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 6 Share Portfolio
About your Portfolio
/ Your MLC Horizon 6 Share Portfolio is designed to be a complete portfolio solution. It is well diversified within the global and Australian share asset classes, and across investment managers, who invest in many companies around the world.We are focussed on growing your wealth for a high 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 6 Share Portfolio invests in growth assets. Your portfolio is focussed on long term capital growth potential.
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. / Emerging markets (EMs) have become a hot topic recently, given the strength of their domestic economies and the magnitude of their recovery in 2009. For example, the MSCI EM Share Index delivered a return of +30% against a fall of 0.8% in the developed world (measured by the MSCI World Index), on an unhedged basis over the first nine months of 2009.
As an MLC investor, you have benefited from emerging markets exposure since the early 1990’s, via your global share and global bond allocations. All your global share managers have the freedom to invest in any listed stock across any industry or country they see as good opportunity for you. In addition, two of your global bond managers – Bridgewater Associates and PIMCo may opportunistically invest in bonds issued in emerging markets.
But investing in shares listed in EM’s is not the only way to capture EM opportunities. In fact, emerging market consumers are known to be very “brand” centric in their purchase decisions. And most of their preferred brands are owned by global multi-nationals, listed in the US or other developed markets.
A couple of examples in your global share strategy include:
· Nestlé – listed in Switzerland, Nestlé is the world’s leading Nutrition, Health and Wellness Company. It is well positioned to benefit from growing consumer demand in the emerging markets. It represented 0.15% of your total global share strategy as at 31 August 2009 and is held by two of your managers - Capital International and Harding Loevner. Nestlé’s share price rose 26% in local currency terms during CY2009.
· Standard Chartered – listed in the UK, Standard Chartered is a multi-national financial services company with 90% of its profits sourced from Asia, Africa and the Middle East. It represented 0.47% of your global share strategy and is held by 3 of your managers - Capital International, Wellington Management and Harding Loevner. Standard Chartered rose by 166% during CY2009 in local currency terms.
You access exceptional investment managers in the world who carefully invest your money in the right businesses and assets. / There are companies that provide unique access to certain sectors which can only be captured by managers who have the ability to research and identify opportunities in those markets.
Sands Capital LLC – one of your newest global share managers is one such organisation. Appointed in February 2009, Sands Capital is responsible for 11% of your global share strategy. Based in Arlington, Virginia, USA, Sands Capital manages a total of $12 billion in funds and has a 21-year track record of growth investing. Their role in your global share strategy is upside participation in rising markets and they have delivered on this expectation in spades. Since their appointment on 23rd February 2009, Sands Capital has delivered a return of +34%, significantly outperforming the MSCI All Country World Index which has risen 2% since 1 January 2009.
Examples of EM themed stocks owned by Sands Capital on your behalf include:
· Naspers - Naspers is a multinational electronic and print media company listed in South Africa. It derives 70% of its revenue from South Africa. Representing 0.54% of your total global share strategy, Naspers rose by 86% during CY2009.
· Mindray – a US listed Healthcare company, Mindray is China's largest medical equipment manufacturer with a home customer base. It represented 0.28% of your global share strategy as at 31 August 2009 and appreciated by 82% during CYTD2009.
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 5 Share Portfolio, the target debt/equity mix is 0/100 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.
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 charts 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
// The actual asset allocation may be adjusted +/-5% around this target. The rebalancing range is +/-2% around the target.
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 6 Share Portfolio has been nothing short of remarkable. For example, over the year to 31 March 2009, a typical Share Portfolio declined by -31%. Just 6 months later, thanks to the recovery in risky asset values this return improved to -2% for the year to 30 September 2009 and +15% 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 to 30-Sept-09 / Fund / Survey / 5 Years % p.a. / 3 Years % p.a. / 1 Year % / 3 Months %MLC Horizon 6 - Share Portfolio
(takes into account fees) / MLC Wholesale / 4.9 / -3.6 / 1.8 / 16.6
Median Manager / IDPS Multi-Sector High Growth / 4.9 / -2.8 / -0.2 / 15.5
Returns Consistency since July 2001
% of time rolling return above Median / MLC Wholesale / 71.8 / 74.6 / 56.3 / 59.4
MLC Horizon 6 - Share Portfolio
(before taking into account fees) / MLC Wholesale / 5.6 / -3.1 / 0.0 / 17.0
Strategic Benchmark / 5.9 / -2.5 / -0.3 / 16.1
MLC Horizon 6 - Share Portfolio
(takes into account fees and tax) / MLC MasterKey Super Fundamentals / - / - / -1.8 / 14.9
MLC MasterKey Gold Star / 3.9 / -3.8 / - / -
Median Manager / Personal Super Multi-Sector High Growth / 4.1 / -3.1 / -1.7 / 14.6
Returns Consistency since December 2006
% of time rolling return above Median / MLC MasterKey Super Fundamentals / - / - / 40.9 / 64.5
Returns Consistency since September 1996
% of time rolling return above Median / MLC MasterKey Gold Star / 84.5 / 79.3 / 63.4 / 61.7
MLC Horizon 6 - Share Portfolio
(before taking into account fees and tax) / MLC MasterKey Super / Gold Star / 6.0 / -2.7 / -1.5 / 16.2
Strategic Benchmark / 6.1 / -2.6 / -0.4 / 16.3
Absolute Returns
/Contributors to your return
/ · By far the largest contributor to your annual return was your substantial exposure to Australian shares. 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 $AUD 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 is hedged back into $AUD to help control the impact of currency fluctuations on your returns.
· The performance of your global share strategy improved over the year, with the new managers appointed in February contributing solidly to returns.
Detractors from your return
/ · The key detractor from annual returns was your 6% exposure to global private equity which continued to decline in value, reflecting the lagged valuation cycle of unlisted assets, such as private companies vis a vis listed assets.The chart shows contributors to your return
/MLC review for the year ending 30 September 2009 Page 10 of 12