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 Horizon 2 Income Portfolio
About your Portfolio
/ Your MLC Horizon 2 Income 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.
YourMLC Horizon 2 Income Portfolio provides a regular income stream with some tax advantages, a high exposure to defensive assets, and some potential for capital growth over the medium term.
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 Income 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 oraltering 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 during 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 on 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 – wholesale
/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 ($AUD) 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 Income Portfolio has been nothing short of remarkable. For example, over the year to 31 March 2009, a Income focussed Portfolio with a defensive mix of 30% growth and 70% defensive assets declined by approximately -11%. Just 6 months later, this return improved to +3% for the year to 30 September 2009 and +8% 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 demonstrated.
The table outlines performance
/ Performance to 30-Sept-09 / Fund / Survey / 5 Years % p.a. / 3 Years % p.a. / 1 Year % / 3 Months %MLC Horizon 2 - Income Portfolio
(takes into account fees) / MLC Wholesale / - / 1.4 / 2.5 / 8.2
Median Manager / IDPS Multi-Sector Conservative / 5.2 / 2.4 / 4.4 / 7.1
Returns Consistency since December 2005
% of time rolling return above Median / MLC Wholesale / - / 0.0 / 20.6 / 44.2
MLC Horizon 2 - Income Portfolio
(before taking into account fees) / MLC Wholesale / 5.6 / 2.3 / 3.6 / 8.7
Strategic Benchmark / 5.2 / 1.9 / 2.6 / 8.7
Contributors to your return
/- Your exposure toAustralian nominal bonds gave your return the biggest boost over the last year. Your strategy invests in nominal bonds with shorter terms to maturity to protect your capital from sharp rises in interest rates. This bias paid off in the first few months of the year, because the Reserve Bank (RBA) of Australia made massive cuts to the official cash rate, from 6% to 3%.
- With interest rates in Australia starting to rise, being diversified across global nominal bonds has helped you capture stronger returns from bonds issued overseas. Government bond yields fell in all major developed countries over the past year as governments slashed cash rates in an attempt to stimulate their economies.
- Cash has served its purpose well – preserving part of your capital in the worst financial crisis since the Great Depression. However, cash rates are now extremely low by historical standards and not providing you much of a return, particularly compared to growth assets. Moving your cash to a higher return-seeking cash strategy, as reported in the June quarter, has helped to you earn a slightly higher return from your cash.
- Your 12% allocation to the MLC IncomeBuilder strategy contributed positively to your annual return, thanks to outperformance by Maple-Brown Abbott who manages 70% of your strategy. Their stock selection, which includes companies with “defensive” characteristics who have been able to maintain or grow their dividends has been beneficial to you. Your other manager, Vanguard also achieved a positive return that was slightly in excess of the market’s.
Detractors from your return
/- Your 9% allocation to Australian Listed Property contributed strongly during the March – September 2009 period, thanks to the sector’ rally and your strategy’s outperformance (+19%CYTD). However this was insufficient to overcome the adverse impact of the sectors’ decline over the October 2008 – March 2009 period which resulted in your annual return remaining in negative territory (-17%). This was however significantly better than the sector performance which fell by -23%. Your two active managers, Resolution and Challenger outperformed due to their focus on trusts with sound financial balance sheets.
- Australian inflation-linked bonds was the only debt sector to produce a negative return this year. Yields on Australian inflation-linked bonds rose as the government has increased issuance (supply) of these securities, pushing prices down. The impact of rising yields was exacerbated by the longer duration of the Australian inflation-linked bond market (8 years) compared to the nominal bond market (1 years). Thus your 9% allocation to CPI bonds detracted from your annual return.
The chart shows contributors to your return
/Returns relative to competitors
/ The MLC Horizon 2 Income Portfolio has a limited performance history, with 20% of observations above median over rolling 1 year periods (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 tonominal bonds.
- Overweight global investment grade credit, relative to domestic debt.
- One of your managers, PIMCO, has a diversified mandate which gives them the flexibility to move in and out of the different debt sectors, rather than only investing in global nominal bonds.
- MLC has a strategic allocation to US high and underweight exposure to cash relative to nominal bonds
The graph shows returns of your Portfolio compared to competitors
/The main drivers of your returns relative to competitors
Contributors / Detractors5 Year / Not applicable / Not applicable
3 Years /
- Excess returns from your MLC IncomeBuilder strategy (+1%), with Maple-Brown Abbott (-2%) outperforming the S&P/ASX300 Industrials Index (-1%).
- Market outperformance in your A-REIT (-14%) and global REIT strategy (-11%) thanks to good stock selection by your active managers.
- No exposure to the Australian Resources equity sector (+8%) which strongly outperformed Industrials (-1%) over 3 years to 30 September 2009.
- Relatively lower exposure to cash and higher exposure to AustralianCPI bonds detracted from peer relative returns over 3 years. Cash outperformed inflation linked bonds and the credit sectors.
1 Year /
- Market outperformance in your A-REIT (-17%) and global REIT strategy (-18%) thanks to good stock selection by your active managers.
- Despite the rally in high yield, emerging market and company issued bonds of calendar year 2009, the relatively higher exposure to inflation linked bonds and the extended credit sectors detracted from peer relative returns over the year.
3 months /
- Although there is little point focussing on 3 month returns, the September quarter is noteworthy for the continuance of the recovery in risky asset values, and the ensuing positive impact on your Portfolio return.
- Your exposure to the debt sectors that declined sharply in value in 2008, namely hedged high yield bonds (+11%) rallied throughout the September quarter and outperformed cash (+1%).
- All listed sharemarkets bounced strongly with your high exposure to Australian Industrial shares (+26%) contributed significantly to your quarterly return.
- Your global REIT strategy (+31%) also benefited from the sector’s recovery and the out performance of your global REIT managers.
- Thought it might be a stretch to call a positive return of +8% ($AUD unhedged) and +16% ($AUD hedged) a detractor, nonetheless, your relatively higher exposure to global shares detracted slightly from your quarterly return, when compared to the return earned by Australian Industrial shares (+26%).
Stock story – Coca Cola Amatil
/ Coca-Cola Amatil is a company that almost seems tailor made for an income-focused fund like MLC IncomeBuilder. Your MLC Horizon 2 Income Portfolio has a 12% allocation to MLC IncomeBuilder.As this chart shows, Coca-Cola Amatil has a strong history of growing its dividends over the last ten years.
In 1999-2000, the company paid a dividend of 12 cents per share (“cps”). Last year’s dividend was 39 cps, more than three times what it was ten years ago. This year looks like being the tenth consecutive year of dividend growth as the 18.5 cps interim dividend paid in October was 8.8% higher than last year’s interim.
So, if you bought $10,000 worth of Coca-Cola Amatil shares on June 30, 1999 (at $3 per share) and owned them through to today, you would have received dividends totalling $8,800 over this period, plus franking credits along the way as well.
This is what MLC IncomeBuilder is designed to capture for you – accessing the growing dividend streams of growing companies like Coca-Cola Amatil. MLC IncomeBuilder has owned Coca-Cola Amatil for a number of years (it is currently 2.4% of MLC IncomeBuilder and 0.3% of your MLC Horizon 2 Income Portfolio) so you have benefited from the company’s impressive track record of dividend growth and franking credits.
MLC review for the year ending 30 September 2009Page 1 of 9