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Transcript
MLC Global Property Fund MLC Annual Review June 2009 MLC Investment Management Level 12, 105 –153 Miller Street North Sydney NSW 2060 1 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, North Sydney 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 June 2009, unless otherwise stated. The specialist investment management companies are current as at 30 June 2009. Funds under management figures are as at 30 June 2009, unless otherwise stated. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you. Page 2 Contents MLC Investment Management Team Recent Comments, Updates and Articles Market Overview Global Real Estate Investment Trust Commentary Appendix: Table of Investment Manager Returns 5 6-8 9-12 13 Page 3 This review provides insights on the performance of MLC Global Property Fund. It also provides an update on our recent research and publications with the latest views on investment issues and market events, and the activity the research team has undertaken on your behalf. Page 4 MLC Investment Management Team Recent Comments, Updates and Articles The recent financial market chaos and plunge in liquidity of credit assets has helped focus mainstream attention on the risk posed by exposure to illiquid assets. This is particularly relevant to many Australian Superannuation investors in Industry Super funds with a high degree of illiquid exposure (eg Direct property, Infrastructure and private equity). Over the past 12 months, MLC Investment Management has undertaken 529 manager meetings. The broad asset class breakdown of these manager meetings is outlined in the below chart. 160 140 120 100 80 60 40 20 Ot he r De bt Ma rk e ts erg i ng Em l as s ali an Pr op er ty Au s tr as se tC nc y 0 Cu rre Amanda Heyes, MLC Investment Specialist, puts 'The Chaser' under the microscope and finds that the power of compound interest over long periods of time can have an incredible impact on your clients wealth. Manager meetings and reviews Mu l ti- A summarized client friendly commentary on the key drivers of performance for the range of MLC Multi-Manager funds over the year to June 2009 is on the client MarketWatch site. MLC Investment Management’s views and analysis on 7 year return potential for asset classes and the range of MLC’s diversified portfolios has been updated to reflect end June 2009 market valuations. Don't forget to have a look at the Marketwatch site for an update on the impacts of the financial crisis and economic downturn on recent income distributions for the MLC MasterKey Investment Trust, Unit Trust and Investment Service and helping clients through tough times. Sh ar es ali an Sh ar es G lo ba lP ro pe rty A fully scripted ‘Performance Preview Pack’ for the year ended 30 June 2009 to help facilitate more meaningful client conversations around fund performance in challenging market environments, The pack “lifts the lid” on the key drivers of the current economic environment, how this has affected investment markets and what this means for your clients. The Lottery Effect of Volatility – MLC does not believe volatility should be seen as the definitive measure of risk. Risk, to clients, is the likelihood they will not achieve their financial objectives. However, the dispersion of returns (volatility) does impact whether clients achieve their financial objectives. This paper examines the contribution the dispersion of returns has on outcomes. Kerry Napper, MLC's Capital Markets Research Analyst, looks at what history can tell us about the effect of banking crises on developed and emerging economies. G lo ba l Some of our recent updates include: MLC has always taken the issue of liquidity and equitable pricing seriously, to ensure we provide our investors with daily access to their unit linked funds. To ensure we can provide this access, MLC has a formal approach to the assessment of liquidity and equitable pricing. For more information on this issue please refer to MLC’s White Paper entitled: ”Liquidity and Equitable Unit Pricing – March 2009”. Au s tr Your investment specialists regularly produce commentary and articles on topical investment issues. These are available on mlc.com.au Traditional portfolio construction approaches have been under intense scrutiny throughout the recent financial crisis. In his article - The do's and don'ts of portfolio construction, John Owen, Senior Investment Specialist for Australian shares and global property provides some insights on how NOT to make the same mistakes. Page 5 Market overview Comments by Brian Parker Investment returns over the past 12 months were very poor, with the typical balanced fund likely to have posted a -11% return for the year. REIT and share markets were the main culprits, while Government bonds posted solid returns as investors continued to seek safety, and the world’s central banks drove official interest rates down to unprecedented levels. Within the bond universe, the dispersion of returns among the various subclasses was truly remarkable. While Government nominal bonds in the developed markets performed well, every other debt securities sub-class performed poorly in the December 2008 quarter. Corporate bond spreads widened dramatically, particularly after the failure of the US investment bank Lehman Brothers in mid-September 2008. Deflation fears meant that markets had little interest in inflation protection, and consequently inflation protected securities also performed extremely poorly. However the unbridled pessimism that characterised market sentiment in late 2008 abated during 2009, and markets became less pessimistic about the outlook for the global economy. The functioning of world money and credit markets has progressively normalised. The result has been sharply higher share prices, higher commodity prices, much tighter credit spreads and higher Government bond yields. Economic conditions in the world economy deteriorated over the course of the year. All the world’s major developed economies are now firmly ensconced in recession. In the case of Japan and the UK, the recession is as severe as any in living memory. Aust bonds Global bonds Cash Global shares (unhedged) Aust shares Aust REITs Global REITs (AUD hedged) -50 -40 -30 -20 -10 0 10 20 Returns (%) for year to end-June 2009 The chart shows both the steep declines in Australian and world share prices during the last half of 2008, and also the solid recovery that has occurred since early March 2009 in the case of the developed markets and October 2008 in the case of emerging share markets. Selected share price indices End-June 2008 equals 100 110 90 70 50 Source: MSCI, Datastream 30 Jun-08 Sep-08 Australia Dec-08 Developed markets Here in Australia, economic growth has slowed to a crawl over the past year, and the economy has almost certainly fallen into recession, despite the fact that economic data released in recent months have tended to surprise on the upside. Retail spending seems to have been supported by the Government’s cash hand-outs. Housing finance has picked up – particularly for new housing construction – spurred on by extremely low interest rates, and the Government’s grants to first home buyers. However, we have yet to see the full effect of the global recession on exports or business investment. Mar-09 Jun-09 Emerging markets Moreover, every leading indicator of employment is pointing to sharply higher unemployment rates over the coming year. Hopes that the major emerging market economies of China and India could sail through this crisis relatively unscathed appear to have been dashed. Chinese growth in particular slowed significantly – industrial output growth fell to its slowest pace in a decade. However, more recent data out of China suggest that some pickup in growth may be underway. Page 6 Trade and production data in some of the world’s most trade dependant economies – including Japan, nonJapan Asia, and Germany – have been notably worse than elsewhere in the last few months. Much of this weakness appears to reflect the collapse of trade finance activity, and indeed world trade, in the wake of the Lehman Brothers failure (see charts below). There remains considerable debate as to whether the Lehman Brothers failure represents an unavoidable consequence of the financial crisis or a policy blunder. We lean towards the latter interpretation. The chart shows industrial output in less trade dependant economies: The chart shows industrial output in highly trade dependant economies: In March 2008, another US investment bank, Bear Sterns, was facing failure, and because of the institution’s pivotal role in the US and global financial system, the US Treasury and Federal Reserve engineered a bail-out of the institution by JP Morgan, under which the business of Bear Sterns was absorbed into JP Morgan, and the troubled assets of the institution were taken on and guaranteed by the Federal Reserve. In the wake of that operation, market participants felt that the rules of the game were reasonably clear: viz, any institution that occupied such a pivotal position in the system would have the support of US Treasury and Federal Reserve if it faced difficulties. As a consequence, market participants felt relatively confident in acquiring the short-term debt obligation of such entities, continuing to utilise them as counterparties for a range of transactions, and holding their equity. By allowing Lehman to fail, the rules of the game appeared to collapse, and with it, confidence in the system. The failure of Lehman Brothers followed a period where key US institutions such as the investment bank Merrill Lynch, the world’s largest insurer AIG, and key US mortgage lenders Fannie Mae and Freddie Mac had been taken over, nationalised, or sent into bankruptcy. Institutions in the UK and Europe have faced similar difficulties. It is now clear that during the aftermath of the Lehman Brothers failure, the world financial markets and economy stood on the edge of an abyss. Flows of credit that are the lifeblood of the world economy in many cases ceased. For exporters and importers, trade finance was extremely difficult to obtain. Corporate debt markets became dysfunctional, and in the case of high yield securities, there was no market to speak of. Interbank lending markets were severely restricted, and cost of funding for the world’s banks soared. In response, the world’s monetary authorities stepped up their injections of liquidity and asset purchases. Later in the year, further capital injections were made into US banks by the US Treasury, and by year’s end, the major US car makers were in line for emergency funding from the same program that had been set-up to aid troubled financial institutions. President Obama’s much anticipated $789 billion stimulus package passed through the US Congress in February. Additionally, a $275 billion housing plan aimed at preventing foreclosures and attempting to stabilise the housing sector was introduced. During the past year, policymakers have continued to take steps to address this crisis that are unprecedented in both their nature and scope. Fiscal policy measures have been taken in many countries, including here in Australia. The world’s central banks have reduced official interest rates aggressively, and injected huge amounts of liquidity into the financial system in a bid to get money and credit markets working again. These efforts are critical, because in the absence of properly functioning markets for credit, and financial institutions willing to lend, traditional monetary policy is close to impotent, and generating a sustainable recovery in private demand will be close to impossible. At the time of writing, conditions in money and credit markets have continued to improve, although they have yet to return to anything that might be described as normal trading conditions. Share prices, while still sharply higher than their recent lows, have fallen across the globe. While there has been some improvement evident in the economic data released across the world so far this year, the recession is far from over. Share markets seem to have gotten ahead of themselves in the latter stages of the financial year, and consequently, their partial retreat appears entirely justified. Page 7 At MLC, we spend a good deal of time assessing the medium to longer-term outlook for economies and investment returns. Before this rally began in early March, prospective investment returns for domestic and global shares, and for non-Government securities looked very favourable – significantly higher than historical averages. Given the size and speed of the recovery so far, those prospective returns have come down sharply, but are still reasonably favourable. In the short term, we believe the pathway towards sustainable recovery – both in the economy and investment returns – remains highly uncertain. What kind of news would we need to hear, what questions need to be answered and what developments would we like to see in order to become more optimistic? Here is a list, but by no means an exhaustive one. So far, the loan and securities losses faced by banks and other financial institutions have mostly been related to the US housing market collapse. Just how bad will the non-housing credit losses be in this recession, and do the banks have enough capital to cushion against those losses? The US Federal Reserve suggests that the major US banks need to raise relatively little capital to provide that cushion. For our part, we think US banks need to raise considerably more capital than the $75 billion or so identified by the Fed. In the US and elsewhere in the English speaking world, households have increased their saving. In Australia, this has been achieved (so far) with very little weakness in consumer spending, but the US and UK have not been so lucky, and consumer spending in those economies has fallen sharply. Sharply lower household wealth has triggered higher rates of saving – a reversal of the trend of the past decade or more. It remains unclear how far this trend has to go – we have no way of knowing in advance just how high the saving rate will need to rise in these economies (and hence how weak, and for how long, consumer spending will be). While the problems in the world’s banking system have restrained the supply of credit, the demand for credit from the private sector has been very weak. We need to see signs of a pick-up in credit demand. Just when will the private sector’s appetite for credit improve – not the kind of voracious, unsustainable appetite for credit that led the world to financial obesity, just normal, garden variety demands for credit for home building and business investment? Thankfully for world bond markets, this lack of appetite for debt has allowed Governments to have the field all to themselves when it comes to borrowing money. Even after their recent sell-off, long bond rates are still very low historically. At some point however, the competition for funds between Governments and a resurgent private sector is likely to be problematic for bond markets. At the end of the day, the share market is a snapshot of the businesses that comprise the economy. Over time, those businesses profit from meeting the needs of their customers, pay dividends, and reinvest in order to grow. Share markets mostly reflect that reality. Extended periods where share markets fail to deliver are rare, but they have happened. Consequently, not everybody can or should have all their eggs in the basket labelled ‘shares’. Our best defence against not knowing the unknowable is to diversify our investments as widely as possible, take enough risk in our portfolios to enable us to meet our clients’ return objectives and, to as much as possible, fully understand the risks attached to every investment we make. Page 8 Global Property Fund Commentary The MLC global property strategy is expected to outperform the UBS Real Estate Investors Trust Index (AUD hedged) 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. The table outlines performance of MLC Global Property Strategy. Performance Overview to 30 June 2009 3 years 1 year 3 mths MLC Global Property Strategy (AUD hedged), Gross -14.9% pa -36.8% 31.8% UBS Real Estate Investors Trust Index (AUD hedged) -18.5% pa -42.5% 23.5% N/Av -37.2% 35.7% Median (Mercer Retail IDPS – Global Property (Hedged)) -19.0% pa -43.4% 24.0% Quartile Ranking (Mercer IDPS Global Property) N/Av 1st 1st Percentage of time above Median (IDPS universe, since inception) N/Av 79 N/Av MLC Wholesale Global Property Fund Class A, Net Note: Inception is January 2007. Executive Summary: As we saw in most global equity markets during the June quarter, Global Real Estate Investment Trust (“GREIT”) markets also performed strongly. The UBS Real Estate Investors Trust Index (AUD hedged) returned 23.5% in the June quarter. However, while this is a welcome development for GREIT investors, the one year return remains significantly negative with the UBS Index down by 42.5% to 30 June. This poor return reflects in part the issue that has dominated the performance of the Australian REIT market. That is, the indebtedness of many REITs which, in the difficult credit market and economic environment of the last year and a half, has required them to undertake drastic measures (equity raisings, property sales, etc) to repair their financial position. Thankfully, there is evidence that these measures are working. Asian REIT markets continue to be the best global performers. Hong Kong’s REIT market was the best, falling by 11.6%, where stable office and residential property fundamentals, the best REIT balance sheets on a global basis and growing confidence based on China’s economic resilience have helped. Japan’s and Singapore’s REIT markets weren’t as firm as Hong Kong’s but were nonetheless superior performers compared to the Australian, US, UK and European REIT markets. The MLC GREIT strategy outperformed the GREIT market return by a substantial 8.3%, bringing the 1 year excess return to 5.7%. The strategy’s significant ownership of Asian REITs was very beneficial to your returns versus the GREIT index. While your return for the year is negative, we are pleased that the strategy we have built has helped cushioned you from the worst of the market’s fall. Both Resolution Capital and Morgan Stanley have produced considerable excess returns, and while La Salle has underperformed, we retain our conviction in the manager to deliver strong long-term performance. Page 9 We are particularly pleased with the strategy’s rolling one year return at the end of June, which was 5.7% better than index. 9.0 6.0 3.0 0.0 -3.0 -6.0 -9.0 1 Year Rolling Excess Return This satisfactory excess return outcome was achieved in what has probably been the most challenging and difficult year in the history of the global REIT market. The result is due to the stock selection of the managers that we have appointed on your behalf. The global REIT market contains over 220 REITs scattered across many different countries. As you would appreciate, not all are equally attractive in terms of quality or their prospective return. Some are worthy investments for you but there are a lot that aren’t. An excess return of 5.7% in the year suggests that your appointed managers have done a good job in a very difficult environment, choosing between the REITs that are investment grade and the ones that should be avoided. Jun-09 Apr-09 Feb-09 Dec-08 Oct-08 Aug-08 Jun-08 Apr-08 Feb-08 Dec-07 Oct-07 Aug-07 Jun-07 Apr-07 Feb-07 Dec-06 Oct-06 -12.0 Aug-06 As you can see from the graph, your strategy has produced better than index returns with a high degree of consistency. While there is a limited performance history, as the strategy was only launched in 2005, the rolling three year excess return has been consistently positive. Rolling one year excess returns have mostly been positive as well. 12.0 Jun-06 Excess returns are shown on a rolling 1 and 3 year basis, rolling through time from 2005 to 30 June 2009. The return of the market index is represented by the intersecting horizontal line. This means that if the rolling excess return line is above the horizontal line, the strategy 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 returns at a single point in time (as in the earlier table). The graph shows how well the MLC Global REIT strategy has performed compared to the market index (“excess return”) to 30 June 2009. % in excess of index* Market Relative Returns 3 Year Rolling Excess Return We do acknowledge that this outperformance may provide you with little comfort when the strategy’s absolute return for the year (-36.8%) is distinctly negative. However, outperformance is a good outcome in such a difficult market and certainly preferable to underperforming. Page 10 Your Managers Irrespective of the market environment, MLC believes that appointing a number of different, experienced managers is far preferable to a strategy that relies on just one or a small number of managers for country, sector and stock selection. We don’t believe it is appropriate for you to be dependant on a narrow range of insights, especially if it is from just one firm, when our research has identified a number of managers with exceptional global REIT skills. We also aim to reduce your dependence on one or a narrow range of investment styles. This is why we have appointed three managers who are responsible for stock selection – the REITs to own and, just as importantly, the REITs to avoid. The diversity of the MLC global REIT strategy is evident from the table above which shows the investment style of each manager and the allocation we have made to each manager. All of the managers we have appointed are providing you with tailored portfolio arrangements as well. This is an example of how MLC uses its significant scale on your behalf, in this case negotiating with your managers to provide special portfolio arrangements that we believe will deliver superior return outcomes for you. A summary of your appointed managers is in the table. Style Tailored mandate ? Key role in strategy LaSalle Relative Value Yes 33.3% Morgan Stanley Absolute Value Yes 33.3% Resolution Capital Quality Value Yes 33.3% Manager As we mentioned earlier, the strategy outperformed the market index return by 5.7% in the year. This pleasing outcome was due to Resolution Capital’s and Morgan Stanley’s substantial outperformance. Morgan Stanley was the best performer, outperforming by 16.6% while Resolution Capital’s outperformance was by a margin of 15.1%. Morgan Stanley’s portfolio has a significant bias to selected REITs in Hong Kong, Japan and Singapore because the REITs in these markets tend to have superior balance sheets and better earnings potential than REITs elsewhere in the world. Another notable but rewarding feature of Morgan Stanley’s portfolio is their low exposure to the US REIT market where there are expectations of a 30% - 40% drop in real estate property values (though Morgan Stanley believe this is already factored into US REIT prices). Resolution Capital’s deliberate strategy of focussing stock selection on well managed, conservatively geared property vehicles with strong operating cashflows continues to benefit your return. LaSalle’s returns lagged those of Resolution and Morgan Stanley. Their 5.4% underperformance was due in part to their smaller exposure to Asian REITs and a higher exposure to US and Australian REIT markets. MLC has been constructing multi manager strategies for nearly 25 years and we know in any multi-manager strategy it is normal for some managers to underperform. Often it is because their style is out of favour or the market prefers companies that the managers have chosen not to own. We retain our conviction in LaSalle. Page 11 Country and Sector Exposures The global REIT strategy is well diversified. At the end of June, the strategy comprised 88 REITs chosen mainly from eleven different country REIT markets (shown in the pie chart on the right). As you can see from the lower diagram, the strategy owns significantly more in Hong Kong, Japanese and Singaporean REITs and less in US, Australian and Canadian REITs compared to index. We have listed some of the largest REIT investments in the strategy with a description of each for you. Hong Kong Land Holdings: One of Asia's leading property investment, management and development groups. Founded in Hong Kong in 1889, the Group has business interests across the region. In Hong Kong, the Group owns and manages some five million square feett of prime commercial space that defines the heart of the Central Business District. In Singapore, it is helping to create the city-state's new Central Business District with the expansion of its joint venture portfolio of new developments. Hongkong Land's properties in these and other Asian centres are recognised as market leaders and house the world's foremost financial, business and luxury retail names. The chart shows the global REIT strategy country exposures as at 30 June 2009. France 5% Netherlands Sweden Switzerland Canada 1% 2% 1% 0% Singapore 7% United States 41% Australia 9% Hong Kong 10% United Kingdom 11% Japan 13% The chart shows the major country exposures of the global REIT strategy versus the index composition as at 30 June 2009. United States Australia Canada United Kingdon Singapore Japan Hong Kong -10 -8 -6 -4 -2 0 2 4 6 8 % Mitsubishi Estate: Mitsubishi Estate Company, Limited is a Japan-based real estate company engaged in various property related business activities, including the development, leasing, operation and management of buildings, the operation of parking lots and housing construction and management. Mitsui Fudosan: Based in Tokyo, Mitsui Fudosan is Japan’s leading property company engaged in a range of property related businesses, including property investment, development and management. Starwood Hotels: One of the world's largest hotel companies, it owns, operates, franchises and manages hotels, resorts, spas, residences, and vacation ownership properties under its nine owned brands. Page 12 Appendix: Table of Investment Manager Returns Investment Manager 15 year % pa 10 year % pa 7 year % pa 5 year % pa 3 year % pa 1 year % 3 months % Gross Total Returns for periods ended 30 June 2009 G-REIT Managers LaSalle Investment n/a n/a n/a n/a -22.21 -36.59 12.62 Morgan Stanley n/a n/a n/a n/a -10.61 -7.32 31.33 Resolution Capital n/a n/a n/a n/a n/a -16.09 13.20 Note all total returns quoted above are before the deduction of fees & taxes and are to periods ended 30 June 2009. Page 13 MLC Investment Management For more information call MLC on 132 652 8am-6pm EST Monday to Friday, or contact your financial adviser. For details on MLC’s range of products and services visit our website mlc.com.au Page 14