fundamental portfolio construction model


Stefan Angelini

Yeah I really like to go back to the peer to peer lending because it's been getting so much attention recently a lot of people are talking about it it's there's a lot of different platforms out there that are doing it so how does the La Trobe platform is this essentially someone can put their their project up on La Trobe and another group of people can come in and choose to fund that how does that work


Chris Andrews

Well first we have a borrower come to us and we assess that borrower as we assess

all the borrowers who come to La Trobe so we've got to be able to satisfy ourselves that therefore is a good credit prospect assuming that the the borrower and that the project if it's a if it's a construct they're not all construction and development loans but they make they are some of them are construction and development ones so assuming that they are approved they can then be put onto what we call our investment marketplace so investors can go online that's available on our website at any time and have a look at individual loans and invest in those individual loans they can research you feel like they're peer-to-peer opportunities before they invest


Stefan Angelini

Yeah


Chris Andrews

You have a benefit the benefit for investors obviously if they get to choose the assets they're

investing in they can often generate a higher yield than through our portfolios


Stefan Angelini

Yeap


Chris Andrews

The flip side of course is that they don't get the same diversification benefits that the portfolio generates so the risk of profile is slightly higher and obviously Stefan that the most

straightforward analogy is an investor choosing and into an individual stock on the on the ASX to purchase versus investing in a diversified portfolio stocks run by a professional manager so from that in we're really pleased to provide our investors with the opportunity to choose the mode of investment that suits them and suits


Stefan Angelini

Yeah


Chris Andrews

Their own circumstances and preferences it's not unusual for us to see investors in fact have some funds in one of our pooled accounts that's our 12-month turn account and to make certain and to set some funds aside to invest in in in select peer-to-peer opportunities if you

like a sort of a core and satellite approach that they take to investment so that's really interesting too


Stefan Angelini

I guess that's what a lot of people don't consider when you look into credit markets and you do see a high return although people get you know they see the flashing lights and they run towards a lot of high return let's do it but it does take on more risk in the diversification especially when it does come to credit markets it's so important and I guess having having an expert team there who've done this for so long to manage that is about most important you may pay for a little bit you may not own as good returns but essentially if you're looking

at fixed return it gives you that safer option


Chris Andrews

So diversification being described Stefan is the one free lunch in investing and it is absolutely true your ability to control the risk in your portfolio and generate repeatable income but you know diversification is absolutely key to that


Stefan Angelini

Yeah beautiful so this show Chris it's called Investor Types where we help people identify

what's the right kind of investment for them if they're looking to get into say a fixed credit or a credit investment which may be a specified term if someone was to come to you and say that look Chris I want to get involved in some fixed income investments with La Trobe

what would be their personality or their investor type


Chris Andrews

We've does we've discussed sort of some categories of investors that we deal with already when you think about it though our fundamental investment objective here at La Trobe is very consistent across our portfolio so whoever our investors are living they're the largest institution or the smallest everyday mom and dad investor they want their capital return

to them in full and they want to generate a consistent monthly income that is a reasonable margin above the rate of inflation traditionally and predictably we see a lot of people at only

retirement age who are looking to protect their capital from market volatility they're looking to manage sequencing risk and they're looking to generate income for living expenses

interestingly though and particularly as we rolled out some of our online platforms and you know perhaps these peer-to-peer offering as well we're seeing a lot of the younger savvy

investors there and really they're coming to us simply because they're dissatisfied with the rates of return from other income offerings in a world where we're base rates base interest

rates are so low I'm always though and you've probably said it a few times already Stefan I

want to to really stress that whoever the investor is and whatever portfolio you're talking about with La Trobe financial and commitment to that those same levels of well of the investment discipline of transparency as we discussed earlier a professionalism pulse also though hopefully on friendly service they remain the same


Stefan Angelini

Yeap okay I see it is oh it's it's almost like because it's a term investment you've got to be willing to give your money away a lot of the time and not not ask for it back before that term is up so be willing to have that money gone but definitely if it is that secure that's security in a portfolio I'm believing in someone that you know will hopefully pay you back you know lending to Bob your next-door neighbor you're lending to a reputable business that's been around for a long time headed up by a very great man and that's the kind of investor that if you wanted that long term and income approach all be it is a more risky but then say a term deposit because term deposits as you spoke about before have that government backing they're less than $250,000 they are government secured so you don't fall into that same banner but look I think La Trobe is amazing business doing amazing things keep marketing the way you're marketing because I see a little La Trobe banner everywhere now and if you

can Chris keep supporting the mighty the mighty Collingwood Magpies


Chris Andrews

I thought we'd get to that at some point Stefan look isn't it great that is a country we're

now on the cusp I'll see out our NRL friends are back in the fray already you know it won't be long before the AFL's back to and I think obviously given all the the tough year the 2020 has been it's great to see some of these more normal pastimes starting to enter our minds again so I'm glad to hear you guys


Stefan Angelini

Go boys thank you everyone for joining us on the investor types we hope you've learned something here about credit investing going for that fixed income return Chris thank you so much for giving up your time I know how busy you are a real look for to hopefully chatting to you again soon


Chris Andrews

A real pleasure to Stefan always happy to talk


Stefan Angelini

Alright thanks a lot for that if you've got any questions feel free to reach out look at La Trobe Financials website they've got plenty of information there and if you've got any questions about the podcast feel free to leave a comment below otherwise reach out to me Stefan

at angeladvisory.com.au Chris thanks again mate everyone listening I'll see you very soon thanks a lot


Chris Andrews

Thank you all



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