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, NorthSydney 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 Australian ShareValue Style Commentary
Benefits and risks of Australian shares
/ When you invest in Australian shares, you effectively own a “share” in companies listed on the Australian share market.Things to consider:
- Returns are driven by many factors including the economic environment, as this tends to influence company profit expectations.
- The Australian share market is currently dominated by a few industries such as Materials, Financials and REITs.
- Australian shares may provide tax advantages through dividend imputation (franking) credits.
- Australian shares can be volatile and are usually included in a portfolio for their growth characteristics.
Objective
/ Your Fund aims to deliver growth by using investment managers who invest and diversify across many companies and securities within the Australian Share Value Style asset class.How you can assess performance
/ You can assess the performance of your fund against its Market Benchmark over a full market cycle. When making this assessment, be aware that the Market Benchmark does not take into account fees and taxes that may apply to your account.The MLC Australian Share Value Style Fund is expected to outperform the S&P/ASX 300 Accumulation Index over rolling 5 year periods. The Fund uses investment managers who have an investment style focusing on companies that they believe are undervalued in relation to their earning potential.
Where MLC invests your money
/ The Fund invests primarily in companies listed (or expected to be listed) on the Australian Securities Exchange. It may have a small exposure to companies listed outside of Australia from time to time.We primarily use investment managers who have an investment style focusing on companies that they believe are undervalued in relation to their earning potential.
Executive summary
/ What a difference a few months makes. In our June quarterly, we reported that the Australian market’s financial year return was the worst for 27 years. Here we are barely three months later and the market’s one year return, 8.5%, is back into positive territory. Seven consecutive months of positive returns since the market bottomed in March has contributed to this turnaround in performance. This welcome recovery has been in response to tentative signs of economic recovery, better global credit market conditions and a reporting period in August-September that revealed company profits hadn’t fallen as much as the market was expecting.Most Australian market sectors recorded positive returns but a standout performer was Financials (excluding Property Trusts) which increased by 24.5% over the year. The major banks and insurance companies reside in this sector and as we will highlight later, your portfolio has been well positioned to capture the high returns that a number of them have delivered.
There has been some evidence of investors moving into ‘cyclical’ companies, which are those who do well when economic activity improves. This is in anticipation of an economic recovery, both here and overseas. Your portfolio has also benefited from this trend via ownership of Bluescope Steel, Fairfax Media and Alumina Ltd.
Your return in the year to 30 September was 11.5% (before fees and tax) and this was 3% higher than the market’s. This is a good outcome in a particularly difficult period for markets and reflects the good returns recorded by your managers.
Maple-Brown Abbott achieved a return of 12.4% in the year to 30 September while Dimensional’s return was 9.9%. Both managers returned more than the market’s.
The table outlines the performance
/ Performance to 30-Sept-09 / Product / 5 Years % p.a. / 3 Years % p.a. / 1 Year % / 3 Months %MLC Australian Share Value Style Fund
(takes into account fees) / MLC Wholesale / - / 1.6 / 10.4 / 25.6
MLC Australian Share Value Style Fund
(takes into account fees and tax) / MLC Masterkey Super Fundamentals / - / - / 9.3 / 24.2
MLC Masterkey Gold Star / 7.5 / 1.6 / - / -
MLC Australian Share Value Style Fund
(before taking into account fees and tax) / MLC Wholesale / Masterkey Super / 9.3 / 2.4 / 11.5 / 26.0
S&P/ASX 300 Accumulation Index / 9.9 / 1.6 / 8.5 / 21.6
Absolute and Market Relative Returns
/ The following graph shows how your Australian Shares Strategy has performed (better or worse) compared to the market, rolling through time. The return of the market index is represented by the horizontal line. If the rolling excess return line is above the horizontal line, your strategy has “outperformed” the index, and vice versa. This is a better way for you to assess the returns you are receiving from MLC, rather than looking at return at a single point in time (as in the table above).As you can see from the graph, your one year return versus the market’s has improved and for much of the last year, it has remained above the market’s. This is because many of the stocks that have been chosen by your managers have performed well. For example, the share prices of Macquarie Group and Goodman Fielder, both significant exposures in your Fund, increased by 59% and 20% over the year.
As you may have observed from the performance chart, there have been periods when your return has lagged (underperformed) the market’s. This has tended to be during highly speculative market periods such as 2005-2007 when market returns were driven by a very narrow range of companies such as BHP Billiton. This underperformance lasted for some time, which is why your rolling five year return remains below the market’s. Note though that while your five year return has lagged the market’s, it is still a positive absolute return, 9.3% pa.
The graph shows returns of your Australian Share Value StyleStrategy compared to its market benchmark
/Your managers
/ The composition of the Fund’s manager strategy is designed to achieve a portfolio of Australian shares with a specific and pronounced ‘value’ style bias. The Fund is managed by two managers, Dimensional and Maple-Brown Abbott, who are longstanding and experienced value investors. They are managers who prefer companies who are selling at prices they consider cheap.Irrespective of the market environment, MLC believes that appointing a number of different managers is far preferable to a strategy that relies on just one manager for stock selection. While both managers MLC has appointed are “value” oriented in their stock selection, they apply different techniques in their search for value companies (refer to the following Manager summary table). Therefore, by appointing two value managers, Fund investors aren’t dependent on just one definition of value. The Fund’s managers provide the required pronounced style characteristics while still providing diversification of insight.
A multi-manager approach also gives you access to the value opportunities available in the broad market. As shown in the following table, Dimensional tends to have a bias to small companies while Maple-Brown Abbott typically finds value amongst medium-large companies.
The following chart showing manager specific returns versus the market indicates that both managers have outperformed in the last year. Dimensional has delivered returns in excess of the benchmark in all periods shown to 30 September. The main contributors to their one year excess return included ownership of strong market performers such as Macquarie Group, Lend Lease, Brickworks and not owning Telstra.
The principal performance drivers of Maple-Brown Abbott’s positive excess return in the last year were National Australia Bank, ANZ Bank and Goodman Fielder.
Manager summary table
Manager / Style / Tailored mandate? / Key role in strategy / Key performance pointsDimenstional (DFA) / Deep Value, small stock bias / Yes / Volatile market relative performance / Small stock returns lagging large
Maple-Brown Abbott / Traditional Value, long term, medium-large stocks / Yes / Performs well in down markets, lags in latter stages of bull market / O/W ANZ, Nat. Aust. Bank, CC Amatil, Goodman Fielder
Note: These are our judgements and the actual outcomes may differ to this. It is difficult to explain the role of any manager in a few words. Details of overall expectations were discussed in our Strategy Enhancement document.
The graph shows manager excess returns vs index
/Strategy exposures
/ As the following chart shows, your strategy is invested in a range of different sectors and industries. It is important that you have a diversified portfolio, otherwise your wealth and returns may become too dependent on too few sectors (and stocks), especially if those sectors of the economy are experiencing tough times. Note though that these sector exposures are an outcome of the stock selection decisions that have been made by the two managers in your strategy.Sector exposure as at 30 September 2009
/This table shows the top ten stocks by portfolio weight in the MLC Australian Share Value Style Portfolio as at 30 September 2009
/ Stock Name / Industry Sector / Portfolio WeightNATIONAL AUSTRALIA BANK / Financials / 6.8%
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED / Financials / 6.2%
WESFARMERS LIMITED / Consumer Staples / 4.4%
MACQUARIE GROUP LTD / Financials / 3.9%
SUNCORP-METWAY LTD / Financials / 3.8%
WESTPAC BANKING CORPORATION / Financials / 3.6%
TELSTRA CORPORATION LTD / Telecommunication Services / 3.1%
BRAMBLES LIMITED / Industrials / 2.4%
BLUESCOPE STEEL LIMITED / Materials / 2.4%
AMCOR LIMITED / Materials / 2.3%
Stock story
/In recent years, the market’s attention has been focused on identifying the Australian companies who may be beneficiaries of China’s economic expansion. Resource and energy based companies have been singled out as the prime beneficiaries and their share prices have, until recently, been understandably strong.
However, many resource and energy companies have tended to be performance laggards in the last year. Instead, the outperformance baton has been handed to the major banks. The upward sloping line in the above chart shows the share prices of financial stocks, including the banks, have increased at a faster rate than the market since March.
Without exception, the big 4 banks have outperformed the market by significant margins in the last twelve months. ANZ is up by 30% in the year, National Australia Bank by 27%, Westpac by 22% and Commonwealth by 21%. While you may have a qualified opinion of banks, the fees they charge and their service standards, their investment appeal and recent performance has been outstanding. Their performance strength, both share price and profitability, is even more impressive considering the difficulties that many of their offshore banking counterparts have experienced during the global financial crisis.
There are a number of reasons for their investment appeal and their impressive share price performance:
- Australia’s big 4 banks entered the global financial crisis in relatively good shape;
- The market has strongly supported bank capital raisings over the last 1-2 years, which has left the banks well capitalised and able to sustain any increase in bad debts associated with the economic slowdown;
- The Federal Government’s guarantee has enhanced the banks’ safe-haven status and enabled them to attract retail deposits, which represent a comparatively cheap source of funds for lending.
However, it is the transformation of the competitive landscape in favour of the big 4 banks, with a commensurate increase in their market share, that has attracted investors. For example, Commonwealth Bank has acquired mortgage provider Wizard and a stake in Aussie Home Loans while also buying BankWest. St George Bank was purchased by Westpac and NAB has acquired the mortgage operations of Challenger. ANZ has taken a different growth path via the acquisition of Asian banking assets previously owned by Royal Bank of Scotland.
It is a widely held view in the market that the dominant position the banks have achieved should translate into higher profits, especially when Australia’s economic environment improves.
Your portfolio has been well positioned to capture the banks’ significant share price upside. At the end of September, Westpac, National Australia Bank and ANZ were owned, accounting for 16.6% of your strategy. In addition, Macquarie Bank and Suncorp-Metway feature prominently as well.
Your managers have also used the recent capital raisings to top-up your holdings at prices that now appear to be very cheap. An example is National Australia Bank’s share offering in July this year when shares were acquired by your managers at $21.50 each. At the end of September, these shares were selling at $30.76 on market, a gain of 43%.
MLC review for the year ending 30 September 2009Page 1 of 9