The SVB story – stop me if you’ve heard this one
What would you think if you looked at an institution and found its depositors were almost exclusively from a particular industry? Then, you investigated its borrowers and found they were overwhelmingly from that same narrow industry? Then you look at where these assets are located and realise they are significantly from within a common geography?
Consider then, that this same institution maintained what can only be described as a cavalier approach to interest rate risk, while also falling outside the scope of regulation that would have required it to meet transparency requirements of its larger counterparts. Now finally, consider what might happen to that institution when interest rates rose at the fastest pace on record.
This, ultimately, was to become the tale of the Silicon Valley Bank.
The Fundamentals of Investing
In a volatile economic environment, as in all points in the economic cycle, the fundamentals of sound investment management do not change. For longer term investors with La Trobe Financial, you will have heard us preach our three ‘golden rules’ of investing: simplicity, diversification and patience. Three golden rules which have proven to work again and again for investors across all economic cycles. The demise of Silicon Valley Bank serves as a timely reminder of the importance of maintaining strong investment fundamentals such as these.
The La Trobe Financial Story – Fundamentals Driving Performance
Simplicity: Simple Structures
The structure of any investment magnifies its results. Paraphrasing Warren Buffett’s famous adage, ‘investing is not like Olympic diving – you don’t get bonus points for degrees of difficulty’. Complex structures should represent a red flag for investors and are anathema for credit and mortgage investments.
In contrast, La Trobe Financial places simplicity at the heart of its strategies. They are transparent, intuitive and easy to understand, recognising the importance of matching assets with liabilities, controlling (and actively managing) for risk, and delivering consistency in the outcome for investors.
Diversification: Strength in Assets
The performance of the assets in a portfolio drive the investment outcome for investors. Which is why it’s imperative that a manager constructs a pool of highly diversified, quality assets, which will help to protect investors during periods of market volatility or stress.
At La Trobe Financial, we established each of our portfolio investment accounts on the simple premise that a diversified portfolio of high-quality, highly granular mortgage assets performs across the cycle – and that fundamental belief is as strong now as ever.
We have long spoken about the importance of diversification in the construction of our portfolios. And those portfolios have been built with discipline over time: the careful selection of granular asset exposures, diversified across sector, loan size, borrower type, and security location.
In fact, our Credit Fund of $9.3 billion (February 2023) comprises 12,640 loans with an average loan amount of $694,542 and an average loan-to-value ratio of 64.8%. Geographically our assets follow the population, ensuring they remain within the broadest and deepest markets. Our asset bias sits towards the stability of the residential asset class, with targeted exposure into commercial, light industrial, rural, vacant land and development finance.