Fund Overview
About the Fund
The portfolio aims to provide a return higher than its benchmark (before fees and tax) over 3 year periods.
MLC aims to achieve this by actively managing the portfolio. This includes reducing risk in the portfolio if market risk is high. As a result, there may be smaller losses than the benchmark in weak or falling markets and potentially lower returns than the benchmark in strong markets.
The portfolio has an approximately equal exposure to growth and defensive assets. The allocations to these assets are actively managed within defined ranges, in accordance with MLCs changing view of potential risks and opportunities in investment markets.
Key Information
APIR Code MLC0745AU
Status Onsale
Product Size as at 31 Aug 2014
$918.17M
Commencement Date
4 Dec 2006
The portfolio is broadly diversified across asset classes and investment managers from around the world. These managers invest in many companies and securities in Australia and overseas.
For additional information on the portfolio and its benchmark please view our page for this portfolio.
Important Announcements
1 Jul 2014
Change to fee disclosure for MLC portfolios
From 1 July 2014, ASIC requires us to include the 'Indirect Costs' of investment strategies in the fee disclosure for our investment options. Further information on Indirect Costs is available on our page to view
16 Jan 2014
Performance fee for Low Correlation strategy
The performance fee is included in the investment fee below. The actual performance fee charged in future periods may vary from period to period. Further information on the Low Correlation strategy is available on mlc.com.au/lcs/
Fund Breakdown
By Asset Class as at 30 Sep 2014
The information displayed reflects the actual asset allocation based on the holdings within the fund at the effective date.
Australian Shares 19.1% Multi-Asset Class Real Return Strategies
1.5%
Australian Bonds 18.3% Low Correlation Strategy 1.4% Global Shares (unhedged) 17.4% Global Absolute Return Bonds 1.1% Australian Inflation-Linked Bonds 8.4% Emerging Market Shares (unhedged) 1.1% Enhanced Cash 7.0% Australian Fixed Interest 1.0%
Global Non-Government Bonds 6.2% Global High Yield Bonds 0.9% Global Private Assets 4.5% Global Bank Loans 0.8% Global Government Bonds 2.8% Cash 0.7%
Global Multi-Sector Bonds 2.7% Risk Management Strategy 0.4%
Global Property Securities 2.6% Other 0.3%
By Manager as at 30 Sep 2014
Defensive Global Shares - Unhedged
1.6%
Global Mortgages 0.2%
Australian Bonds / Antares / 9.0% / $899
UBS / 9.2% / $920
Australian Fixed Interest / Antares / 0.9% / $93
Australian Inflation-Linked Bonds / Antares / 8.4% / $836
Australian Shares / Alphinity Investment Management / 3.0% / $302
Antares / 3.3% / $332
JCP / 3.0% / $301
Northcape / 2.2% / $221
Other / 0.7% / $65
Redpoint / 3.5% / $345
Vinva / 3.1% / $308
Cash / Antares / 0.2% / $18
Cash / 0.5% / $52
Defensive Global Shares - Unhedged / International Value Advisors / 1.6% / $159
Emerging Market Shares (unhedged) / Capital International / 1.1% / $108
Enhanced Cash / Antares / 7.0% / $698
Global Absolute Return Bonds / Peridiem / 1.1% / $109
Global Bank Loans / Shenkman Capital / 0.8% / $83
Global Government Bonds / Goldman Sachs / 2.8% / $284
Global High Yield Bonds / Oaktree / 0.4% / $37
Peridiem / 0.2% / $18
W.R. Huff / 0.3% / $34
Global Mortgages / Apollo / 0.2% / $17
Global Multi-Sector Bonds / Amundi / 0.6% / $64
Franklin Templeton / 0.4% / $44
PIMCO / 1.3% / $128
Peridiem / 0.3% / $35
Global Non-Government Bonds / Loomis / 3.1% / $308
Wellington Management / 3.2% / $315
Global Private Assets / MLC Global Private Markets / 4.5% / $454
Global Property Securities / Morgan Stanley / 0.9% / $90
Other / 0.2% / $17
Presima / 0.6% / $59
Resolution Capital / 0.9% / $90
Global Shares (unhedged) / Carnegie Asset Management / 2.3% / $228
Dimensional / 2.1% / $206
Harding Loevner / 2.4% / $242
Jackson Square Partners / 1.9% / $190
Kiltearn Partners / 1.3% / $128
Other / 0.2% / $23
Sands Capital / 2.1% / $208
Tweedy, Browne / 2.3% / $233
Walter Scott / 2.7% / $274
Low Correlation Strategy / MLC Alternative Strategies / 1.2% / $121
Multi-Asset Class Real Return Strategies / Pyrford / 0.5% / $47
Ruffer / 1.0% / $100
Other / Other / 1.2% / $118
Risk Management Strategy / MLC Investment Management / 0.4% / $41
Total / 100.0% / $10,000
Stock Holdings
Top Stocks for Fund as at 31 Aug 2014
The Top Stocks for Fund have a one month reporting delay.
Stock Description / Industry / Country / Percentage / Investment AmountCOMMONWEALTH BANK OF AUSTRALIA / Financials / Australia / 1.7% / $171
BHP BILLITON / Materials / Australia / 1.7% / $170
WESTPAC BANKING CORP / Financials / Australia / 1.7% / $169
ANZ BANKING GROUP / Financials / Australia / 1.5% / $146
TELSTRA CORP / Telecommunication Services / Australia / 1.2% / $117
NATIONAL AUSTRALIA BANK / Financials / Australia / 1.0% / $100
WOOLWORTHS LTD / Consumer Staples / Australia / 0.5% / $55
RIO TINTO / Materials / Australia / 0.5% / $54
WESFARMERS / Consumer Staples / Australia / 0.5% / $50
QBE INSURANCE GROUP / Financials / Australia / 0.4% / $41
Performance
Historical Performance
Absolute Fund Returns as at 30 Sep 2014
Returns for periods one year or greater are calculated on an annualised basis. All returns are calculated using end of month redemption prices assuming all distributions are reinvested and are net of management fees which may include administration fees, issuer fees and investment fees and prior to any individual tax considerations, and do not allow for initial entry fees.
The returns outlined below represent historical performance only and is not an indication of future performance. The value of an investment may rise or fall with changes in the market. Returns are calculated in accordance with FSC Standard No
6.
3 month / 6 month / 1 Year / 3 Years / 5 Years / 10 Years / Since Inception4 Dec 2006
Fund Performance / 1.6% / 3.3% / 7.1% / 9.2% / 6.7% / N/A / 4.1%
Commentaries
Fund Commentary
As at 30 September 2014
The portfolio produced a return of 1.8% in the quarter and 8.8% in the year to 30 September 2014 (before fees and tax).
Contributors to performance
Key contributors to performance for the quarter and the year are in the following table. Returns are before fees and tax.
For the quarter / For the yearThe portfolios global shares (unhedged) strategy delivered a very strong return of 5.6%. Global shares performed well in the quarter despite market volatility beginning to increase in the month of September. Improving economic data from the US and accommodative monetary policy continued to push share prices higher around the world.
The portfolios fixed income strategy produced a positive return of
0.8% over the quarter. Volatility in the US high-yield market led to losses over the quarter and was a drag on returns. Although there was an initial rise in government bond yields off the back of
strong US economic data, yields ended the quarter and year lower. We attribute this fall in yields partly to investors seeking safe havens from rising geopolitical risks caused by events in Ukraine and Iraq. Investors also continue to downplay the risk of future inflation, despite tightening labour market conditions in the US.
Global private assets produced a very strong return of 6.0% in the quarter. / The portfolios investment in the global shares (unhedged) strategy delivered a very strong return of 17.9%. Five of seven managers underperformed the broader market for the year (the eighth manager, Kiltearn, has been in the portfolio for less than a year). Strong performance by Carnegie couldnt overcome the drag caused by Jackson Square Partners and Walter Scott.
The fixed income strategy produced a solid return of 5.2% over the year. All managers delivered positive returns and most managers also outperformed their benchmarks. Key to the strategys performance were the strong absolute and market relative returns generated by Antares in a number of strategies they manage in the portfolio.
The Australian shares strategy delivered a return of 5.4%. The
Australian economy continues to expand at a moderate pace, despite continued weakness in mining investment. There are signs that the non-mining economy is improving: housing activity is picking up, business investment outside of the mining industry is starting to grow, and private sector credit growth has been accelerating. However, whether this pick-up in non-mining activity will be sufficient to offset weaker mining investment is still unclear.
Performance relative to the benchmark
Over the 3 years to 30 September 2014, the portfolio has produced a strong return but slightly underperformed its benchmark by 0.2%. By applying the Investment Futures Framework MLC continues to reduce risk in the portfolio when market risk is high, as explained below.
Portfolio positioning
These are currently the main positions in the portfolio. In the September quarter, we made small changes to increase the portfolios defensive positioning, relative to its benchmark, before the Australian share market decline in September.
In recent quarters, several factors have combined to increase the risk of a further market correction. These include the prospect of more normal monetary policy in the US, slowing global growth and the possibly of renewed recession in Europe, the spread of Ebola, and a worrying mix of other geopolitical factors. While none of these factors is new, the risk of each has intensified. Because of these factors, along with stretched market valuations, the portfolio had been positioned more defensively before the September market decline. So far, the decline in share prices has not been enough to offset the rise in risk, which meant that at the end of the September quarter the portfolio remained defensively positioned.
Portfolio position compared with benchmark / Why we have the position / Impact on performanceBelow benchmark exposure to growth assets
We have implemented this position by:
1. increasing exposure to multi-asset real return strategies in previous quarters
reducing the Australian shares allocation, and
1. increasing exposure to the Low Correlation Strategy this quarter. / The portfolio has an exposure to shares to generate long-term returns. However, because shares can be volatile, weve increased the portfolios diversification over time to manage risk and generate more robust returns. These risk-controlled exposures include multi-asset real return strategies, the Low Correlation Strategy, a multi-asset emerging markets strategy and the defensive global shares strategy. During the September quarter, these strategies helped reduce exposure to declining share markets.
As these strategies were introduced to the portfolio, we reduced allocations that invest in the broader Australian and global share markets.
For the last few years share market returns, supported by unusually low interest rates, have been strong and have tended to run ahead of actual company earnings. When market returns have been strong for a long period, there is increased risk that share valuations become stretched, and that markets may fall. In the September quarter, there were signs of a change in the share markets behaviour, with higher volatility and the US Federal Reserve being less able to soothe market concerns.
As a result, during the quarter there was a limited reversal of strong share market returns. However, our assessment remains that the decline in share prices has not been enough to offset the rise in the risk of a market correction. Potential negative scenarios for growth assets (such as shares) include
Developed market austerity, Recession, Stagnation and
China hard landing.
The portfolio will continue to benefit from strong returns in positive scenarios for growth assets, such as a Mild inflationary resolution or an Early re-leveraging scenario. In these scenarios, growth assets should perform strongly compared to bonds.
Another positive scenario for growth assets is Extended quantitative easing. This scenario is starting to emerge in Europe due to weak economic data. In this scenario market expectations of more monetary stimulus could push growth assets higher.
Our below benchmark exposure to growth assets is consistent with the views of a number of our investment managers that the risk of a negative environment for growth assets has risen. / By further reducing the allocation to Australian shares before the market decline in September, the portfolio benefited from the strong share market performance of previous months.
This position may mean the portfolios returns will be slightly lower if share markets rebound from Septembers decline. However, we consider the position is appropriate given the current risk level and the increased protection it will provide if negative scenarios occur.
Below benchmark exposure to interest rate risk
We have implemented this position by reducing the duration (exposure to changes in bond interest rates) of our government bond strategy. / While government bond yields (interest rates on bonds) could decline from their already low levels, the potential for further falls is less than the potential for yields to rise. Rising yields means bond prices fall and there is the potential for negative returns.
By reducing the duration, weve reduced the risk of negative returns if yields rise, such as in a Sovereign yield re-rating scenario.
Shortening the duration of our government bond strategy will also give the portfolio some protection if inflation eventually rises. In a Rising inflation or Inflation shock scenario, traditional bonds would perform poorly and could deliver negative returns.
We also recently increased the portfolios exposure to
inflation-linked bonds to benchmark level. Although the yields on these bonds are quite low, their returns move with inflation (unlike traditional bonds). This means they can help protect against the risk of rising inflation. / Global government bond yields rose in September, benefiting performance. However, yields fell earlier in the year, reducing the portfolios one year returns.