MLC Australian Share Value
Style 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
5
Market Overview
6-8
Australian Share Value Style Commentary
9-11
Appendix: Table of Investment Manager Returns
12
Page 3
This review provides
insights on the
performance of the
MLC Australian Share
Value Style 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).
160
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 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.
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.
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.
Manager meetings and
reviews
Sh
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 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.
 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.
G lo
ba
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Some of our recent updates include:
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.
Au
s tr
Your investment
specialists
regularly
produce
commentary and
articles on
topical
investment
issues. These
are available on
mlc.com.au
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”.
 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.
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
The graph shows another miserable year for share and
REIT investors.
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.
110
Selected share price indices
End-June 2008 equals 100
90
70
50
Source: MSCI, Datastream
30
Jun-08
Sep-08
Australia
Dec-08
Developed markets
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.
Moreover, every leading indicator of
employment is pointing to sharply
higher unemployment rates over the
coming year.
Mar-09
Jun-09
Emerging markets
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.
Hopes that the major emerging
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
Australian Share Value
Style Commentary
The MLC
Australian Share
Value Style Fund
is expected to
outperform the
S&P/ASX 300
Accumulation
Index over
rolling 5 year
periods. The
Fund uses
investment
managers who
have an
investment style
focusing on
companies that
they believe are
undervalued in
relation to their
earning
potential.
Executive Summary:
The table outlines performance of MLC Australian
Share Value Style Strategy.
Performance Overview
to 30 June 2009
5 years
3 years
1 year
3 mths
MLC Australian Share Value
Style strategy, Gross
5.9%pa
-2.9%pa
-17.3%
17.6%
S&P/ASX300 Accumulation
Index
6.8%pa
-3.9%pa
-20.3%
11.5%
MLC Wholesale Australian
share Value Fund, Net
N/Av
-3.7%pa
-17.9%
17.1%
Median (Mercer Retail IDPS –
Australian Shares)
6.9%pa
-3.5%pa
-17.7%
11.5%
Quartile Ranking (Mercer IDPS
Australian Shares)
N/Av
3rd
3rd
1st
Percentage of time above
median
(IDPS universe, since
inception*
N/Av
0%
18%
N/Av
* Inception is November 2004
 The Australian market returned 20.3% in the year, its worst
financial year result for 27 years. A
June quarter increase of 11.5%
and a phenomenal but
nonetheless welcome 27.3% rise
since the early March low
rewarded investors who were
disciplined and chose to maintain
their strategy and market
exposure. At the sector level, only
Information Technology (0.5% of
the market) recorded a positive
return. Sectors with defensive
characteristics such as Telecoms,
Consumer Staples, Healthcare and
Banks delivered the best results,
albeit negative. In contrast, cyclical
sectors with a more direct
exposure to the economic cycle
(including resources) tended to
lose the most ground while the
Australian REIT sector, down by
42.3%, was again the worst
performer.
 The MLC Australian Shares Value
strategy returned 17.3% in the
year, outperforming the market
return by 3.1%. Even though your
actual return is still disappointingly
negative, we are pleased that the
strategy we have built has
cushioned you from the worst of
the market’s fall (as we would
expect from the strategy in this
type of market).
 The managers we have appointed
for you performed well in the year.
Maple-Brown Abbott achieved a
return that was 5.5% better than
the index) while Dimensional’s
value approach delivered a return
that was a marginal 0.1% under
the benchmark’s.
Page 9
Market Relative Returns
Your Managers
Your MLC Australian share Value
style strategy returned -17.3% for the
year, outperforming the market return
by 3.1%. This was due primarily to the
stock selection strategies of MapleBrown Abbott which included
outperforming stocks such as Fosters
Group, Coca-Cola Amatil and
Singapore Telecommunications in
their portfolio. Dimensional’s return
was marginally behind the market
return. Ownership of stocks such as
BlueScope Steel and OneSteel
detracted from their performance.
The composition of the Fund’s
manager strategy is designed to
achieve a portfolio of Australian
shares with a specific and
pronounced ‘value’ style bias. The
MLC Australian Share Value Style
Fund is managed by two fund
managers, Dimensional and MapleBrown Abbott, who are longstanding
value oriented practitioners. They are
managers who prefer companies who
are selling at prices they consider
cheap.
While we expect that the negative
absolute return from your investment
will disappoint you, outperformance is
a good outcome in such a difficult
market and certainly preferable to
underperforming. It’s also an outcome
that we tend to expect in difficult
market circumstances such as these,
given the deliberate value style focus
of your fund. The managers we have
chosen for you are both experienced
value investors. They tend to be long
term investors and, as disciplined
value investors, look to invest in
companies trading at cheap prices.
Also, the key investment staff within
these firms are typically people who
have long track records in Australian
shares research and portfolio
management.
A multi-manager approach also
provides Fund investors access to the
growth opportunities available in the
broad market. As shown in the
following table, Dimensional tends to
have a bias to small companies while
Maple-Brown Abbott can have an
exposure to small, medium and large
companies.
The combination of Maple-Brown
Abbott and Dimensional provide the
required value oriented portfolio
strategy that is consistent with the
objective of the Fund.
Irrespective of the market
environment, MLC believes that
appointing a number of different
managers is far preferable to a
strategy that relies on just one
manager for stock selection. While
both managers MLC has appointed
are “value” oriented in their stock
selection, they apply different
techniques in their search for value
companies. Therefore, by appointing
two value managers, Fund investors
aren’t dependent on just one definition
of value. The Fund’s managers
provide the required pronounced style
characteristics while still providing
diversification of insight.
The table shows the value style practiced by your
managers and the allocation to each.
Style
Tailored
mandate?
Strategy
Allocation
Market cap.
Characteristics
Dimensional (DFA)
Deep Value
Yes
50%
Small
Maple-Brown Abbott
Value
Yes
50%
All
Manager
Page 10
Stock Exposures
Over the year, stock selection was a
significant positive contributor to your
return. Your Fund’s outperformance
was due to the combined stock
selection of both managers. The stock
strategies that contributed well to the
Fund’s return include ownership of
National Australia Bank, Goodman
Fielder, Amcor, Singapore
Telecommunications and Coca-Cola
Amatil. Their decision not to own BHP
Billiton and to have a low exposure to
real estate investment trusts also
made a positive contribution.
This is precisely what our managers
have been doing in this difficult
market (and in good markets as well).
We have seen numerous examples of
our managers using the market’s
weakness as wealth building
opportunities on your behalf. For
example, many companies have
come to the market to raise fresh
capital via rights issues or placements
of new shares. This has enabled
MLC’s managers to buy stock, often
at very cheap prices.
While many of our managers tend to
think of stock selection from a long
term perspective, their processes are
also dynamic. They need to be
because economic, market and
company circumstances change
though time, which may require action
or provides opportunities to enhance
the portfolio. This can mean one,
some or all of the following actions by
our managers – adding to or reducing
existing holdings, adding stocks to the
strategy or selling out of some stocks
completely if their fundamentals have
changed for the better or worse.
 Wesfarmers: earlier this year, the
company raised additional capital
via a rights issue and institutional
bookbuild covering additional
shares. A number of MLC
managers participated, buying
stock at $13.50 and $15. Based
on a $22.65 share price on 30
June, there has been a gain of at
least 51% on the additional
shares acquired.
Examples include:
 Insurance Australia Group:
additional shares were acquired
for the strategy via participation in
an issue of shares to institutional
investors at $3.00 per share.
IAG’s 30 June share price was
$3.50 so the shares acquired are
showing a gain of 17%.
 BlueScope Steel: a rights issue
of shares priced at $1.55 per
share occurred in May. With the
30 June share price at $2.53, the
newly acquired shares are
showing a gain of 63%.
Page 11
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
Australian Share Managers
DFA
Maple- Brown Abbott
MLC Australian Share
Value Style Portfolio
S&P/ASX 300
Accumulation Index
n/a
n/a
n/a
7.3%
-1.7%
-20.5%
20.2%
10.8%
8.3%
6.9%
5.6%
-2.8%
-14.6%
15.0%
n/a
n/a
n/a
5.9%
-2.9%
-17.3%
17.6%
9.0%
7.1%
7.5%
6.8%
-3.9%
-20.3%
11.5%
Note all total returns quoted above are before the deduction of fees & taxes and are to periods ended 30
June 2009.
Page 12
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 13