P 1800 230 099 | F (07) 3039 2829 | www.trilogyfunds.com.au | E investorrelations@trilogyfunds.com.au

Christmas can be a special, but also expensive, time of the year for most of us. Whilst it is a great opportunity to

QUARTERLY | SUMMER EDITION 2014

WE KNOW PROPERTY

Inside Good cash flow makes life easier

Investor insights

Education spotlight: Managed funds

What it means to be a Responsible Entity

Mortgage trusts: a viable option for income seekers

reconnect with family and friends, it often comes at a price. Travel, gifts and the cost of time off from your job or business can threaten to dampen this otherwise joyful period.

This serves to highlight the importance of cash flow in helping us plan for expenses we reasonably expect to incur during the year, as well as a contingency for the unexpected. In this edition of Acumen, we have included an article on cash flow and its importance within your investment portfolio. It is important to make sure the income generated by your investments, and

its regularity, aligns with your income needs.

As an Investor myself I appreciate the importance of responsiveness in fund managers. The survey we recently conducted of investors has highlighted there is room for improvement in the delivery of end of financial year statements. I have earmarked this as an area for focus and appreciate your patience throughout the process this year. We have included a snapshot of other investor insights gained through the survey in this edition for your information.

On behalf of the entire Trilogy Funds team, we wish you an enjoyable festive season.

Please note our office will be closed from noon on Wednesday, 24 December 2014 through until Friday, 2 January 2015. The office will reopen on Monday, 5 January 2015.

Rodger BaconEXECUTIVE DEPUTY CHAIRMAN

ARTICLE SUGGESTIONS

If you have any suggestions for articles you’d like to see in the next edition of Acumen, please email marketing@trilogyfunds.com.au

Welcome to our quarterly newsletter

Dear Investor,

For many investors an important aspect of managing their portfolio of investments is cash flow. Cash flow simply looks at the payment frequency of income from an investment. This income is paid regularly (e.g. monthly, quarterly, biannually or annually) but can be inconsistent, particularly for longer term investments. 

Cash flow differs from the total income return, in that it examines how often and when income is paid, rather than the actual level of income received from the investment over a set period.

Two main reasons cash flow is important to understand: 

1. It is fundamental for having an effective personal financial budget.

While you may be receiving income from an investment, if the income doesn’t arrive regularly enough to meet living expenses, you may need to access cash from other sources to bridge the gap.

2. Having uneven cash flow makes accelerated debt repayment a difficult goal to achieve.

Due to the high initial costs involved, many of us go into debt to purchase items such as cars. However, this debt comes at a price: while you are carrying it you cannot use these funds

to invest elsewhere.

It makes financial sense to reduce lifestyle debt as quickly as possible so that these funds can be used to invest in financial assets that will appreciate in value to create enduring wealth.  

By having a sufficient mix of underlying assets within your portfolio you can help ensure you receive a relatively even income throughout the year.Considering cash flow diversification

Diversification is not limited to your choice of investment asset type. It is wise to consider it from a cash flow perspective as well. By having a sufficient mix of underlying assets within your portfolio you can help ensure you receive a relatively even income throughout the year. While some investments may look similar at first glance, a prime differentiator between them may be the frequency of dividend or distribution payments and the terms on which they are paid.

It is best to speak with a licensed adviser for further guidance on how to manage your investment cash flow to meet your personal requirements.

Good cash flow makes life easier

Investor insightsJUSTIN SMART | CHIEF OPERATING OFFICER

In the last edition of Acumen we invited investors to complete an online survey and have recently compiled the results. We extend our thanks to every investor who took the time to share their feedback with us.

Key insights from the survey included:

Top 3 online information sources preferred by our investors:• Finance websites • Internet search • Internet in general

Our investors favour their financial advisers and accountants for advice however 43% do not currently use the services of a financial adviser.

Almost half (43%) of our investors use Facebook, but 37% indicated they do not use social media at all.

Our investors felt the following characteristics reflected us best:• Provide investors with

high rates of return on investments

• Provide long term value for investors• Experts

in property investment.

Our investors favour their financial advisers and accountants for advice, however 43% do not currently use the services of a financial adviser.

The survey also provided us with valuable feedback with regard to delivery timeframes for statements at the end of the financial year.

We are currently in the final stage of implementing a new registry system, which will significantly improve our ability to meet these timeframes for our year end reporting obligations.

There was also feedback regarding frequency of investor fund updates, which we have taken on board and will be reviewing. We are also planning improvements to the investor portal, MyInvest, in early 2015 that will improve its usefulness for investors. We have also been glad to receive positive feedback from new investors about the implementation of our electronic verification processes and procedures.

A Responsible Entity, or RE, was a concept created by the Managed Investments Act 1998 and is unique to the Australian financial services sector. It replaced the ‘Manager’ and ‘Trustee’ role that had previously existed for managed investment schemes. The RE has the dual role of trustee and manager of an investment scheme, and must be appointed if an investment scheme needs to be registered.

Managed investment schemes cover a wide variety of investments, including:• Cash management

trusts• Property trusts• Australian equity

(share) trusts• Many agricultural

schemes • International equity

trusts• Some film schemes• Timeshare schemes• Some mortgage

schemes• Actively managed

strata title schemes.REs must be public

Australian companies with a prescribed level of net tangible assets, depending on the value of the scheme’s assets. REs must also hold an Australian Financial Services Licence.

An RE can either be owned by the same group as the fund manager, i.e. an “internal” RE, or alternatively be run separate to the fund manager, i.e. an “external” RE. Where the RE is external, the RE, on behalf of the investment scheme, typically enters into a management agreement with the fund manager.

When acting on behalf of an investment scheme, an RE must:• Act in the best

interests of members • Act honestly• Exercise a reasonable

degree of care and diligence

• Treat all investment scheme members equally.

The duties of an RE include:• Scheme (fund)

registration including the Constitution of the Scheme

• Issue of disclosure documents i.e. Product Disclosure Documents

• Establishing compliance arrangements to monitor regulatory and legislative requirements

• Appointment of a compliance committee

• Appointment and monitoring of external service providers (Audit, Custody and Administration).

Replacement REs Investors in managed investment schemes can replace the existing RE through a vote. Trilogy Funds has replaced other REs and in doing so taken on a number of distressed property and mortgage trusts with receivers involved. In these circumstances it has been our role to act in the best interests of the investors.

Personally I have almost two decades of direct experience in the management of investment schemes, or managed funds. It is our core business as an investment manager and one of the most common ways people choose to invest their money. Many large superannuation funds will use managed funds as a way to access the skills of investment managers and different types of investments.

Managed funds: the basics

When you invest in a managed fund, you are allocated a number of “units” based on how much you invest and the current price of each unit. For example, if you invest $10,000 and the unit price at the time is $1, you would own 10,000 units.

If the unit price rises to $1.10, the investment will be worth $11,000 ($1.10 x 10,000 units). Or if the unit price drops to 90 cents, the investment would then be worth $9,000 ($0.90 x 10,000 units).

Managed funds can be an effective way to make the most of your investment dollars because your contribution is pooled with the money of other investors. This delivers benefits such as:

• Asset diversification. This can help investors achieve a lower level of investment risk across their entire portfolio. Depending

on the type of managed investment it may invest in shares, property, fixed interest or cash, or a specific combination of these assets.• Broader market

access. Some markets may be unavailable to you as an individual investor.

• A tailored portfolio. Your investments can be designed to suit your needs, whether you want a regular income or capital growth.

• Professional management and administration of your investment. A team of experienced investment managers will be in charge of your money. Managed funds are also convenient for the investor because the manager handles the day-to-day fund administration.

The returnsThere are two types

of returns for managed funds: unit price growth and distribution income.• Unit price growth

occurs when the value of the underlying investments in the fund have grown over the period of the investment. This results in an increase in the price of units in the fund.

• Distribution income is paid to unit holders when a managed fund makes a payment to investors and are received during the course of your investment. They consist of the earnings the fund has generated over the period and may include capital gains (from the sale of fund shares or other fund investments) or income (from dividends or interest). Most managed funds

will give you the option of receiving your distributions as cash directly into your bank account, or reinvesting your distribution back into the fund.

Risk and returnThere is a simple

rule about risk which generally holds true for all investments: the higher the possible return, the greater the risk of loss over the short term. However, if you plan to invest over the long term, these risks can be reduced.

For this reason, funds with a higher exposure to growth assets such as shares and property are best suited to those who are looking to invest for strong returns over longer time periods (greater than seven years) and who are prepared to experience short-term volatility along the way. Funds with a higher exposure to more conservative investment types, such as Australian fixed interest, mortgages and cash, are less volatile but generally deliver lower returns. Diversification can reduce risk. By investing across a range of asset classes that experience good performance at different times, the higher returns you receive from one type of investment can help to offset lower or negative returns from another.

It is our core business as an investment manager and one of the most common ways people choose to invest their money.

Investing in managed funds requires a medium-to-long term investment horizon, particularly those that include growth assets. Switching investments or redeeming the investment before this time elapses can result in you receiving less back than you originally invested.

PerformanceNaturally a fund’s

track record is important but you do need to be careful as past performance is not a reliable indicator of future performance. This is where the quality of the management team and understanding how the fund invests is crucial,

as different investment styles tend to perform differently across the economic cycle.

P 1800 230 099 | F (07) 3039 2829 | www.trilogyfunds.com.au | E investorrelations@trilogyfunds.com.au

What it means to be a Responsible Entity

Education spotlight: Managed fundsPHILIP RYAN | MANAGING DIRECTOR

P 1800 230 099 | F (07) 3039 2829 | www.trilogyfunds.com.au | E investorrelations@trilogyfunds.com.au

Disclaimer: While every effort is made to provide accurate and complete information, Trilogy Funds does not warrant or represent that the information in this newsletter is free from errors or omissions or is suitable for your intended use. Subject to any terms implied by law and which cannot be excluded, Trilogy Funds accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omission or misrep-resentation in information. Note: All figures are in Australian dollars unless otherwise indicated.

Investors are constantly preached to about the virtues of diversification within their portfolio. The old adage of not having your eggs all in the one basket, is certainly a smart approach.

It is also important for

you to balance your portfolio to ensure you have a mix of short and long term investments. Achieving the right portfolio mix will help ensure you have money available to keep living life the way you want. Perhaps this is why mortgage trusts are re-emerging as an option for individual and SMSF investors seeking income in their investment portfolio. The Global Financial Crisis (GFC) resulted in a number of investors moving away from this investment type.

However, Trusts that were structured consistently with the liquidity of the underlying mortgage assets and conservative Loan to Value Ratios (LVR) survived the crisis.

In terms of trust liquidity, prior to the GFC many mortgage trust managers paid redemptions on demand, but mortgages are illiquid assets. Mortgages can have a 12-18 month timeframe from the time of loan settlement until repayment. Since the GFC, some mortgage trust managers have

restructured their redemption policies to align more closely with the liquidity of the underlying mortgage assets. One way this is achieved is to require a redemption notice period from investors, therefore giving the manager adequate time to manage trust liquidity.

LVR is a lending risk assessment ratio that mortgage trust managers calculate before approving a mortgage. For non-property development loans,

the LVR must be at a maximum of 70% of the ‘as is’ valuation. All valuations are conducted by independent valuers. Mortgage trusts generally do not lend in excess of 70% LVR.

For example, if a project involves the construction of six townhouses with an independent valuation of $3 million ($500,000 per townhouse), the loan advanced will generally not exceed $2.1 million ($350,000 per townhouse). Conservative LVRs help to guard against

potential property price downturns.

The risks of mortgage funds vary depending on the borrowers and the purpose of the loans. As with any investment, it must meet your individual needs, so seek professional advice before making a decision.

For a short explanation on how mortgage funds work, you can view our new “Trilogy Monthly Income Trust” introductory video at

www.trilogyfunds.com .au/tmit

Mortgage trusts: A viable option for income seekersGARY CONNOLLY | BUSINESS DEVELOPMENT MANAGER