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Investment Update
for your MLC Horizon 1
Bond 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 sub-prime
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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d
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In
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Pr
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Pr
op
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ty
re
s
ed
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d
Sh
a
-H
-U
Sh
ar
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Sh
ar
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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
Engineering construction
Chain volumes $bn
$Abn
14
70
60
50
10
8
Work done
Work yet-to-be-done
6
4
2
0
Sep-86
Mar-93
Sep-99
Mar-06
Mar-90
Sep-96
Mar-03
40
10
8
30
6
20
4
10
2
0
0
Mar-95
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
8
7
6
Approvals
Commencements
Work done
5
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
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!
The problem isn’t ‘P’
..it’s ‘E’
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
20
70
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 1
Bond Portfolio
Contribution to performance
MLC Horizon 1 Bond 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
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.
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!