Fund Profile & Commentary 30 September 2008 Mortgage Income Fund Issued by Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468. The investment information in this option profile is historical, produced as at the date specified above. We may change asset allocation and securities within the option at any time. Past performance is not an indicator of future performance for this option or any other option available from Colonial First State. 3 months 1 year 3 years 5 years 7 years 10 years Inception (%) (%) (%) pa (%) pa (%) pa (%) pa (%) pa Total 1.77 6.20 5.84 5.67 5.46 - 5.54 Distribution Return 1.77 6.20 5.84 5.67 5.46 - 5.54 Growth Return 0.00 0.00 0.00 0.00 0.00 - 0.00 UBS Australian Bank Bill Index 1.93 7.65 6.69 6.25 5.82 - Returns are calculated on an annualised basis using exit price to exit price with distributions reinvested for investments, net of taxes payable, management but excluding contribution fees, member fees, adviser service fees and individual taxes (if applicable) and plan services fees (For Employer Super only). The ‘distribution’ component represents the amount paid by the way of distribution, including ne realised capital gains. Investment objective To provide a consistent monthly income, while minimising the risk of capital Key data loss, by predominantly investing in a broad selection of Australian-based Size of Management Date mortgages, fixed interest investments and cash. option ($m) cost* established $912.52m 1.15% Aug 1999 Investment strategy * Management costs include management fees, estimated performance fees (if applicable), investment expenses and custody fees but do not include contribution fees, transaction costs or The fund’s strategy is to invest in a broad selection of Australian-based additional service fees which may also apply. Please refer to the PDS for full details of the mortgages, fixed interest investments and cash, placing emphasis on applicable fees and costs. the management of credit risk. The fund does not purchase securities that give rise to material currency risk and Special information Investment category 1 Important change effective 24 October 2008 Fixed interest and cash 2 3 Colonial First State has suspended applications, withdrawals and 4 switches relating to this option. We are writing to investors about what this decision means for them. We will continue to make pension payments Minimum suggested time frame 5 and pay distributions to investors. Our intention is to process withdrawals 3 years 6 on a quarterly basis, from the available cash from the fund. 7 Investment ranges 8 This decision has nothing to do with the overall underlying strength and Range Benchmark 9 quality of the investments held by this option, which are unchanged. Cash and fixed interest 0% - 100% 100% 10 Why take this action? Income distributions We have been prudently managing the option and, until Friday 24 October Cents per Franking Realised 2008, have been well placed to process withdrawals and switches. This unit level capital gain situation has changed suddenly as most funds in the market with mortgage investments suspended withdrawals. Total 07/08 5.77 0.00% 0.00% Total 06/07 5.72 0.00% 0.00% By suspending this option, we can take a measured approach to processing withdrawals. Colonial First State’s decision has been made in Investment Allocation the best interests of investors to ensure all investors are treated fairly. Allocation Value Mortgages 80.5% $734.21m If there is anything you would like to discuss please contact your financial adviser or call us on 13 13 36, Monday to Friday, 8am to 7pm, Sydney Mortgage backed securities 19.0% $173.56m time. FS1822 Fund Profile & Commentary 30 September 2008 Mortgage Income Fund The Colonial First State Income option (“Option”) may have a significant The following tables and graphs provide a summary of the mortgage exposure to mortgage investments. fund that the option invests into: Mortgage split by nature of development What are Mortgage Investments? Type Number of Value ($m) % of value mortgages Mortgage investments are generally investments with an exposure to a Construction 5 $13.04 0.67% portfolio of mortgages. The investment may be direct or indirect. Improved Industrial 233 $501.21 25.93% Improved Office 140 $515.67 26.68% Industry and regulators have identified and developed a number of Improved Residential 53 $89.37 4.62% benchmarks that apply to unlisted mortgage investments. Information on these benchmarks is set out below. Improved Retail 232 $758.31 39.23% Pre-development Land 7 $37.10 1.92% The benchmarks are as follows: Specialised 9 $17.33 0.90% Vacant Land 1 $0.97 0.05% 0% Construction 1% 2% 1% Liquidity Improved Industrial 26% Improved Office An option uses cash to fund its operations including making loans, Improved meeting withdrawals and paying distributions. If sufficient cash is not 38% Residential available this may affect the ability to meet funding obligations, Improved Retail withdrawals, operational costs and the level of distributions. Pre-development Land For the purposes of this benchmark, liquidity is the proportion of cash or Specialised cash equivalents held by a fund/option. Generally, we endeavour to manage these types of liquidity risk through the following processes: 27% Vacant Land 5% • adopting liquidity risk measures and profiles including the terms of redemption, changes in market liquidity conditions and funding provided Mortgage split by type to the fund; Type Number of Value ($m) % of value • managing the terms of agreements with lenders and investors to best mortgages protect the fund’s interests; • applying credit and lending principles and agreements including those Residential 53 $89.37 4.62% terms which will impact funding and the overall risk of the fund including Commercial 140 $515.67 26.68% hedging cash flows; Industrial 233 $501.21 25.93% • monitoring events which may increase liquidity risk; and Retail 232 $758.31 39.23% • reviewing alternative sources of funding. Other 22 $68.44 3.54% Scheme borrowing 3.5% 4.6% We generally do not borrow on a long term basis but may borrow on a Residential short-term basis for settlement purposes or in unusual or extraordinary 26.7% Commercial circumstances. 39.2% Industrial Retail Portfolio diversification Other We aim to ensure that we hold exposure to a sufficiently diversified pool of mortgages to reduce the impact of any one group of mortgage investments on risk or returns. These mortgages are diversified by 25.9% geographic region and by property type/sector. There are geographic limits (loan security property locations) for each state as a maximum of the total Fund value. In addition there are limits placed on the holdings in each of the various property sectors (ie Industrial, Office, Retail and Residential). The maximum size of any individual loan exposure is to be limited to the lesser of $100m or 10% of the total fund value. We currently do not invest in, nor do we have a policy of investing in, unlisted mortgage schemes operated by other responsible entities. The fund uses interest rate swaps to manage interest rate volatility. Fund Profile & Commentary 30 September 2008 Mortgage Income Fund Loans where interest has been capitalised Proportion of total loan monies lent Number of Value ($m) % of value Value ($m) % of value mortgages Largest borrower $69.25 3.58% 6 $23.46 1.21% Ten largest borrowers $449.12 13.84% Nature of security for loans Undrawn loan commitments Nature of security Number of Value ($m) % of value Nature of security Number of Value ($m) % of value mortgages mortgages First mortgage 680 $1,933.00 100.00% Approved but not advanced 2 $57.63 2.98% Second mortgage 0 $0.00 0.00% Funding commitments in place 6 $3.06 0.16% Other 0 $0.00 0.00% Proportion of loans in default or arrears Maturity profile Duration Number of Value ($m) % of value Time to maturity Number of Value ($m) % of value mortgages mortgages < 30 days 5 $5.95 0.31% < 1 year 102 $246.42 12.75% < 30-60 days 3 $25.37 1.31% 1 – 2 years 163 $497.16 25.72% < 60-90 days 3 $62.72 0.32% 2 – 3 years 194 $479.38 24.80% 90+ days 8 $31.42 1.63% 3 – 4 years 150 $416.33 21.54% 8.7% 4 – 5 years 69 $293.08 15.16% > 5 years 2 $0.64 0.03% 0% 12.7% < 30 days 15.2% 45.7% < 30-60 days < 1 year < 60-90 days 1 – 2 years 36.7% 2 – 3 years 90+ days 3 – 4 years 21.5% 25.7% 4 – 5 years > 5 years 9.0% 24.8% LVR for loans LVR Number of Value ($m) % of value mortgages Mortgage split by geographic region 0% – 10% 11 $0.21 0.01% State Number of Value ($m) % of value 10% – 20% 9 $2.87 0.15% mortgages 20% – 30% 21 $23.38 1.21% NSW 354 $1,080.05 55.87% 30% – 40% 39 $89.89 4.65% Vic 130 $361.66 18.71% 40% – 50% 70 $123.98 6.41% Qld 175 $395.68 20.47% 50% – 60% 105 $288.40 14.92% WA 7 $39.44 2.04% 60% – 70% 338 $1,009.94 52.25% SA 5 $17.84 0.92% 70% – 80% 87 $394.34 20.40% Tas 4 $4.36 0.23% 80% – 90% 0 $0.00 0.00% ACT 4 $32.95 1.70% 90% – 100% 0 $0.00 0.00% NT 1 $1.02 0.05% 0% 0.2% 1.2% 0.2% 1.7% 0% 0% – 10% 0.9% 0% 4.7% 0.1% NSW 2.0% 6.4% 10% – 20% Vic 20.4% 20% – 30% 20.5% Qld 14.9% WA 30% – 40% SA 40% – 50% Tas 55.9% ACT 50% – 60% NT 60% – 70% 18.7% 70% – 80% 52.3% Fund Profile & Commentary 30 September 2008 Mortgage Income Fund Fixed rate Security properties are valued on the following basis: Interest rate Number of Value ($m) % of value mortgages - ‘as is’ basis – all valuations; - ‘as if complete’ basis for construction loans in addition to the ‘as is’ >9.00 15 $31.34 1.62% basis; 8.51-9.00 14 $70.23 3.63% - ‘vacant possession’ basis for owner occupied properties. 8.01-8.50 34 $126.08 6.52% 7.51-8.00 44 $104.17 5.39% Lending Principles 7.01-7.50 86 $232.72 12.04% 6.51-7.00 30 $154.22 7.98% We only provide loans which meet the following general criteria: <6.50 2 $27.18 1.41% • mandatory registered first mortgage security over real property is held; Variable rate • borrower has a demonstrated ability to meet loan obligations; Interest rate Number of Value ($m) % of value • a satisfactory valuation is carried out by one of the qualified and mortgages independent Colonial First State panel valuers ; >9.00 299 $579.90 30.00% • due diligence review of loan funding proposal inclusive of full financial 8.51-9.00 141 $551.81 28.55% analysis/assessment, credit reference checks, review of security property 8.01-8.50 valuation/s. 15 $55.36 2.86% 7.51-8.00 0 $0.00 0.00% On establishment of a new mortgage, the applicable maximum loan-to- 7.01-7.50 0 $0.00 0.00% valuation ratios (LVRs) will generally apply: 6.51-7.00 0 $0.00 0.00% - 75% for improved property; <6.50 0 $0.00 0.00% - Maximum LVR of 70% will apply for construction type lending (based on lesser of hard cost or end valuation ‘upon completion’); - Maximum 60% for any owner occupied property transactions. 38.6% Distribution Practices Fixed rate Variable rate An investor’s entitlement to distributions will be based on the income 61.4% which is earned. Our policy is to only distribute income that has been earned. We do not forecast distributions. Withdrawal Arrangements Withdrawal requests are generally processed within seven working days. Related Party Transactions Generally, a further period of up to 60 days is allowed for withdrawals under the managed investment scheme Constitution . In some circumstances the maximum period allowed for withdrawals may be We may be involved in related party transactions. Any related party extended for up to a further 28 days. transactions are completed on an arms length basis and are assessed against the market to ensure that they are completed on commercial Withdrawal requests made for a non-superannuation or non-pension terms. We may put in place arm’s length commercial arrangements with investment option which is illiquid can only be made in accordance with major banks or financial institutions to purchase mortgage assets from us. the Corporations Act. This restricts your ability to withdraw from the managed investment scheme option. If the option becomes illiquid we will inform you in writing. Valuation Policy An option may experience difficulty in selling an asset for cash without an We use a panel of external valuers to provide sworn valuations over adverse impact on the price received. This risk may particularly affect security property. Appointment to the panel is subject to defined primary your ability to withdraw your investment from a fund/option that has criteria based upon minimum qualifications, experience, references, significant investments in mortgages. minimum professional indemnity insurance cover etc. Valuations are dated no longer than three months prior to the advance of any loan funds. Where a fund or option is suspended, restricted or terminated we may not We aim to spread the valuations between valuers dependent upon process withdrawal requests and your regular withdrawal plan from this location and specialty of the valuer/firm (e.g. large retail). When fund or option will stop. Any decisions whether to process withdrawals or mortgages are renewed we prefer to rotate the valuer if possible so that partial withdrawals will be made in the best interests of investors as a consecutive valuations are not obtained from the same valuer. whole, and if any payment is to be made, then the exit price used to calculate this payment will be the one determined at the time payment is Sworn property valuations from panel valuers are instructed (under made. comprehensive defined formal instruction) and obtained at the inception of each loan (dated within three months at the date of funds being Credit Risk advanced) and again when each loan is assessed at the time of loan term Mortgage investments are also exposed to credit risk. This is the risk that expiry/renewal. a party to a credit transaction fails to meet its obligations such as when a borrower defaults in payment under a mortgage, mortgage backed Outside of these times, if we consider it warranted, we obtain additional security or a fixed interest security. valuations which would normally be at the expense of the borrower. Further information to help you understand credit risk and mortgage investment risk is outlined in the Understanding Investment Risk section in Part 1 of the PDS. Fund Profile & Commentary 30 September 2008 Mortgage Income Fund performance and outlook Market Review Key economic data released in Australia during the September Recent returns have been negatively affected by the financial quarter indicated that in the 12 months to June 2008 inflation had market volatility. Since the beginning of the year there has been a moved up to 4.5% while economic growth had slowed from 4.2% to quite dramatic tightening in the property lending market, which has 2.7%. This prompted the Reserve Bank of Australia (RBA) to led to falls in the market value of mortgage-backed securities. reduce interest rates from 7.25% to 7%, and they were subsequently reduced to 6% in October. Nevertheless, the investments continue to earn stable, reliable interest income. The current interest rates on mortgage and The RBA is forecasting that inflation will fall below 3% during 2010 mortgage-backed securities have risen to their highest levels since despite firm commodity prices, job growth, wages growth, tax cuts 1995, and are currently averaging around 8% pa. This should mean and infrastructure spending. It believes that high interest rates, that clients can expect a higher level of income in the future, which weak home lending, lower retail spending and the global financial will more than compensate them for any short term capital losses. crisis could slow demand. Consequently, the market is expecting These capital losses are temporary as at maturity the principal of more rate cuts. each bond will be repaid in full. Furthermore, any new inflows into the fund will be used to buy new securities that deliver higher interest, adding to future returns for the fund. The sub-prime inspired credit crisis is still negatively affecting short-term borrowing. Lenders remain wary about parting with their The large mortgage portfolio comprises 680 individual loans for a cash, and continue to demand higher interest rates than six or nine total of $1.9 billion and remains highly diversified across the months ago. Term deposits and other domestic bank accounts are following sectors: insufficient to provide Australia’s banks with the quantity of money they need to meet their lending requirements. Consequently, they o Industrial 25.93% have to raise money via offshore borrowing, and offshore rates o Office 26.68% have increased dramatically due to the credit crisis. o Residential 4.62% o Retail 39.23% In offshore markets, inflation concerns gave way to heightened o Construction 0.67% worries about global economic growth. Early in October, the US, o Pre-development Land 1.92% UK and European central banks all cut rates by 0.5% in a co- o Specialised 0.90% ordinated global action. o Vacant Land 0.05% Currently 39% of the Fund’s mortgages are at a fixed rate with 61% variable. To achieve our objective of low volatility all fixed rate loans are swapped out to floating rates. . This document provides general advice only and is not personal advice. It does not take into account your individual objectives, financial situation or needs. Product Disclosure Statements (PDSs) for all Colonial First State products are available at colonialfirststate.com.au or by contacting Investor Services on 13 13 36 or from your financial adviser. You should read the relevant PDS and assess whether the information in it is appropriate for you, and consider talking to a financial adviser before making an investment decision. Commonwealth Bank of Australia and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital by the products. Investments in these products are not deposits or other liabilities of the Commonwealth Bank of Australia or its subsidiaries and investment type products are subject to investment risk including loss of income and capital invested. Information used in this publication, which is taken from sources other than Colonial First State is believed to be accurate. Information provided by the Investment Manager are views of the Investment Manager only and can be subject to change. Subject to any contrary provision in any applicable law, neither Colonial First State nor any of its related parties, their employees or directors, provides any warranty of accuracy or reliability in relation to such information or accept any liability to any person who relies on it.
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