investment update for your mlc horizon 4 balanced portfolio year to 31 march 2008
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Investment Update for your MLC Horizon 4 Balanced Portfolio Year to 31 March 2008. Important information. - PowerPoint PPT PresentationTRANSCRIPT
Investment Updatefor your MLC Horizon 4
Balanced Portfolio
Year to 31 March 2008
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
Important information
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 sub-prime mortgages!
When too much debt just isn’t enough!
Source: Thomson Financial Datastream
Australian household debt
020406080
100120140160180
Q1 1980 Q1 1985 Q1 1990 Q1 1995 Q1 2000 Q1 2005
as % of GDP
as % of disposable income
%
US household debt
020406080
100120140160180
Q1 1980 Q1 1985 Q1 1990 Q1 1995 Q1 2000 Q1 2005
as % of GDP
as % of disposable income
%
UK household debt
020406080
100120140160180
Q1 1980 Q1 1985 Q1 1990 Q1 1995 Q1 2000 Q1 2005
as % of GDP
as % of disposable income
%
No, it’s not just a US problem
Source: Thomson Financial Datastream, MLC Investment Management
EU, Japanese manufacturing confidence is following US lower..
-3
-2
-1
0
1
2
3
Q1 1990 Q1 1995 Q1 2000 Q1 2005
US EU-15 and Japan
Std deviations away from 5yr average
..and G3 consumer sentiment is also falling
-3
-2
-1
0
1
2
3
Q1 1990 Q1 1995 Q1 2000 Q1 2005
US EU-15 and Japan
Std deviations away from 3yr average
-30%
-20%
-10%
0%
10%
20%
30%
An
nu
alis
ed
Re
turn
s (%
pa
)
3-Months
1 Year
3 Year
Asset Class Returns to March 2008
*
Some of the major central banks have started the rescue operation…
0
1
2
3
4
5
6
7
8
9
May-04 Feb-05 Nov-05 Aug-06 May-07 Feb-08
US Euro-area Japan
Canada UK
Official interest rates %
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 the1yr benchmark lending rate. NZ rate is RBNZ cash rate target.
0
1
2
3
4
5
6
7
8
9
May-04 Feb-05 Nov-05 Aug-06 May-07 Feb-08
Australia China
New Zealand
Official interest rates %
“.. 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
0
1
2
3
4
5
6
Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008
Annual growth in real GDP %
..helping to keep inflation above the RBA’s target range
The RBA's worst target 'miss' of the low-inflation era?
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Q2 1989 Q2 1991 Q2 1993 Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007
Consumer prices y/y% - average of RBA's preferred measures
Outlook for business investment is still very strongEngineering construction
Work done, 2003/04 prices
0
2
4
6
8
10
12
14
Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07
By private sector for private sectorBy private for public sectorPublic sectorTotal
$Abn
Non-residential building indicatorsCurrent prices
01
234
567
89
Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07
Approvals Commencements Work done
$Abn
Non-residential construction: Still heaps of work in the pipeline
02468
10121416
Sep-86 Mar-93 Sep-99 Mar-06 Mar-90 Sep-96 Mar-030
10
20
30
40
50
60
70Chain volumes $bn $Abn
Work done Work yet-to-be-done
CAPEX survey: latest estimate of year-ahead spending is up sharply on last year
0100002000030000400005000060000700008000090000
2000/01 2002/03 2004/05 2006/07 2008/09
$A million
Australian shares have been incredibly strong. These returns were NEVER going to last
-15
-10
-5
0
5
10
15
20
25
30
Q1 1977 Q1 1982 Q1 1987 Q1 1992 Q1 1997 Q1 2002 Q1 2007
Rolling 5yr real returns - Datastream Australian Market Index
Source: Thomson Financial Datastream
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!
The problem isn’t ‘P’
Source: Thomson Financial Datastream
..it’s ‘E’
PE ratio close to its lowest since 1991 suggests local market is cheap...
0
5
10
15
20
25
30
Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08
Trailing PE ratio
..as long as you think these earnings are sustainable!
0
10
20
30
40
50
60
70
80
90
100
Q4 1979 Q4 1984 Q4 1989 Q4 1994 Q4 1999 Q4 2004
Real Earnings per share (Index)
Your portfolio in review:
MLC Horizon 4Balanced Portfolio
Contribution to performanceMLC Horizon 4 Balanced Portfolio
Contribution from each asset class for the periods ending 31 March 2008Returns are gross of all fees and taxes
Contribution from each asset class= strategic asset allocation weighting x total return for the asset class
Data source: MLC Investment Management
Portfolio ReturnsMLC Horizon 4 Balanced Portfolio – Personal Super
Absolute Rolling Period Return ( March 1988 – March 2008)Returns are gross of all fees and taxes
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Twelve Month Return (%pa) Three Year Return (%pa) Five Year Return (%pa)
Source: Mercers Investment Consulting (MPA Retail Software Kit)
• 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)
MLC Horizon Fund expected outcomes for investors
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.
Reasons for Horizon’s recent performance
Sample of Projected Scenario Real Returns: Horizon 4 versus Mercer Average (over 5 year horizons, post superannuation tax, fees and alpha)
-15%
-10%
-5%
0%
5%
10%
15%
20%
Global depression orstagnation (1930s)
Bubble bursts (econom
y okay)
Aus econom
ic crisis (reversalscen 8) W
orld weak
Credit/ m
onetary contraction
Investor Pessim
ism - rise in
risk premium
s
Global P
andemic
Aus only bust (w
orld econ notw
eak)
Steady S
tate
Global C
atasptrophe
Debt driven grow
th
Deflation - productivity driven
boom
Disinflation
Australian boom
Benign A
ust inflation
Speculative B
ubble
Generalised global grow
thboom
– investor optimism
Prolonged global grow
th &productivity boom
/BR
ICs R
esboom
Rea
l Ret
urns
(%pa
)
Horizon 4's Excess Return vs Mercer Median
Horizon 4's Real Return
MLC likely to outperform peers in adverse scenarios
Current environment similar to
We believe our asset allocation will outperform in most risk scenarios, particularly adverse scenarios
vs competitors
The Investors’ Experience with MLC
Value of investing $100 on 31 March 1993(net of super tax and fees)
$100
$150
$200
$250
$300
$350
Mar
-93
Sep
-93
Mar
-94
Sep
-94
Mar
-95
Sep
-95
Mar
-96
Sep
-96
Mar
-97
Sep
-97
Mar
-98
Sep
-98
Mar
-99
Sep
-99
Mar
-00
Sep
-00
Mar
-01
Sep
-01
Mar
-02
Sep
-02
Mar
-03
Sep
-03
Mar
-04
Sep
-04
Mar
-05
Sep
-05
Mar
-06
Sep
-06
Mar
-07
Sep
-07
Mar
-08
Inflation (CPI) MLC Super H4 Balanced fund
Source: Mercers Retail software Kit, Super Multi-Sector Balanced Growth universe
Protecting & growing real wealth
MLC Moderate OptionComparison with the Mercer Pooled Fund Survey Universe
Annualised Risk and Return for 20 years ended March 2008(after tax and after fees) - - - - Median
9.8
9.6
9.4AnnualReturn(% pa)
9.2
9.0
8.8
8.6
8.46.0 6.3 6.6 6.9 7.2 7.5
Annualised Standard Deviation (% pa) calculated monthly MLC
MLC’s process delivers
MLC Balanced Fund
32 funds started this race in May 1985.Where the lines intersect shows themedian risk and return result of the 12 managers who survived the 22 year period
Share manager performance31 March 2007 – 31 March 2008
Returns are gross of fees and taxes
Australian shares
Maple-Brown Abbott -6.5%Dimensional -5.6%Lazard Asset Management -13.0%Contango -4.3%Concord Capital -4.2%Wallara Asset Management -7.2%JF Capital Partners -2.2%Balanced Equity Management -10.4%Northcape -5.3%
Total -6.9%
Global shares
Capital International -6.0%Alliance Growth Equites -14.2%Dimensional - Global -18.8%Dimensional - Emerging Mkts 7.4%Fortis Investments N/Ap*Bernstein Value Equities -18.4%Walter Scott & Partners -7.6%Wellington -12.1%
Total hedged -5.9% Total unhedged -12.1%
*Returns for this manager are not applicable, because the manager was not appointed to the fund for this period of time
Data: MLC Investments Limited
Top Ten Australian Stocks – MLC Horizon 4 - Balanced Portfolio
Company Industry Sector Portfolio (%)
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
Top 10 Australian Sharesas at 31 March 2008
Top 10 Global Shares (Hedged and Unhedged)as at 31 March 2008
Top Ten Global Stocks – MLC Horizon 4 - Balanced Portfolio
Company Industry Sector Portfolio (%)
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
Investment ProcessThe 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
Periods to end March 2008 5yr 10yrMLC's Long-term
expectation?#
Cash 5.9 5.6 5.0Australian bonds 4.7 5.6 5.8Aust'n List Prop 9.5 9.6 6.4Global equities (unhedged) 8.4 2.3 8.4Australian shares 18.0 11.2 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.
Let’s be realistic about the kind of returns that are achievable and sustainable over time
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!