MLC Annual Review
September 2009
MLC Investment Management
Level 12, 105 –153 Miller Street
North Sydney NSW 2060
Important information
This information has been provided by MLC Limited (ABN 90 000 000 402) a member of the National Group, 105-153 Miller Street, North Sydney 2060. This material was prepared for advisers only.Any advice in this communication has been prepared without taking account of individual objectives, financial situation or needs. Because of this you should, before acting on any information in this communication, consider whether it is appropriate to your objectives, financial situation and needs. You should obtain a Product Disclosure Statement or other disclosure document relating to any financial product issued by MLC Investments Limited (ABN 30 002 641 661) and MLC Nominees Pty Ltd (ABN 93 002 814 959) as trustee of The Universal Super Scheme (ABN 44 928 361 101), and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the Product Disclosure Statement or other disclosure document is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au.
An investment in any product offered by a member company of the National group does not represent a deposit with or a liability of the National Australia Bank Limited ABN 12 004 044 937 or other member company of the National Australia Bank group of companies and is subject to investment risk including possible delays in repayment and loss or income and capital invested. None of the National Australia Bank Limited, MLC Limited, MLC Investments Limited or other member company in the National Australia Bank group of companies guarantees the capital value, payment of income or performance of any financial product referred to in this publication.
Past performance is not indicative of future performance. The value of an investment may rise or fall with the changes in the market. Please note that all return figures reported are before management fees and taxes, and for the period up to 30 September 2009, unless otherwise stated.
The specialist investment management companies are current as at 30 September 2009. Funds under management figures are as at 30 September 2009, unless otherwise stated. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you.
MLC Horizon 2 Capital Stable Portfolio
About your Portfolio
/ Your MLC Horizon 2 Capital Stable Portfolio is designed to be a complete portfolio solution. It is well diversified within asset classes, across asset classes and across investment managers, who invest in many companies and securities around the world.We are focussed on growing your wealth for a low to moderate level of volatility. We won’t chase risky returns when markets are very strong, which may temporarily result in a lower return than comparable funds that do. At other times, and particularly when markets are weak, we expect your Portfolio to have higher returns than comparable funds.
/ Your MLC Horizon 2 Capital Stable portfolio is invested with a bias towards defensive assets, with some exposure to growth assets. Preserving your capital is an important but not overriding concern.
How we design investment solutions
How we design investment solutions to grow and protect your wealth / Recent Example of this in actionWe design solutions based on investors’ fundamental needs to grow wealth over the long-term. / The extreme market environment of 2007 – 2009 has highlighted the importance of understanding the risk and return characteristics of different assets under multiple scenarios.
During adverse environments, often only “risk free” assets such as cash and government guaranteed bonds deliver positive returns. Every other major asset class may fall in value. This is what occurred in 2008.
In contrast in 2009, so called “risky” assets such as shares, company issued bonds and listed property recovered significantly. Cash and government guaranteed bonds were the laggards of this year.
With the objective of growing and protecting your investments, MLC explicitly models extreme scenarios and their likely impact when constructing your MLC Horizon portfolio. Being clear about your investment timeframe allows us to “look through” such extreme short term environments, and form a view of an appropriate asset mix for the long term. This is your target or strategic asset allocation.
Building on the insights from the multiple scenario analysis, we have recently introduced the concept of a “Strategic Overlay” (SO) to your portfolio. It has been designed to better manage your risks.
Using a 5-7 year prospective assessment of the risk-return trade-off, the SO process will allow MLC to adjust your strategic asset allocation within +/-5% bands. From time to time, your manager allocations within each sector may also be adjusted.
SO will typically reduce risk when sentiment is at its most optimistic and asset prices are high. Conversely, when investors are pessimistic and asset prices are low, there may be an opportunity to benefit from relatively high return potential. Patience can be required to reap this benefit.
SO is likely to be introduced to your MLC Horizon Portfolio over the next three to six months.
The introduction of the SO remains consistent with our belief that a strategic, rather than tactical or short term approach to asset and manager allocation is the most robust method of building and protecting your capital.
We manage the risk in your portfolio by building thoroughly diversified portfolios at every level – asset class, country, currency, industry, company and manager. / You have a small exposure to emerging market bonds to boost the long-term return we expect from your portfolio. Emerging market bonds offer a higher yield (interest rate) than more traditional developed country government bonds because they have greater credit and currency risk due to their political and economic instability. And they can behave differently to the developed world which is why they are used to diversify your debt portfolio’s returns.
Emerging markets bonds have boosted your return in recent months.
You access exceptional investment managers in the world who carefully invest your money in the right businesses and assets. / Despite the extreme conditions over the past year, at 31 March 2009 PIMCO had 12% of their global nominal bonds strategy invested in emerging markets bonds. After capturing strong returns from the recovery in emerging markets, by 30 September they had sold down most of their exposure. Refer to the ‘Investing in emerging markets debt’ at the end of this section.
We keep your investment goals on track because we actively manage your portfolio to stay true to its original intent. / We know that when you select a MLC Horizon Portfolio based on your risk/return objectives and investment timeframe, you expect that strategy to be maintained through time.
This is why MLC ensures your portfolio does not move far away from its strategic target. In the case of the MLC Horizon 2 Capital Stable Portfolio, the target debt/equity mix is 70/30 and the range is +/-5% around this target.
One of the main reasons you benefited from the recent rally was the disciplined rebalancing strategy applied on a daily basis. Allowing your strategy to drift or altering it dramatically could have resulted in you missing the 6 month rally to 30 September. Throughout the last 2 years your exposure to shares has been maintained within +/-2% of your target exposure
As market volatility was abnormally high over the last year, not only did MLC maintain your strategy using daily cash flows but we also formally rebalanced your portfolio a number of times during the year.
For example in 2008, we sold bonds and bought Australian & global shares to maintain your strategy. So at the margin we applied the buy low/sell high principle to preserve your Debt/Equity mix.
When risky assets started to recover in 2009 and daily market returns were abnormally high we formally rebalanced in 2009 by selling Australian shares & buying bonds and global shares.
Without this rebalancing discipline, your participation on the rally could have been significantly lower, resulting in lower returns and perhaps regret around pulling out of the market at its lowest point.
Where MLC invests your money
/ Your portfolio is a complete solution to meet your financial goals. It’s diversified within asset classes, across asset classes and across investment managers who invest in many companies and securities around the world. The main asset classes are shown in the pie chart below.Designing a complete portfolio solution involves much more than simply combining a number of asset classes. Every aspect of our Portfolios is important; from the securities we include and the way in which we mandate investment managers, to the asset classes we use. This is not a set and forget approach; your Portfolio is continuously kept balanced using efficient processes. And your Portfolio evolves through time as we research new opportunities to increase returns or reduce risk.
Target Asset Allocation – Super
/Executive summary
/ After enduring almost 2 years of relentless declines in asset values, it’s wonderful to see some tangible evidence that the world is not about to end and a sustained recovery has commenced. It’s amazing what a difference 6 months can make.As of the 13th October, the Australian sharemarket was up more than 50% from its March 2009 low, the Australian dollar had rallied strongly, corporate bonds yields had declined sharply, and the listed property market had begun its structural recovery. Positive returns were recorded for virtually all risk assets over the year, and the quarter to 30 September 2009.
The impact of these positive factors on your MLC Horizon 2 Capital Stable Portfolio has been nothing short of remarkable. For example, over the year to 31 March 2009, a Portfolio with a defensive mix of 30% growth and 70% defensive assets declined by approximately -9%. Just 6 months later, this return improved to +1% for the year to 30 September 2009 and +6% for the quarter to 30 September 2009.
The last 6 months are testament to the benefits of maintaining your strategy, particularly if your investment timeframe is long term (>5 years).
There is no doubt that the length and severity of the downturn tested the resolve of all investors, irrespective of individual risk appetites. But the enduring lesson is that markets can turn quickly and unexpectedly. Maintaining your exposure to assets such as shares that contribute to economic growth will provide you with premium returns often in short periods of time, as the last 6 months have amply demonstrated.
The table outlines performance
/ Performance to30-Sep-09 / Fund / Survey / 5 Years % p.a. / 3 Years % p.a. / 1 Year % / 3 Months %
MLC Horizon 2 - Capital Stable Portfolio
(takes into account fees and tax) / MLC MasterKey Super Fundamentals / - / - / 1.0 / 5.5
MLC MasterKey Gold Star / 3.3 / 0.7 / - / -
Median Manager / Personal Super Multi-Sector Conservative / 3.8 / 1.5 / 2.3 / 5.8
Returns Consistency since December 2006
% of time rolling return above Median / MLC MasterKey Super Fundamentals / - / - / 45.5 / 67.7
Returns Consistency since August 1992
% of time rolling return above Median / MLC MasterKey Gold Star / 53.4 / 45.3 / 45.4 / 52.7
MLC Horizon 2 - Capital Stable Portfolio
(before taking into account fees and tax) / MLC MasterKey Super / Gold Star / 5.8 / 2.8 / 2.3 / 6.3
Strategic Benchmark / 6.0 / 3.4 / 3.8 / 6.1
Absolute Returns
/MLC review for the year ending 30 September 2009 Page 1 of 11
Contributors to your return
/ · By far the largest contributor to your annual return was your substantial exposure to defensive securities such as bonds.· In particular, the corporate, high yield and emerging market sectors of the global bond market during calendar 2009 have had a strong positive impact on your annual returns. With a focus on delivering long term net real returns, your defensive strategy has had a relatively higher exposure to these sectors than the typical Capital Stable fund. This was a net detractor during the height of the GFC, most notably when Lehman Bros failed in September 2008. But with credit spreads narrowing and investor expectations of economic recovery gaining strength, these sectors delivered strong positive returns over the year and outperformed the safe-haven of government issued bonds and cash.
· Your small exposure to Australian shares also helped. Our domestic market rose 8.5% and significantly outperformed the rest of the developed world (which fell 12% on an unhedged basis), thanks to a more robust financial sector, and ongoing demand for our raw materials supporting the resources sector.
· Enhancing this was the out performance of your MLC Australian share strategy (which rose 12.6%), with 8 of your 10 active managers beating the market. Of particular note was Concord Capital (+22%) and Northcape’s (+22%) performance, driven by their timely purchase of banking stocks and selected cyclical companies (eg James Hardie +58%) which benefited from the sharp change in investor expectations of economic recovery.
· The maintenance of a high Australian dollar hedge on your global assets added significant value. $AUD hedged assets outperformed unhedged assets due to the $AUD appreciating strongly over the year. More than 60% of your total exposure to global shares, bonds and property is hedged back into $AUD to help control the impact of currency fluctuations on your returns.
Detractors from your return
/ · Your small exposure to inflation linked bonds within your defensive strategy also marginally detracted from returns. Inflation linked bonds underperformed traditional fixed interest bonds over the year due to falling expectations of inflation adversely affecting inflation linked yields and market values.The chart shows contributors to your return
/Returns relative to competitors
/ The MLC Super GS Horizon 2 Capital Stable portfolio has delivered disappointing peer relative returns, with 45%, 45% and 53% of observations above median over rolling 1, 3 and 5 years (respectively on a net of fees and tax basis), since inception.Whilst performance was poor during the epicentre of the GFC in both absolute and relative terms, more recently, MLC’s competitive positioning has marginally improved.
The reasons for the soft peer relative returns are that most of MLC’s competitors have strategies that reflect mainstream nominal bond benchmarks whereas the MLC Portfolio tends to have a broader exposure to different types of debt securities. The MLC Portfolio tends to be different in the following ways:
· Overweight Australian inflation-linked bonds relative to Australian nominal bonds.
· Overweight global, and investment grade credit, relative to domestic debt.
· One of the global managers, PIMCO, has a diversified debt mandate which gives them the flexibility to move in and out of the different types of debt, rather than conventional global nominal bond mandates.
· MLC has a strategic allocation to US high yield and within super funds an opportunistic exposure to global bank loans.
· Underweight exposure to cash relative to nominal bonds
The graph shows returns of your Portfolio compared to competitors
/MLC review for the year ending 30 September 2009 Page 1 of 11