How an Australian mortgage trust could help meet your retirement income needs

Economists and historians will no doubt hark back to 2020 as not just the year of Covid-19 but of higher unemployment and ultra-low interest rates, of stockmarket upheaval and Australia’s first recession in almost three decades.

If you’re a retiree in 2020 or hope to become one in 2021, though, the thing you’ll probably remember was just how difficult it was to supplement your superannuation and Age Pension income. After all, that future-you will probably still be living with the investment decisions you made in 2020!

Future-you will hardly blame 2020-you for looking at the interest rates and thinking that the returns weren’t going to provide much of an income boost over the intervening years.

Future-you may be rejoicing over the capital gain on any residential property purchase you make now but capital-city rental yields have been on a downward trend for at least the past decade to 2020 so don’t look like a winning choice for income going forward either.

Whether future-you congratulates 2020-you for opting to put your money into equities – well, who knows?

Equities can be an income rollercoaster

The adage is that ‘shares always go up’ but it’s easy to forget that it’s rarely in a straight line and sometimes only over years or decades, with what can be substantial downturns in between. For example, if you’d invested in the key Australian stock index in 1970, you’d have picked up an average return of 9.4 per cent per annum up to now.

But numbers can be misleading. What that return of 9.4 per cent doesn’t tell you is that between 1970-1975, Australian shares lost more than half their value – value the index didn’t completely recover until 1978.

And fresh in our memory is the first few months of 2020, when the S&P/ASX200 fell nearly 40 per cent. As of mid-November, the index hadn’t recovered to its pre-Covid-19 level – and many retirees reliant on a super income stream are living on reduced drawdowns to protect their balance while this recovery takes place.

Philip Ryan, a long-time personal investor and the managing director of Brisbane-based fund manager Trilogy, remembers the thrills and spills of his early years as an investor.

“It was 1974 and the insurance industry had taken a pounding following devastating floods in Brisbane and the impact of Cyclone Tracey in the north of the country,” he recalls.

“I took the money I’d saved from my after-school job and invested in an insurance company whose share price had plummeted amid the natural disasters. When the value rebounded in my favour, I was hooked and couldn’t wait for my next opportunity.

“But it wasn’t all plain sailing in my early days as an investor. I bought into the finance company controlled by Reg Ansett and when that company collapsed, I learned a tough lesson – I lost 100 per cent of my investment.

“The ‘80s also proved challenging too, especially the 1987 crash, where I was again forced to look inward and try to assess my own investment profile and tolerance to risk. I certainly endured a few sleepless nights.”

Sleepless nights caused by investment worries aren’t fun at any age but they’re particularly unenjoyable when you’re near or in retirement. At this stage, you may be more focused on capital preservation and competitive returns.

“When you’re young, diversification isn’t such a big thing [because] you have time to recover from any mistakes you make along the way,” Trilogy’s MD says. “But as you get older, you have to look at the fact that not everything you touch will turn to gold, so in your 50s and 60s, investing isn’t just about generating wealth but preserving it – and you can only do that through diversification.”

Trilogy offers income AND diversification

Ryan understands that older investors want carefully risk-managed sources of income that can also help them diversify their investment portfolio. That’s why he co-founded Trilogy in 2004 with the aim of providing just that, chiefly through pooled investments in Australian residential and commercial property.

One of Trilogy’s earliest investment products – and still one of its most popular – was the Trilogy Monthly Income Trust, which has been providing investors with competitive monthly returns since 2007. Its November 2020 distribution to investors was 6.56 per cent per annum^[1].

You can read more about mortgage trusts and the long history of the Trilogy Monthly Income Trust here but ultimately, the trust uses a pool of investors’ funds to provide short-term loans to the building and property development sectors in Australia. Such loans can be hard for builders and property developers to obtain from other lenders, so risk-based pricing may mean different rates between residential construction and residential stock loans.

The income from the loans is combined with income from cash holdings and any other investments to generate the Trilogy Monthly Income Trust’s monthly distributions to investors. Income distributions are calculated daily and distributed monthly in arrears. They are also variable.

Trilogy’s team of property and investment experts carefully manage the risk to investors’ funds by ensuring the Trilogy Monthly Income Trust provides loans only as ‘registered first mortgages’ that are secured on a wide range of residential, commercial, industrial and retail developments across Australia. Holding registered first mortgages means the Trilogy Monthly Income Trust is the first commercial debtor to be repaid in the case of default, while the number and variety of developments the trust holds dilutes the default risk.

The Trilogy difference

While personal investors have many Australian mortgage trusts to choose from, Trilogy is recognised as a leader in the field.

In November 2020, independent ratings agency Australia Ratings^[2] upgraded the Trilogy Monthly Income Trust from ‘strong’ to ‘very strong’ due to its consistent performance through the Covid-19 pandemic, the level of diversification in the trust’s holdings and the high degree of management oversight of the trust’s portfolio.

“The ratings also indicate the high level of confidence Australia Ratings has that the funds will continue to deliver a strong risk-adjusted return,” analyst Maggie Callinan says.

As a long-time personal investor, Philip Ryan knows the importance of achieving competitive returns while carefully managing investment risk.

“I understand how difficult it can be, even with today’s wide range of investment options, to obtain a competitive rate of return … I’ve seen first-hand the difference receiving a return of 6-7 per cent per annum, rather than 1-2 per cent, can make to your lifestyle,” he says. “[And] I know how important it is to be comfortable with the risk inherent in an investment.”

How to invest with Trilogy

The first step is to obtain a copy, read fully and understand the Product Disclosure Statement (PDS).

There are no entry or exit fees for the Trilogy Monthly Income Trust but it does have a minimum investment of $10,000. You can choose to have your monthly income distributions paid to your bank account or to reinvest them in the trust, and the minimum further investment is just $1,000.

It’s important, though, to understand that the Trilogy Monthly Income Trust isn’t an at-call investment. Trilogy advises investors to think of the trust as having a minimum six-month term because you must wait two months after your initial investment to give notice that you wish to withdraw funds, then provide four months’ notice for any withdrawal after that.

If you’d like to know more about Trilogy the role the Trilogy Monthly Income Trust could play in your income-producing portfolio, you can learn more here.

[1] The net distribution rate paid to investors for the month ended 30 November 2020. Net distributions are variable each month and are quoted net of management fees, costs and assume no reinvestment. Distributions are calculated daily and paid monthly in arrears. Please note, past performance is not a reliable indicator of future performance.

[2] The Australia Ratings report is used for information purposes only and does not constitute a recommendation or an offer or solicitation to purchase any fund or company securities offered by Trilogy Funds Management (the manager). Investors should refer to the full disclaimer on the manager’s rated funds that can be found at http://www.australiaratings.com/.

TRILOGY INFO This article was prepared in partnership with Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the Trilogy Monthly Income Trust ARSN 121 846 722 and Trilogy Enhanced Income Fund ARSN 614 682 469. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 17 December 2018 and by considering the Target Market Determination (TMD) dated 1 October 2021 for the Trilogy Monthly Income Trust ARSN 121 846 722 and PDS dated 28 July 2020 and TMD dated 1 October 2021 for the Trilogy Enhanced Income Fund ARSN 614 682 469 available at www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section prior to lodging any application or making a further investment, together with the TMD. All investments, including those with Trilogy Funds, involve risk which can lead to loss of part or all of your capital or diminished returns. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy Funds are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.