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Important information
Disclaimer:
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.
MLC Investments Limited ABN 30 002 641 661 is the issuer of interests in each fund of the MLC MasterKey Unit Trust, MLC Investment Trust and MLC Nominees Pty Limited ABN 93 002 814 959 is the issuer of MLC MasterKey Superannuation and the MLC Allocated Pension. Information about the MLC Horizon Series is available in the current Product Disclosure Statement (‘PDS’) or other disclosure document, copies of which are available upon request by phoning the MasterKey Service Centre on 133 433 or on our website at mlc.com.au. Persons should consider the relevant PDS in deciding whether to acquire, or to continue to hold, this product. Persons wishing to acquire an interest in this product must complete the application form attached to the relevant PDS.
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 June 2009, unless otherwise stated.
The specialist investment management companies are current as at 30 June 2009. Funds under management figures are as at 30 June 2009, unless otherwise stated. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you.
MLC Investment Management Team Recent Activity 5
MLC Investment Management Team Recent Comments, Updates and Articles 6
Market Overview 7
MLC Horizon 1 Bond Portfolio 10-15
MLC Horizon 2 Capital Stable Portfolio 16-20
MLC Horizon 2 Income Portfolio 21-25
MLC Horizon 3 Conservative Growth Portfolio 26-30
MLC Horizon 4 Balanced Portfolio 31-35
MLC Horizon 5 Growth Portfolio 36-40
MLC Horizon 6 Share Portfolio 41-45
MLC Horizon 7 Accelerated Growth Portfolio 46-50
MLC Long-Term Absolute Return (LTAR) Portfolio 51-54
Cash Commentary 55-57
Diversified Debt Commentary 58-63
Australian Real Estate Investment Trust Commentary 64-67
Global Real Estate Investment Trust Commentary 68-71
Australian Share Commentary 72-76
Global Share Commentary 77-80
Global Private Assets Commentary 81-82
IncomeBuilder Commentary 83-86
Australian Share Value Style Commentary 87-89
Australian Share Growth Style Commentary 90-91
Global Share Value Style Commentary 92-93
Global Share Growth Style Commentary 94-95
Appendix: Table of Investment Manager Returns 96-97
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MLC Horizon 1 and MLC Horizon 2 to invest in enhanced cash
Over recent months, MLC has been conducting a detailed review of the debt securities strategy. Although the review has not yet been finalised, we took the opportunity to implement one of the changes during July.
In late 2008 MLC reduced the risk exposures of our cash strategies to better meet the needs of investors with a low risk profile. Since this time, all new investments in the cash strategies have been restricted to bank deposits or discount securities maturing within three months, issued by either the 4 major Australian banks or other licensed banks rated A-1 or better.
After reviewing the risk/return requirements of our diversified portfolios that also invest in cash - i.e. MLC Horizon 1 Bond Portfolio and MLC Horizon 2 Capital Stable/Income Portfolio - MLC has chosen to move to an enhanced cash strategy within these portfolios.
National Specialist Investment Management (NSIM), our existing cash manager, has successfully managed an enhanced cash strategy since 2007. The enhanced cash strategy allows NSIM greater flexibility to target a higher level of excess return, than they are able to within standard cash portfolios, by opportunistically allocating to both interest rate and credit risk, subject to overall portfolio exposure limits.
The enhanced cash strategy can invest in a greater range of high quality debt securities than the existing cash strategy. This is important in an environment where there are opportunities for managers to take advantage of unusually attractive pricing in high quality securities that are now excluded from the cash strategy. The investment guidelines for the enhanced cash strategy are conservative in terms of both credit and duration exposures, ensuring that capital preservation remains the overriding focus of the investment strategy.
During July we moved the cash investments for MLC Horizon 1 Bond Portfolio (30%) and MLC Horizon 2 Capital Stable/Income Portfolio (9.8%) from cash to the enhanced cash strategy managed by NSIM. There is no fee impact resulting from this change.
We will provide more updates as the review progresses over coming months.
Recent Changes to the Strategic Overlay of the MLC Long Term Absolute Return Portfolio
The Global Financial Crisis and ensuing Global Economic Slowdown was a tail risk scenario unprecedented in modern times. Only with extraordinary monetary and fiscal policy intervention on the part of governments and central banks around the world have we avoided complete financial and economic market dislocation.
During the second quarter of 2009 it became clear that the plunge in real economic activity had ceased and there had been a stabilization of conditions. An economic disaster scenario appears to have been averted.
Major market declines typically mark the point at which prospective return potential versus risk is relatively high. This environment is not clear-cut. The path forward is extremely uncertain. On the positive side, precipitous policy action has reversed fears of financial collapse. This does not mean there will be a quick or smooth path back to economic normality. Fears of a deflationary slump are real; MLC also take seriously the risk of a shock rise in inflation. The immediate forces may be for an apparently benign combination of an inventory re-building burst of growth, and a sufficient improvement in confidence to limit deflation but not trigger inflation. But this is an exceptionally difficult environment for policy makers – it may not be possible to both underpin recovery and avoid significant inflation.
The MLC LTAR Strategic Overlay was adjusted during the June quarter with a series of incremental steps. Previous steps in this process include the allocation to Ruffer in February 2009. The exposure to emerging market equities was raised by 3% (4% in IDPS) and hedged global property and global shares unhedged were each increased by 2% during the quarter. These strategy changes increase the foreign currency exposure, taking advantage of Australian dollar strength.
While tail risk remains, downside risk is lower as markets have fallen significantly from their highs despite recent upswings. This means the potential downside risk for equity and listed property markets is lower than previously. Nevertheless, given the enormity of the shock that has been delivered to the global economy, there remains considerable uncertainty about the adjustment path. It is not yet clear that underlying global imbalances are being corrected, or at least that they are being corrected in other than a highly adverse manner. While the spendthrift Anglo world is now saving, the Asian savers are not spending – this combination could result in a prolonged adverse growth environment (a paradox of thrift). On balance, a less defensive position remains appropriate but caution still needs to be applied while our assessment is that equity markets have not sufficiently discounted these risks.
Manager meetings and reviews
Over the past 12 months, MLC Investment Management has undertaken 529 manager meetings. The broad asset class breakdown of these manager meetings is outlined in the below chart.
Your investment specialists regularly produce commentary and articles on topical investment issues. These are available on
mlc.com.au
Some of our recent updates include:
· A fully scripted ‘Performance Preview Pack’ for the year ended 30 June 2009 to help facilitate more meaningful client conversations around fund performance in challenging market environments, The pack “lifts the lid” on the key drivers of the current economic environment, how this has affected investment markets and what this means for your clients.
· A summarized client friendly commentary on the key drivers of performance for the range of MLC Multi-Manager funds over the year to June 2009 is on the client MarketWatch site.
· The recent financial market chaos and plunge in liquidity of credit assets has helped focus mainstream attention on the risk posed by exposure to illiquid assets. This is particularly relevant to many Australian Superannuation investors in Industry Super funds with a high degree of illiquid exposure (eg Direct property, Infrastructure and private equity).
MLC has always taken the issue of liquidity and equitable pricing seriously, to ensure we provide our investors with daily access to their unit linked funds. To ensure we can provide this access, MLC has a formal approach to the assessment of liquidity and equitable pricing. For more information on this issue please refer to MLC’s White Paper entitled: “Liquidity and Equitable Unit Pricing – March 2009”.
The Lottery Effect of Volatility – MLC does not believe volatility should be seen as the definitive measure of risk. Risk, to clients, is the likelihood they will not achieve their financial objectives. However, the dispersion of returns (volatility) does impact whether clients achieve their financial objectives. This paper examines the contribution the dispersion of returns has on outcomes.
· MLC Investment Management’s views and analysis on 7 year return potential for asset classes and the range of MLC’s diversified portfolios has been updated to reflect end June 2009 market valuations.
· Amanda Heyes, MLC Investment Specialist, puts 'The Chaser' under the microscope and finds that the power of compound interest over long periods of time can have an incredible impact on your clients’ wealth.
· Traditional portfolio construction approaches have been under intense scrutiny throughout the recent financial crisis. In his article - The do's and don'ts of portfolio construction, John Owen, Senior Investment Specialist for Australian shares and global property provides some insights on how NOT to make the same mistakes.
· Kerry Napper, MLC's Capital Markets Research Analyst, looks at what history can tell us about the effect of banking crises on developed and emerging economies.
· Don't forget to have a look at the Marketwatch site for an update on the impacts of the financial crisis and economic downturn on recent income distributions for the MLC MasterKey Investment Trust, Unit Trust and Investment Service and helping clients through tough times.
Investment returns over the past 12 months were very poor, with the typical balanced fund likely to have posted a -11% return for the year. REIT and share markets were the main culprits, while Government bonds posted solid returns as investors continued to seek safety, and the world’s central banks drove official interest rates down to unprecedented levels. Within the bond universe, the dispersion of returns among the various sub-classes was truly remarkable. While Government nominal bonds in the developed markets performed well, every other debt securities sub-class performed poorly in the December 2008 quarter. Corporate bond spreads widened dramatically, particularly after the failure of the US investment bank Lehman Brothers in mid-September 2008. Deflation fears meant that markets had little interest in inflation protection, and consequently inflation protected securities also performed extremely poorly.
However the unbridled pessimism that characterised market sentiment in late 2008 abated during 2009, and markets became less pessimistic about the outlook for the global economy. The functioning of world money and credit markets has progressively normalised. The result has been sharply higher share prices, higher commodity prices, much tighter credit spreads and higher Government bond yields.
Economic conditions in the world economy deteriorated over the course of the year. All the world’s major developed economies are now firmly ensconced in recession. In the case of Japan and the UK, the recession is as severe as any in living memory.
Here in Australia, economic growth has slowed to a crawl over the past year, and the economy has almost certainly fallen into recession, despite the fact that economic data released in recent months have tended to surprise on the upside. Retail spending seems to have been supported by the Government’s cash hand-outs. Housing finance has picked up – particularly for new housing construction – spurred on by extremely low interest rates, and the Government’s grants to first home buyers. However, we have yet to see the full effect of the global recession on exports or business investment.