Transcript Investment Update for your MLC Horizon 4 Balanced

Investment Update
for your MLC Horizon 4
Balanced Portfolio
Year to 31 March 2008
Important information
Any advice in this communication has been prepared without taking
account of your objectives, financial situation or needs. Because of this
you should, before acting on any advice 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 product issued by MLC Investments Limited and
MLC Limited 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 MasterKey Service Centre on
132 652 or on our website at mlc.com.au. For the MLC Investment Trust, a
Product Disclosure Statement is available at mlcinvestmenttrust.com.au
Investment update agenda
•
The market environment
•
Your portfolio in review
–
MLC’s approach to wealth creation
– Sector & Manager Performance
–
•
Recent enhancements to your portfolio
Outlook & Conclusion
The state of play
• Too much liquidity
• Too much leverage
• Too much complacency
• Voracious risk appetites
• A benign macroeconomic environment
Have led to….
• Risk being way underpriced – too little reward on offer for risks
that have not been properly understood
• Opportunistic funds being launched that do not really meet the
needs of long term investors
• In short, returns have been too high, and volatility has been
too low, and this situation is now normalising
The problem was (and still is) much larger than just US subprime mortgages!
When too much debt just isn’t enough!
Australian household debt
%
180
160
as % of GDP
140
as % of disposable income
120
100
80
60
40
20
0
Q1 1980 Q1 1985 Q1 1990 Q1 1995 Q1 2000 Q1 2005
UK household debt
%
180
160
as % of GDP
140
as % of disposable income
120
100
80
60
40
20
0
Q1 1980 Q1 1985 Q1 1990 Q1 1995 Q1 2000 Q1 2005
Source: Thomson Financial Datastream
US household debt
180 %
160
as % of GDP
140
as % of disposable income
120
100
80
60
40
20
0
Q1 1980 Q1 1985 Q1 1990 Q1 1995 Q1 2000 Q1 2005
No, it’s not just a US problem
EU, Japanese manufacturing
confidence is following US lower..
3
Std deviations away from 5yr average
US
..and G3 consumer sentiment is
also falling
3
Std deviations away from 3yr average
EU-15 and Japan
US
2
2
1
1
0
0
-1
-1
-2
-2
-3
Q1 1990
-3
Q1 1990
Q1 1995
Q1 2000
Q1 2005
Source: Thomson Financial Datastream, MLC Investment Management
Q1 1995
EU-15 and Japan
Q1 2000
Q1 2005
-30%
G
-20%
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Pr
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Sh
ar
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Sh
ar
es
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-10%
Au
st
ra
lia
n
G
G
Au
st
ra
lia
n
Annualised Returns (%pa)
Asset Class Returns to March 2008
30%
20%
10%
0%
3-Months
1 Year
3 Year
Some of the major central banks have started
the rescue operation…
9
Official interest rates %
9
Official interest rates %
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
May-04 Feb-05 Nov-05 Aug-06 May-07 Feb-08
0
May-04 Feb-05 Nov-05 Aug-06 May-07 Feb-08
US
Canada
Euro-area
UK
Japan
Australia
New Zealand
China
Source: Thomson Financial Datastream. US rate is target rate for Federal Funds. For Europe, short-term repo rate.
Canadian rate is Bank of Canada policy rate. Australian rate is the RBA cash rate target. Chinese rate is the
1yr benchmark lending rate. NZ rate is RBNZ cash rate target.
“.. there are known unknowns; that is
to say we know there are some things
we do not know. But there are also
unknown unknowns -- the ones we
don't know we don't know."
…”
• What we don’t know…(and may not know, that we don’t
know)
? How far US house prices will fall
? How much damage will be done to household balance
sheets
? The full impact on US financial institutions’ balance
sheets (and hence their ability to create credit)
? The full impact on household spending and hence the
economy
? The full impact on corporate earnings
Global economic and investment prospects
• Global economy slowing down (the US is in recession
now)
• ..but the Chinese economy is well-placed to weather the
storm (good news for Australia)
• The US Federal Reserve now understands the magnitude
of the problem, and is responding..
• ..and the economy and financial markets will eventually
recover..
• ..but we are most unlikely to see a repeat of the kind of
investment returns seen in recent years.
Australian economic prospects
• Australian economic growth to slow significantly (either
the economy slows ‘by itself’ or RBA will make it slow!)
• (Patriotism has paid handsomely over past five
years, but this will not last!)
Australia's economy accelerated while the G4 was slowing
6
Annual growth in real GDP %
5
4
3
2
1
0
Q1 2000
Q1 2002
Q1 2004
Q1 2006
Q1 2008
..helping to keep inflation above the RBA’s target range
The RBA's worst target 'miss' of the low-inflation era?
7.0
Consumer prices y/y% - average of RBA's preferred measures
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Q2 1989 Q2 1991 Q2 1993 Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007
Outlook for business investment is still very strong
Non-residential construction:
Still heaps of work in the pipeline
16
14
12
10
8
Engineering construction
Chain volumes $bn
$Abn
14
70
60
50
Work done
6
4
2
0
Sep-86
Mar-93
Sep-99
Work yet-to-be-done
Mar-06
Mar-90
Sep-96
Mar-03
40
10
8
30
6
20
4
10
2
0
0
Mar-95
7
6
5
Approvals
Commencements
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
Work done
4
3
2
1
0
Mar-95
Mar-97
Mar-99
Mar-01
Mar-03
Mar-05
Mar-07
Mar-97
Mar-99
Mar-01
Mar-03
Mar-05
Mar-07
CAPEX survey: latest estimate of year-ahead
spending is up sharply on last year
Current prices
$Abn
By private sector for private sector
By private for public sector
Public sector
Total
12
Non-residential building indicators
9
8
Work done, 2003/04 prices
$Abn
$A million
2000/01
2002/03
2004/05
2006/07
2008/09
Australian shares have been incredibly strong.
These returns were NEVER going to last
30
Rolling 5yr real returns - Datastream Australian Market Index
25
20
15
10
5
0
-5
-10
-15
Q1 1977 Q1 1982
Q1 1987
Source: Thomson Financial Datastream
Q1 1992 Q1 1997
Q1 2002 Q1 2007
MLC’s approach to sensible wealth creation
1. The best way to grow wealth is to use exceptional
investment managers
2. Deep research is the only reliable way to identify exceptional
investment managers. Brand and past performance are
unreliable predictors of future performance
3. Diversification leads to more consistent investment
outcomes
4. Be patient - A long-term (strategic) approach should be
used if your financial goals are long term
5. Efficient implementation reduces the costs of running a
portfolio
Investing does not need to be complex, opaque, and
dangerous, but too many people in recent years have
made it that way!
..it’s ‘E’
The problem isn’t ‘P’
PE ratio close to its lowest since 1991
suggests local market is cheap...
30
Trailing PE ratio
..as long as you think these earnings are
sustainable!
100
Real Earnings per share (Index)
90
25
80
70
20
60
15
50
40
10
30
5
20
10
0
Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08
Source: Thomson Financial Datastream
0
Q4 1979 Q4 1984 Q4 1989 Q4 1994 Q4 1999 Q4 2004
Your portfolio in review:
MLC Horizon 4
Balanced Portfolio
Contribution to performance
MLC Horizon 4 Balanced Portfolio
Contribution from each asset class for the periods ending 31 March 2008
Returns are gross of all fees and taxes
Data source: MLC Investment Management
Contribution from each asset class
= strategic asset allocation weighting x total return for the asset class
Portfolio Returns
MLC Horizon 4 Balanced Portfolio – Personal Super
Absolute Rolling Period Return ( March 1988 – March 2008)
Returns are gross of all fees and taxes
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
M
ar
1
M 988
ar
1
M 989
ar
1
M 990
ar
1
M 991
ar
1
M 992
ar
1
M 993
ar
1
M 994
ar
1
M 995
ar
1
M 996
ar
1
M 997
ar
1
M 998
ar
1
M 999
ar
2
M 000
ar
2
M 001
ar
2
M 002
ar
2
M 003
ar
2
M 004
ar
2
M 005
ar
2
M 006
ar
2
M 007
ar
20
08
-15%
-20%
Twelve Month Return (%pa)
Three Year Return (%pa)
Source: Mercers Investment Consulting (MPA Retail Software Kit)
Five Year Return (%pa)
MLC Horizon Fund expected outcomes for
investors
• Maximise after-tax real returns over the long term with
lower than average absolute risk
• Provide consistent added value across market cycles
(good and bad)
• Provide consistently above median (ie competitors)
returns over the long-term
• Likely to outperform peers in adverse environments
(capital protection)
Reasons for Horizon’s recent performance
Performance
compared to:
Key messages:
Absolute returns

1. Returns have been very strong over the medium and
long term, although the 1 year returns are now
negative.
2. Clients need to focus on the longer term returns as they
are less volatile.
Competitors

1. Since markets turned bearish in the last year, MLC
performance has been strong relative to competitors.
2. Returns were helped by relatively high allocations to
hedged global shares, private markets and good relative
performance in debt assets.
3. MLC almost always outperforms median manager over 5
year periods
4. Risk is lower than median manager.
Market indices

1. Performance of the active managers has picked up over
the last year as markets have been bearish. There are
not many periods where our strategies are
underperforming (gross of fees).
2. Fundamental equity managers like MLC’s tend to find
more opportunities in volatile markets.
10%
5%
Prolonged global growth &
productivity boom/BRICs Res
boom
Generalised global growth
boom – investor optimism
Speculative Bubble
Benign Aust inflation
Australian boom
Disinflation
Credit/ monetary contraction
Investor Pessimism - rise in
risk premiums
Global Pandemic
Aus only bust (world econ not
weak)
Steady State
Global Catasptrophe
Debt driven growth
Deflation - productivity driven
boom
We believe our asset allocation will outperform in most risk
scenarios, particularly adverse scenarios
Aus economic crisis (reversal
scen 8) World weak
-15%
Bubble bursts (economy okay)
-10%
Global depression or
stagnation (1930s)
-5%
Horizon 4's Real Return
15%
Current
environme
nt similar
to
0%
Real Returns (%pa)
vs competitors
MLC likely to outperform peers in adverse scenarios
Sample of Projected Scenario Real Returns: Horizon 4 versus Mercer Average
(over 5 year horizons, post superannuation tax, fees and alpha)
20%
Horizon 4's Excess Return vs Mercer Median
The Investors’ Experience with MLC
Value of investing $100 on 31 March 1993
(net of super tax and fees)
$350
$300
$250
Protecting
& growing
real wealth
$200
$150
Inflation (CPI)
MLC Super H4 Balanced fund
Source: Mercers Retail software Kit, Super Multi-Sector Balanced Growth universe
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-04
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
Sep-01
Mar-01
Sep-00
Mar-00
Sep-99
Mar-99
Sep-98
Mar-98
Sep-97
Mar-97
Sep-96
Mar-96
Sep-95
Mar-95
Sep-94
Mar-94
Sep-93
Mar-93
$100
MLC’s process delivers
MLC Moderate Option
Comparison with the Mercer Pooled Fund Survey Universe
Annualised Risk and Return for 20 years ended March 2008
(after tax and after fees)
- - - - Median
32 funds started this race
in May 1985.Where the
lines intersect shows the
median risk and return
result of the 12 managers
who survived the 22 year
period
9.8
9.6
9.4
Annual
Return
(% pa)
9.2
MLC Balanced Fund
9.0
8.8
8.6
8.4
6.0
6.3
MLC
6.6
6.9
7.2
Annualised Standard Deviation (% pa) calculated monthly
7.5
Share manager performance
31 March 2007 – 31 March 2008
Returns are gross of fees and taxes
Australian shares
Global shares
Capital International
Alliance Growth Equites
Dimensional - Global
Dimensional - Emerging Mkts
Fortis Investments
Bernstein Value Equities
Walter Scott & Partners
Wellington
-6.0%
-14.2%
-18.8%
7.4%
N/Ap*
-18.4%
-7.6%
-12.1%
Maple-Brown Abbott
Dimensional
Lazard Asset Management
Contango
Concord Capital
Wallara Asset Management
JF Capital Partners
Balanced Equity Management
Northcape
-6.5%
-5.6%
-13.0%
-4.3%
-4.2%
-7.2%
-2.2%
-10.4%
-5.3%
Total hedged
Total unhedged
-5.9%
-12.1%
Total
-6.9%
*Returns for this manager are not applicable, because the manager was not appointed to the fund for
this period of time
Top 10 Australian Shares
as at 31 March 2008
Top Ten Australian Stocks – MLC Horizon 4 - Balanced Portfolio
Company
Industry Sector
BHP Billiton
Materials
7.6
National Australia Bank
Financials Excluding Property Trusts
6.6
ANZ Bank
Financials Excluding Property Trusts
6.1
Rio Tinto
Materials
4.5
Westpac
Financials Excluding Property Trusts
4.3
Telstra
Telecommunication Services
3.8
Brambles
Industrials
2.5
Woolworths
Consumer Staples
2.4
Suncorp Metway
Financials Excluding Property Trusts
2.3
News Corp
Consumer Discretionary
2.2
Data: MLC Investments Limited
Portfolio
(%)
Top 10 Global Shares (Hedged and Unhedged)
as at 31 March 2008
Top Ten Global Stocks – MLC Horizon 4 - Balanced Portfolio
Company
Industry Sector
Credit Suisse
Financials
1.3
Potash Corp of Saskatche
Materials
1.3
Rio Tinto
Materials
1.0
Barrick Gold
Materials
1.0
America Movil
Telecommunication Services
1.0
JP Morgan
Financials
1.0
Monsanto
Materials
0.9
Nintendo
Consumer Discretionary
0.9
Nestle
Consumer Staples
0.9
Abbott Labs
Health Care
0.9
Data: MLC Investments Limited
Portfolio
(%)
Investment Process
The Process is monitored by a cycle of
ongoing reviews
Daily: Monitor compliance and manage
cash flow / rebalancing
Monthly: Review investment manager
portfolio strategies and performance
Six monthly: Pre-briefs, formal investment
manager reviews, debriefs and marketing
updates
Annually+: Asset class reviews (Australian
share, global share and property securities
strategies refined)
Ad hoc: Overseas research trips
Outlook & Conclusion
Let’s be realistic about the kind of returns that are
achievable and sustainable over time
Periods to end March 2008
5yr
10yr
MLC's Long-term
expectation? #
Cash
Australian bonds
Aust'n List Prop
Global equities (unhedged)
Australian shares
5.9
4.7
9.5
8.4
18.0
5.6
5.6
9.6
2.3
11.2
5.0
5.8
6.4
8.4
8.4
Source: Thomson Financial Datastream, MLC Investment Management
#
MLC base case equilibrium assumptions for asset class returns over the next 10 years,
assuming that markets are fairly valued at the commencement of the period, that the
global and domestic economies grow at around a trend-like pace, and inflation outcomes
are in line with central bank targets. Estimates are subject to change without notice.
Conclusion
• Investment solutions have to be appropriate for
good and bad times.
• Its better to outperform in negative return
environments than vice versa.
• We are committed to providing and maintaining
investment solutions that are both sensible and
help clients achieve their goals.
Questions?
Comments.
Statements!