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 Share Commentary
Benefits and risks of Australian shares
/ When you invest in Australian shares, you effectively own a “share” in companies listed on the Australian sharemarket.Things to consider:
- Returns are driven by many factors including the economic environment, as this tends to influence company profit expectations.
- The Australian sharemarket 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.
Investment objective
/ The strategy is designed to be a complete portfolio for the Australian shares asset class, and aims to deliver growth by using investment managers who invest and diversify across many companies and securities within that 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 the Market Benchmark doesn’t take into account fees and taxes that may apply to your account.The Australian Share Strategy is expected to outperform the S&P/ASX 300 Accumulation Index over rolling 5 year periods. However, as part of our focus on growing your wealth, we won’t chase risky returns when markets are very strong. This means your returns are likely to lag or underperform the benchmark return in strong markets. At other times, and particularly when markets are weak, we expect to outperform the market’s return.
Where MLC invests your money
/ The Fund invests primarily in companies listed (or expected to be listed) on the Australian Securities Exchange, and is typically diversified across major listed industry groups. It may have a small exposure to companies listed outside of Australia from time to time.Executive summary
/ What a difference a few months makes. In our June quarterly, we reported that the Australian sharemarket’s financial year return was the worst for 27 years. Here we are barely three months later and themarket’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 hasbeen 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’ll highlight later, this portfolio has been well positioned to capture the high returns that a number of them have delivered.
There’s 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. You have also benefited from this trend via ownership of Brambles, Fairfax Media and James Hardie.
Your Australian shares return in the year to 30 September was 12.5% (before fees and tax) and this was 4% higher than the market’s. This continues the very strong track record of performance (versus the market) where your one year returns have consistently been better than market since early September 2008. This is a good outcome in a particularly difficult period for markets and investors. Even though your actual return was in negative territory for much of this period, being disciplined and maintaining this strategy has paid off as returns are now back into positive territory.
The managers we have appointed for you have generally performed well in the year. All ten managers achieved a positive return and eight of them recorded returns better than the market’s, some by substantial margins. Concord Capital and Northcape Capital were the best performers, recording returnsof 22.4% and 21.5% which were 14.1% and 13% (respectively) better than the market benchmark. We’re pleased that the careful stock selection approach of your managers has delivered good results for you through the difficult market and economic environment that we’ve been through.
The table outlines performance
/ Performance to 30-Sept-09 / Product / 5 Years % pa / 3 Years % pa / 1 Year % / 3 Months %MLC Australian Share Fund
(takes into account fees) / MLC Wholesale / 9.6 / 2.0 / 11.6 / 23.7
MLC Australian Share Fund
(takes into account fees and tax) / MLC Masterkey Super Fundamentals / - / - / 10.8 / 21.0
MLC Masterkey Gold Star / 8.9 / 2.0 / - / -
MLC Australian Share Fund
(before taking into account fees and tax) / MLC Wholesale / Masterkey Super / 10.7 / 2.9 / 12.5 / 23.9
S&P/ASX 300 Accumulation Index
(S&P/ASX 200 Index prior to Nov 2002) / 9.9 / 1.6 / 8.5 / 21.6
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Absolute and market relative returns
/ The following graph shows the five year return of thestrategy in each of the years (as at 30 September) since 1992. As you may have observed, five-year returns have all been positive, with the exception of the period to 30 September 1992. Your five-year return to 30 September 2009 is also positive, even after the extreme weakness recorded by the market in the last couple of years. This is why we recommend that you assess your returns on a long-term basis because it smooths out the returns volatility that typically occurs in the short term, such as looking at one-year returns.The graph shows absolute returns of yourstrategy
/The following graph shows how theAustralian 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, thestrategy 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 earlier table).
The graph shows returns of your Australian Share Strategy compared to its market benchmark /
Your managers
/ As you can see from the graph above, your recent return has been significantly better than the return recorded by the market. This is especially the case for your one year return which was 4.0% better than the market’s for the year to 30 September. This good outcome is because most of your managers also delivered better than index returns and this in turn was due to the performance strength of many of the companies they have chosen for you.Your outperformance isn’t just a recent phenomenon. In fact, your one-year return has consistently exceeded the market’s since September 2008. You’ll probably recall that for much of this period, your return was mostly in negative territory and we understand this was obviously disappointing and concerning for you. However,your decision to remain invested through this difficult period has paid off as returns are back into positive territory. It’s also pleasing that you have participated fully in the market’s recovery, plus an extra margin, as your return has outpaced the market return.
As you may have observed from the previous performance chart, there’s been periods when your return has lagged (underperformed) the market’s. This tends to be during highly speculative periods such as the ‘Tech Boom’ in the late 1990s and more recently 2006-2007 when market returns were driven by a very narrow range of companies such as BHP Billiton. However, in both cases, what we’ve left behind in terms of excess returns during those very positive return environments have tended to be made up when market conditions deteriorate, such as those we have seen for the last couple of years. While we can’t guarantee this will always be the case, it’s something that we would expect from the way we construct the strategy and the types of managers that have been appointed for you.
Manager summary table
/ Irrespective of the market environment, we believe it’s far preferable to have a number of different but experienced managers choosing stocks for you rather than one that relies on just one or a small number of managers. We don’t believe it’s appropriate for you to be dependant on a narrow range of insights, especially if it’s from just one firm, when our research has identified a number of managers with exceptional Australian shares skills. We also aim to reduce your dependence on one or a narrow range of investment styles. This is why we have appointed ten managers who are responsible for stock selection – the stocks to own and, just as importantly, the stocks to avoid.The diversity of the MLC Australian Share Strategy is evident from the following table which shows the investment style of each manager and where their portfolios tend to be focused (small, medium or large companies). A number of the managers we engage with are providing you with tailored portfolio arrangements as well. Note that the managers who don’t are able to provide us with what’s necessary via their standard portfolio.
Key points to note from the table are:
- The strategy is well diversified with no manager accounting for more than 15% of the total strategy.
- The strategy comprises a range of different management styles, and variations within the style categories “Value”, “Growth” and “GARP” (Growth at a Reasonable Price). For instance, Dimensional’s approach to identifying the companies that represent the best value is very different to Maple-Brown Abbott’s.
- The strategy is structured so that you receive full market coverage, with access to the range of small, medium and large stock opportunities.
Manager / Style / Tailored mandate? / Key role in strategy / Key performance points
Balanced Equity / Value with a large company (Top 50) focus / Yes / Focuses on large (Top 50) companies / O/W Westpac, ANZ, Lend Lease
Concord / Growth, mid-cap oriented utilising a multiple portfolio manager approach / No / Through the cycle performance / O/W James Hardie, Westpac, ANZ, JB Hi-Fi, Macquarie Gr.
Contango / Business Cycle approach that incorporates economic, sector and stock research / Yes / Through the cycle performance / Increased exposure to economic recovery stocks
Dimensional / Deep Value with a bias to small companies / Yes / Volatile market relative performance / Small stock returns lagging large
JF Capital / Pronounced Growth, long termforecasting of company fundamentals / Yes / Through the cycle performance, particularly in up markets / Substantial returns from Sino Gold, Oil Search, Invocare, Navitas
Lazard / “Eclectic” approach to defining Value / No / Through the cycle performance / O/W J. Hardie, Goodman Fielder
Northcape / Growth oriented, multi-manager approach / No / Through the cycle performance / O/W ANZ, Nat. Aust. Bank, Toll
Northward Capital / Growth at a reasonable price (GARP) / No / Through the cycle performance / O/W Woolworths, CBA, Metcash, CC Amatil
Maple-Brown Abbott / “Traditional”value criteria, long term investors contrarian in nature / Yes / Performs well in down markets, lags in latter stages of bull market / O/W ANZ, Nat. Aust. Bank. CC Amatil
Wallara / Growth with a focus on superior companies that create “shareholder value” / No / Through the cycle performance, particularly in up markets / O/W Challenger Financial, Toll, Nat. Aust.Bank, Cochlear, Macquarie Group
Note: These are our judgements and the actual outcomes may differ to this. It’s difficult to explain the role of any manager in a few words. A profile of each manager can be accessed on mlc.com.au
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The following graph shows manager excess returns vs index.It’s pleasing to report that eight of the ten managers in Australian Shares strategy have outperformed the market return and a significant number of them did so by substantial margins. For instance, Concord Capital’s return was 14.1% better than the market benchmark. We are also pleased there has been a variety of investment styles contained within the strategy that have contributed positively to your return. However, it’s worth remembering that this won’t always be the case, as we saw in the 2005-2007 bull market when “growth” managers who owned resource and energy companies tended to perform better than “value” managers who didn’t have much of an exposure because they thought resource and energy companies were expensive. This is why we believe so strongly in having a diversified mix of managers and investment styles for you, so you are not dependant for returns on just one or a limited number of managers and styles.The graph shows manager excess returns vs index /
Strategy exposures
/ As the following chart shows, this strategy invests in a range of different sectors and industries. It’s 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 ten managers in the strategy.Sector exposure as at 30 September 2009
/Top ten stocks as at 30 September 2009
The following table shows the top ten stocks by portfolio weight in the MLC Australian Share Portfolio. / Stock Name / Industry Sector / Portfolio WeightNATIONAL AUSTRALIA BANK / Financials / 7.2%
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED / Financials / 6.6%
BHP BILLITON LIMITED / Materials / 6.5%
WESTPAC BANKING CORPORATION / Financials / 6.0%
TELSTRA CORPORATION LTD / Telecommunication Services / 3.9%
COMMONWEALTH BANK OF AUSTRALIA / Financials / 3.2%
SUNCORP-METWAY LTD / Financials / 2.6%
BRAMBLES LIMITED / Industrials / 2.3%
RIO TINTO LTD / Materials / 2.3%
MACQUARIE GROUP LTD / Financials / 2.2%
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 previous 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 four 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 many of their offshore banking counterparts have experienced during the global financial crisis.
There are a number of reasons for their investment appeal and impressive share price performance:
- Australia’s big four banks entered the global financial crisis in relatively good shape;
- The market has strongly supported bank capital raisings over the last 1-2 years, leaving 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’s the transformation of the competitive landscape in favour of the big four banks, with a commensurate increase in their market share, that’s 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 National Australia Bank 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’s 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.
The Australian Shares portfolio has been well positioned to capture the banks’ significant share price upside. At the end of September, all four bank majors were owned and collectively accounted for 22% of your Australian Shares Strategy. NAB and ANZ feature more prominently than Commonwealth and Westpac while Suncorp-Metway is also a large holding.
The managers in your Australian Shares strategy have anticipated the adjustments that have been taking place in the banking sector and how these developments favour the banks. In response, many of your managers have been adding to their bank holdings for some time, particularly via the recent capital raisings which were done at prices that now appear to be very cheap. For example, a number of our managers participated in the Commonwealth Bank’s capital raising in December 2008. The shares they acquired for you were priced at $26.00 per share. At the end of September, these shares were selling on market at $51.75. This is an increase of 99%.
In July 2009, some of our managers participated in National Australia Bank’s capital raising where shares were offered at $21.50 each. At the end of September, these shares were selling at $30.76 on market, a gain of 43%.
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