MLC Horizon 2 - Income
Portfolio
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 Activity
5
MLC Investment Management Team Recent Comments,
Updates and Articles
6
Market Overview
7
MLC Horizon 2 Income Portfolio
10-14
Cash Commentary
15-17
Diversified Debt Commentary
18-21
Australian Real Estate Investment Trust Commentary
22-25
Global Real Estate Investment Trust Commentary
26-29
Global Share Commentary
30-32
Global Private Assets Commentary
33-34
IncomeBuilder Commentary
35-38
Appendix: Table of Investment Manager Returns
39-40
Page 3
This review provides
insights on the
performance of MLC
Horizon 2 Income
Portfolio.
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 Activity
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National Specialist Investment
Management (NSIM), our existing
cash manager, has successfully
managed an enhanced cash strategy
since 2007. The enhanced cash
strategy allows NSIM greater flexibility
to target a higher level of excess
return, than they are able to within
standard cash portfolios, by
opportunistically allocating to both
interest rate and credit risk, subject to
overall portfolio exposure limits.
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-
After reviewing the risk/return
requirements of our diversified
portfolios that also invest in cash - i.e.
MLC Horizon 1 Bond Portfolio and
MLC Horizon 2 Capital Stable/Income
Portfolio - MLC has chosen to move
to an enhanced cash strategy within
these portfolios.
Manager meetings and
reviews
Sh
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an
Sh
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G lo
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In late 2008 MLC reduced the risk
exposures of our cash strategies to
better meet the needs of investors
with a low risk profile. Since this time,
all new investments in the cash
strategies have been restricted to
bank deposits or discount securities
maturing within three months, issued
by either the 4 major Australian banks
or other licensed banks rated A-1 or
better.
We will provide more updates as the
review progresses over coming
months.
G lo
ba
l
Over recent months, MLC has been
conducting a detailed review of the
debt securities strategy. Although the
review has not yet been finalised, we
took the opportunity to implement one
of the changes during July.
During July we moved the cash
investments for MLC Horizon 1 Bond
Portfolio (30%) and MLC Horizon 2
Capital Stable/Income Portfolio (9.8%)
from cash to the enhanced cash
strategy managed by NSIM. There is
no fee impact resulting from this
change.
Au
s tr
MLC Horizon 1 and MLC
Horizon 2 to invest in
enhanced cash
The enhanced cash strategy can
invest in a greater range of high
quality debt securities than the
existing cash strategy. This is
important in an environment where
there are opportunities for managers
to take advantage of unusually
attractive pricing in high quality
securities that are now excluded from
the cash strategy. The investment
guidelines for the enhanced cash
strategy are conservative in terms of
both credit and duration exposures,
ensuring that capital preservation
remains the overriding focus of the
investment strategy.
Page 5
MLC Investment
Management Team
Recent Comments,
Updates and Articles
Your investment
specialists
regularly
produce
commentary and
articles on
topical
investment
issues. These
are available on
mlc.com.au
Some of our recent updates include:
 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.
 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.
 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).
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”.
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.
the effect of banking crises on
developed and emerging
economies.
 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.
 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.
 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.
 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.
 Kerry Napper, MLC's Capital
Markets Research Analyst, looks
at what history can tell us about
Page 6
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
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
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
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 7
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
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.
lean towards the latter interpretation.
Page 8
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 9
MLC Horizon 2
Income Portfolio
The MLC Horizon Series of portfolios
is designed as a complete solution to
meet an investor’s financial goals, and
are focussed on growing real wealth
for an expected level of risk. The
portfolios are well diversified within
asset classes, across asset classes
and across investment managers,
who invest in many companies and
securities around the world.
In building the MLC Horizon Series,
we won’t chase risky returns when
markets are very strong, which may
temporarily result in a lower return
than comparable funds that do. At
other times, and particularly when
markets are weak, we expect each
Portfolio to have higher returns than
comparable funds.
The MLC Horizon
2 Income
Portfolio may be
suited to you if
you want a
regular income
stream with
some tax
advantages, a
high exposure to
defensive
assets, and
some potential
for capital
growth over the
medium term.
The portfolio’s
expected
volatility is low.
Target Asset Allocation*
MLC Wholesale Income Portfolio
Cash
10%
Income
Builder
12%
A-REITs
9%
Global
shares
unhedged)
4%
Global
shares
(hedged)
1%
Global
property
securities
(hedged)
4%
Diversified
Debt
60%
*The actual asset allocation may be adjusted +/-5% around this
target. The rebalancing range is +/-2% around the target.
Page 10
How we design investment solutions
to grow and protect your clients’
wealth
Recent Example of this in action
We design solutions based on investors’
fundamental needs to grow wealth over the
long-term.
Your high allocations to cash (~10%), and short dated Australian
nominal bonds (~25%), provided some capital protection against the
share market decline of 2008. Your 30% exposure to global and
Australian shares contributed positively to returns in 2009 due to the
strong rally in world share markets.
This broad diversification helps limit the declines in portfolio value in
adverse environments.
We manage the risk in your portfolio by building
thoroughly diversified portfolios at every level –
asset class, country, currency, industry,
company and manager.
You access property via a combination of $AUD hedged global REITS
and A -REITs.
Your active global REIT strategy significantly outperformed the market
over the year, thanks to strong stock selection from 2 of your 3
managers. For example, Resolution Capital outperformed the Global
REIT market by 15%.
One example of Resolution’s strong stock selection was UnibailRodamco, which accounts for 4.6% of your global REIT strategy.
Resolution Capital has invested in this REIT since 2007, on the basis
that unlike many REITs, Unibail-Rodamco has a conservative balance
sheet, with a 26% Loan to Valuation (LTV) ratio and a strong earnings
per unit and distribution per unit outlook.
Unibail-Rodamco is the largest commercial REIT in Europe with 100
shopping centres in 13 European countries, office properties located
mainly in the Parisian CBD and over ten convention/exhibition venues.
It has a property portfolio valued at €24.6 billion at December 31, 2008.
You access exceptional investment managers
in the world who carefully invest your money in
the right businesses and assets.
Your 12% exposure to Australian shares is via the MLC IncomeBuilder
strategy. Your active manager, Maple-Brown Abbott (-6.3%) strongly
outperformed the S&P/ASX300 Industrials Index (-14.3%) over the
year.
During the year, Maple-Brown Abbott used market circumstances to
participate in selected equity raisings by quality companies, often at
historically cheap prices.
For example, BlueScope Steel made a rights issue in May 2009 at a
price of $1.55 per share, an all time low since listing in July 2002. As of
21st July 2009, the stock was trading at $2.83, a gain of 82%.
In May alone, Maple-Brown Abbott invested over $27 million in share
issues by BlueScope Steel, ANZ (issued at $14.40, share price on 21st
July was $16.84) and Stockland (issued at $2.70, share price on 30
June was $3.09).
We keep your investment goals on track
because we actively manage your portfolio to
stay true to its original intent.
MLC regularly reviews all strategies, but in light of the past year there
is an even greater focus on whether the strategy can be improved. An
outcome of the defensive strategy review (which is still continuing) is
the Fund should provide even better capital preservation in future
credit crunches.
Page 11
Executive Summary
2009 has provided some welcome
respite from the rapid decline in asset
values experienced in calendar year
2008. Every major share market
rallied strongly between March and
June 2009. Unfortunately, this was
insufficient to eliminate the losses of
the prior calendar year.
As most of your portfolio was invested
in cash (~10%) and short dated highly
rated bonds (~60%), this provided
some protection from the ravages of
global sharemarket declines in the
second half of 2008. As interest rates
declined significantly over the year,
this had a positive effect on the
market value of the bonds which was
passed through in your income
distribution.
The flight to quality assets in the last
quarter of 2008 also had a positive
impact on the value of these bonds.
The portfolios’ low exposure to shares
and listed property (approximately
30% of the portfolio) meant the
adverse impact of falling share values
and dividends was muted.
The table outlines performance of MLC Horizon 2
– Income Portfolio.
Performance
Overview to 30 June
2009


5 years
3
years
1 year
3
months
MLC Wholesale Horizon 2
– Income, net performance
N/Av
0% pa
-4.4%
5.5%
Median (Mercer IDPS MultiSector Conservative)
N/Av
0.8% pa
-2.7%
4.1%
Quartile Ranking (Mercer
IDPS Multi-Sector
Conservative)
N/Av
3rd
3rd
1st
Percentage of time rolling
return above Median (since
inception)
N/Av
0%
23%
N/Av
Returns for this period are for the MLC IDPS – Horizon 2 Income Portfolio which
commenced January 2006.
The net return quoted is sourced from Mercers Retail software where the administration
fee has NOT been deducted.
However, your one year return to
June 2009 remains in negative
territory.
Page 12
Contributors to returns

Some capital protection from your
10% allocation to cash (+5.4%)
and 60% exposure to
predominantly short dated bonds
(+5.3%).

Excess returns from your MLC
IncomeBuilder strategy (-8.4%),
with Maple-Brown Abbott (-6.3%)
outperforming the S&P/ASX300
Industrials Index (-14.3%) by a
substantial margin.
3.0%
2.0%
1.0%
Excess returns in your A- REIT
strategy (-36%) driven by
Resolution (-37%) and
Challenger’s (-36%)
outperformance relative to the
S&P/ASX300 A-REIT Index (42%).
Detractors from returns

MLC Wsale - Horizon 2 Income
Excess Return in IDPS Multi-Sector Conservative from Dec 2006 to Jun 2009
MLC0670AU versus Median (before tax and after fees)
4.0%
Excess Return (%pa)

The graph shows the rolling 1 and 3 year
returns of the MLC Horizon 2 – Income
Portfolio (for MasterKey IDPS ) versus the
Mercer median manager to 30 June 2009.
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
Dec 2006
Mar 2007
Data Source: Morningstar
Jun 2007
Sep 2007
Dec 2007
12 Month Rolling Excess Return
Mar 2008
Jun 2008
Sep 2008
Dec 2008
Mar 2009
Jun 2009
3 Year Rolling Excess Return
The key detractor was the (~30%)
exposure to Australian and global
shares which, despite the rally of
2009 declined sharply over the
year.
Peer relative returns
The graph on the right shows the
rolling 1 (blue) and 3 (red) year
returns of the MLC Horizon 2 –
Income Portfolio (for MasterKey IDPS
) versus the Mercer median manager
(the horizontal axis). If the coloured
lines are above the horizontal line, the
portfolio has outperformed the median
manager and vice versa. Due to the
short life of this fund – inception date
is December 2006 - no reliable
consistency statistics can be
calculated for the longer time periods.
The fund outperformed the median
23% of the time over rolling 1 year
periods.
Performance has marginally lagged
the median manager. Most of this lag
is due to differences in asset
allocation. The portfolio has a lower
allocation to cash and short dated
Australian bonds than peers, which
adversely affected peer relative
performance for much of the recent
market downturn.
Page 13
The main drivers
of this relative
performance have
been:
Contributors
3 years
 Excess returns from your MLC
IncomeBuilder strategy (-4.1%), with
Maple-Brown Abbott (-3.3%)
outperforming the S&P/ASX300
Industrials Index (-6.5%) by a
substantial margin.
 No exposure to the Australian
Resources sector (+1.6%) which
strongly outperformed Industrials (6.5%) over 3 years to June 2009. This is
in line with the fund’s primary objective
to provide a regular income stream with
some tax advantages.
 Relatively lower exposure to cash and
Australian government bonds detracted
from peer relative returns over 3 years,
with both sectors outperforming inflation
linked bonds and the credit sectors.
 Market outperformance in your A-REIT
(-36%) and global REIT strategy (-37%).
 Despite the rally of the June quarter, the
relatively higher exposure to inflation
linked bonds and the extended credit
sectors detracted from peer relative
returns over the year.
 Although there is usually little point
focussing on 3 month returns, the June
quarter deserves a mention because of
the sharp turnaround in investor
preferences. The debt sectors that were
poorly performing after Lehman’s
collapse had a massive up-swing in the
last few months of the year.
 As investors became more comfortable
with the prospect the economy may not
be in free fall, they had a renewed
appetite for risk. Higher credit risk debt
securities were seen to be better value
than cash and government bonds which
have a relatively low yield. As investors
moved money into higher credit risk,
prices of higher risk securities rose,
further reinforcing positive sentiment.
MLC maintained the small strategic
exposure to these sectors and investors
benefited from the rally.
 Yields on Australian inflation linked
securities rose in the June quarter,
because the market expects the
government to issue more of these
securities. This pushed the market value
of existing CPI bonds down. MLC has a
higher strategic exposure to CPI bonds
than many competitors so this was a net
detractor from quarterly returns.
1 year
3 month
Detractors
Page 14
Cash Commentary
The MLC Cash Fund is expected to
perform in line with the UBS Bank Bill
Index before fees and taxes are
deducted. The Fund is designed to be
a complete portfolio for the cash asset
class, and aims to deliver growth by
using investment managers who
invest and diversify across many
companies and securities within the
cash asset class.
The MLC Cash Fund is chosen for its
safety and low risk status. Therefore
MLC’s Cash Fund is focused on
investing in assets with a high credit
quality and high levels of liquidity.
Executive Summary
 Cash, being the lowest risk
strategy, has weathered the storm
from the global financial crisis.
 The problem facing cash investors
going forward is cash rates have
been more than halved over the
past year. The official cash rate is
now only 3%.
 Over recent months, as debt
securities markets have started to
return to some normality, the
market has raised its expectations
for future cash rates.
The table outlines performance of MLC MasterKey
Investment Service Fundamentals – Cash Fund.
Performance Overview to 30
June 2009
5 years
(pa)
3 years
(pa)
1 year
3 months
MLC MasterKey Investment Service
Fundamentals – Cash Fund
5.1%
5.3%
4.6%
0.4%
UBS Bank Bill Index
6.1%
6.4%
5.5%
0.8%
Median (Mercer Retail – Retail Trusts
Short Duration - Cash)
5.1%
5.3%
4.4%
0.6%
Page 15
Absolute and Market
Relative Returns
The graph shows the rolling 1 (blue) and 3 (red) year
returns of the MLC Cash Fund (for MasterKey Investment
Service) to 30 June 2009.
Cash, being the lowest risk strategy,
has weathered the storm from the
global financial crisis. The problem
facing cash investors going forward is
cash rates have been more than
halved as the government attempted
to improve liquidity in the markets
after they seized up following Lehman
Brothers’ collapse in September 2008.
Over the last few months, as debt
securities markets have started to
return to some normality, the market
has raised its expectations for future
cash rates. The graph on the right
shows the Australian government
bond yield curve at 30 June 2009. It
provides an indication of the market’s
expectation for interest rates over
various time frames. You can see the
current cash rate is 3% and the 2 year
bond rate is 4.01%. In other words, at
30 June 2009 the market expected
cash rates to rise to around 4% over
the next 2 years.
You should consider that the yield
curve changes over time as it is
based on the market which is revalued constantly.
The graph on the right shows returns
relative to peers. Because cash is an
inherently conservative asset class,
there is little opportunity to generate
excess returns. That’s why there is
negligible difference between your
fund and the median manager’s
returns.
12.0%
Return (%pa)
6.0%
0.0%
-6.0%
-12.0%
-18.0%
May 1985
Feb 1987
Nov 1988
Aug 1990 May 1992
Feb 1994
Nov 1995
12 Month Rolling Return
Data Source: Morningstar
Aug 1997 May 1999
Feb 2001
Nov 2002
Aug 2004 May 2006
Feb 2008
3 Year Rolling Return
The graph shows theAust
Australian
govt bond yield curve.
yield curve
6.00
5.63
5.52
5.22
5.00
4.56
4.00
4.01
3.00
3.00
2.00
30/06/2009
1.00
0.00
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Years
The graph shows the rolling 1 (blue) and 3 (red) year
returns of the MLC Cash Fund (for MasterKey Investment
Service) versus the Mercer median manager to 30 June.
If the coloured lines are above the horizontal line, the portfolio has
outperformed the median manager and vice versa.
MLC MK IS/UT - Cash
Excess Return in Retail Trusts Short Duration - Cash from May 1985 to May 2009
MLC0011AU versus Median (before tax and after fees)
3.0%
2.0%
1.0%
Excess Return (%pa)
The Reserve Bank of Australia rapidly
cut the official cash rate from 7.25%
to 3.0% over the course of the year
with a massive 4% being slashed in
the months following the failure of
Lehman Brothers. Your cash return
for the last year includes the higher
cash rates you were earning before
the rate cuts. This “higher” return
does not reflect the potential return
from cash over the coming year as
the official cash rate is now low
yielding at only 3%.
MLC MK IS/UT - Cash
Return in Retail Trusts Short Duration from May 1985 to May 2009
MLC0011AU (before tax and after fees)
18.0%
0.0%
-1.0%
-2.0%
-3.0%
May 1985
Page 16
Feb 1987
Data Source: Morningstar
Nov 1988
Aug 1990
May 1992
Feb 1994
Nov 1995
12 Month Rolling Excess Return
Aug 1997
May 1999
Feb 2001
3 Year Rolling Excess Return
Nov 2002
Aug 2004
May 2006
Feb 2008
Your Managers
National Specialist Investment
Management, the manager appointed
by MLC to manage cash, actively
manages the Fund using a tightly risk
controlled investment process. That’s
why excess returns are minimal.
The graph shows the manager’s excess returns to 30
June 2009.
Manager Excess Returns
% pa
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
NSIM (MLC super and pension products)
3 years
NSIM (MasterKey Investment Service)
1 year
Page 17
Diversified Debt
Commentary
Executive Summary:
 One year returns still reflect the
aftermath of the sharp rise in
yields on higher credit risk
securities (credit spreads) after
Lehman Brothers collapsed in
September 2008. At this point,
yields on securities with any
credit risk “blew out” as the
market anticipated a massive
rise in defaults. Credit risk is
most pronounced in the global
bank loans, real return strategy
and global high yield sectors.
Remember that when yields are
rising, the prices of the securities
are falling which is reflected in
the negative returns.
 Although there is usually little
point focussing on the last
quarter of returns, the June quarter
deserves a mention because of the
sharp turnaround in returns. The
debt sectors that were poorly
performing after Lehman’s
collapse had a massive up-swing
in the last few months of the year.
Still not enough to bring all the 1
year returns back into positive
territory, but it certainly helped.
 There are still obstacles that need
to be overcome before we are “out
of the woods”. And a prolonged
period of positive indicators must
happen before confidence in a
turnaround really can be given any
credibility. It is certainly heading in
the right direction though with debt
markets starting to return to normal
conditions.
The table outlines the performance of the MLC Horizon 2
Income Fund Diversified Debt Strategy.
Performance Overview to 30
June 2009
5 years
(pa)
3 years
(pa)
1 year
3 mths
MLC Super Horizon 2 Diversified
Debt
6.1%
5.6%
5.2%
1.6%
Customised Index
6.3%
6.3%
7.0%
0.8%
MLC Wholesale Horizon 2
Diversified Debt
6.1%
5.7%
5.3%
1.3%
Customised Index
6.3%
6.3%
7.1%
0.6%
Note: Customised indices are calculated by MLC Investment Management based on the strategic
allocations to the underlying debt sectors.
The difference between the Super and Wholesale performance is an allocation to global alternative
debt within the super strategy.
 The one year return for the
Strategy is positive so it is
providing you a small buffer to the
negative returns in shares and
property. But it is still behind the
market benchmark.
 The Strategy’s position relative to
peers, and the market, that hurt
performance after Lehman’s
collapse, have helped over the last
quarter - overweight to credit risk
(and underweight to government
securities) and overweight to
global nominal bonds (and
underweight to Australian).
Likewise the positions of your
managers have helped over the
last few months, although 1 year
excess returns are still weighed
down by the months of
underperformance late in 2008.
The MLC Diversified Debt Strategy
aims to deliver growth by using
investment managers who invest and
diversify across many companies and
securities within the debt asset class.
MLC tailors its debt strategies across
the MLC Horizon portfolios for interest
rate risk, inflation risk, credit risk,
currency risks, and the level of
domestic assets. The debt strategy for
MLC Horizon 5 – Growth Portfolio is
focussed on real capital preservation
and has higher return seeking
strategies. The debt strategy for MLC
Horizon 1 – Bond Portfolio is focussed
on nominal capital preservation, with
a low volatility risk return outcome.
The debt strategies for the rest of the
MLC Horizon portfolios is a graduated
mix of these two book-ends.
 An outcome of the debt strategy
review (which is still continuing) is
to provide you with greater
diversification relative to shares in
future credit crunches - we won’t
ride the wave down and then back
up as we have in the last year.
Page 18
Absolute & Market
Relative Returns
One year returns still reflect the
aftermath of the sharp rise in yields on
higher credit risk securities (credit
spreads) after Lehman Brothers
collapsed in September 2008. At this
point, yields on securities with any
credit risk “blew out” as the market
anticipated a massive rise in defaults.
Credit risk is most pronounced in the
global bank loans, real return strategy
and global high yield sectors.
Remember that when yields are
rising, the prices of the securities are
falling which is reflected in the
negative returns.
Yields on Australian inflation linked
securities have also risen because the
market expects the government to
increase issuance (supply) of these
securities, pushing prices down.
Solid returns in Australian and global
nominal bonds prevented the Fund
from producing a negative return this
past year. Within these sectors
Government nominal bonds were the
best performers due to their virtual
“risk free” status. Cash was also one
of the best performers but the Fund
doesn’t have a strategic exposure to
cash because of its longer-term return
seeking focus.
Although there is usually little point
focussing on the last quarter of
returns, the June quarter deserves a
mention because of the sharp
turnaround in returns. The debt
sectors that were poorly performing
after Lehman’s collapse had a
massive up-swing in the last few
months of the year. Still not enough to
bring all the 1 year returns back into
positive territory, but it certainly
helped.
The graph shows returns of the different
types of debt to 30 June 2009.
Sector Strategy Returns
% pa
15.00%
10.00%
5.00%
0.00%
Australian
Australian
Australian
Global Nominal Global Nominal
Nominal Bonds Nominal Bonds Inflation Linked Bonds (short)
Bonds (all)
(short)
(all)
Securities
Global High
Yield Debt
Global
Diversified Debt
Real Return
Strategies
Global Bank
Loans
-5.00%
-10.00%
3 yr returns
As investors became more
comfortable with the prospect the
economy may not be in free fall, they
had a renewed appetite for risk. It
didn’t take long for the value of higher
credit risk debt securities compared to
low yielding cash and government
bonds to be realised. As investors put
their money to work, pushing up the
prices of higher risk securities, it
further reinforced positive sentiment.
Credit spreads have narrowed and
are at a similar level to a “normal”
credit crunch, such as the previous
one in 2002.
What may be a little surprising is that
the strong rebound in high yield debt
is occurring at a time when company
defaults on loans are at record high
levels. It’s just that the market had
previously priced in much higher
default rates. Late in 2008, the market
had expected default rates to be as
bad, or worse, than the Great
Depression.
1 yr returns
There are still obstacles that need to
be overcome before we are “out of the
woods”. And a prolonged period of
positive indicators must happen
before confidence in a turnaround
really can be given any credibility.
It is certainly
heading in the
right direction
though with debt
markets starting
to return to
normal
conditions.
Your one year return for the Strategy
is positive so it is providing a buffer to
the negative returns in shares and
property.
Page 19
Your Managers
The positions of your managers that
hurt returns relative to market
benchmarks have all helped over the
last quarter. Unfortunately, the
rebound in recent months was not
enough to recover the
underperformance following Lehman
Brothers collapse. That’s why some of
the 1 year excess returns are
improving but many are still quite
some way behind their benchmarks.
The main causes of the
underperformance for the year are:
The graph shows manager excess returns to 30
June 2009.
Manager Excess Returns
% pa
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-8.00%
 Bridgewater is one of the real
return strategy managers, and has
the flexibility to move in and out of
the different types of debt. The last
year has not been a good one for
Bridgewater relative to their
benchmark. Bridgewater’s
“depression gauge” switched on
during October which resulted in
them moving their strategy to a
very prudent one in which credit
risk was removed and their
commodities exposure was
invested in gold. In May they
reintroduced some risk back into
the portfolio but are still managing
a strategy which is cautious
relative to their “normal” strategy.
Their timing of both portfolio
moves was poor. Bridgewater’s
view is distinctively different from
PIMCO’s, the other real return
manager, and highlights the
importance of getting
diversification of views from
different managers in your
portfolio.
 BlackRock, NSIM and PIMCO
were all overweight Financials
which, in hindsight, was the sector
to avoid.
BlackRock
(global
nominal
bonds)
Bridgewater
(real return
seeking
strategy)
NSIM
(Australian
nominal
bonds)
NSIM
Oaktree
PIMCO (real
(Australian
(global high return seeking
inflation linked yield debt)
strategies)
securities)
3 years
UBS
(Australian
nominal
bonds)
UBS
W.R. Huff
(Australian
(global high
inflation linked yield debt)
securities)
Oaktree
Capital
Managent
(global bank
loans)
1 year
Data shown has not had fees or taxes deducted.
 NSIM had some credit exposures
in their Australian inflation linked
securities portfolio which hurt.
Oaktree, manager of global bank
loans for MLC’s super and pension
products, has produced strong
outperformance in a sector that was
sold down aggressively due to its
“higher credit risk” status. The bank
loan market rebounded this quarter
and 22% of the loans have already
been repaid at face value.
Also positive was the performance of
Oaktree (global high yield debt), NSIM
(nominal bonds), PIMCO and UBS
(nominal bonds) who all managed to
exceed their market benchmarks.
They have done well in a very tough
environment.
Now that prices have started to
improve, your investment managers in
general, have started to reduce
exposure to sectors and issuers that
now have a reduced “margin of
safety” should economic conditions
deteriorate in future - helping protect
your returns in an unfavourable
environment.
The 3 year returns are in a much
tighter range because the extreme
returns experienced over short
periods tends to be diluted or offset
over longer periods.
 PIMCO and BlackRock also had
exposure to Mortgage Backed
Securities which have
underperformed.
Page 20
TCEH is a successful power
producer. It is the 2nd largest
deregulated power generator in the
US. It has relatively steady operating
cash flow due mostly to the consistent
demand for power in Texas where it’s
generating facilities are located. It
also has a rolling 5 year hedge on
more than 80% of its baseload
generation. It also has no significant
debt maturities in the next few years.
The forced selling of high yield
securities following Lehman Brothers’
collapse caused the price of the bond
in MLC’s portfolio to fall sharply and
its yield rose. Bonds are liquid and
therefore when market participants
were forced to sell, to meet
redemptions, they sold the liquid
securities, artificially pushing the price
down. TCEH securities are often used
to hedge the high yield bond market
so when the market was bearish,
TCEH securities were shorted which
further depressed the price.
TCEH bond's market price vs interest coverage (EBITDA/Interest)
2.00x
100
95
1.80x
90
85
1.60x
80
75
1.40x
70
Bond market price
Texas Competitive Electric Holdings
Company LLC (TCEH) issued a bond
which has a coupon (interest rate) of
10.25%pa and matures in 2015. WR
Huff hold this security as a part of its
high yield debt mandate (in all MLC’s
debt strategies).
The graph shows WR Huff’s calculation of interest
coverage which is in sharp contrast to the market
pricing of the bond.
Interest coverage
High yield stock story
65
1.20x
60
55
1.00x
50
Dec'07
Mar'08
Jun'08
Sep'08
Dec'08
Mar'09
Interest Coverage
Jun'09
Sep'09 Est.
Dec'09 Est.
Mar'10 Est.
10.25% '15 Bond Price
Despite the market pricing WR Huff
continued to believe the bond was
“money good” and TCEH continued to
operate as normal and honour interest
payments.
The MLC Diversified Debt Strategy
continued to receive the 10.25%
interest coupon through all the market
turbulence and, if WR Huff hold until
its maturity in 2015, the interest will
continue to be received and the face
value will be received at maturity.
However, as your fund is marked-tomarket the market’s pricing of the
bond is reflected in the unit price.
Hence the apparently volatile returns
of the Fund.
Despite some rebound in the price
since February, because the price is
still so low, the yield on the TCEH
bond (calculated as the interest
divided by the market value of the
bond) is now more than 20% for new
investors in the Fund.
Page 21
Australian Real
Estate Investment
Trust Commentary
The MLC Australian Real Estate
Investment Trust (“AREIT”) strategy is
expected to outperform the S&P/ASX
300 AREIT Accumulation Index
(market benchmark) 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.
Executive Summary:
 The AREIT market staged a
substantial recovery late in the
year with four consecutive months
of positive returns recorded
through to June. The market
increased 38.6% from its March 9
low through to the end of the year.
While this performance revival is
both welcome and encouraging,
the one year return of the AREIT
market
(-42.1%) still remains
deep in negative territory.
 A notable feature of the market
has been the magnitude of new
capital ($14.8 billion) that was
raised during the year, the most in
the sector’s history. As a result,
many REITs have managed to
improve and underpin their
financial position though others are
expected to need to raise more
capital. While this is a good
outcome, the sector remains very
concentrated with Westfield
accounting for 45% of sector value
and the Top 5 REITs, 81%.
Investors reliant on the sector for
income should also be aware that
the enormous amount of new
shares that have been issued will
dilute future distributions.
The table outlines the performance of the MLC
Australian REIT Strategy.
Performance Overview
to 30 June 2009
5 years
3 years
1 year
3 mths
MLC Australian REIT
Strategy (Gross)
-5.1% pa
-18.4%pa
-36.2%
16.8%
S&P/ASX 300 AREIT
Accumulation Index
-8.6% pa
-23.1% pa
-42.1%
16.2%
MLC Wholesale Property
Securities Fund (Net)
-5.8%pa
-18.9%pa
-36.5%
16.9%
Median (Mercer Retail IDPS –
Australian Property
Securities)
-8.2% pa
-21.8% pa
-39.7%
15.1%
Quartile (Mercer IDPS
Property Securities)
1st
1st
2nd
1st
Percentage of time above
Median (IDPS universe, since
inception)
31
34
40
n/a
Note: Inception is February 1998.
 The MLC AREIT strategy returned
-36.2% for the year, which is 5.9%
better than index. While you are no
doubt disappointed with the
magnitude of the negative return
from your investment in this Fund,
the two managers appointed by
MLC on your behalf delivered
returns considerably better than
index, cushioning your return
versus index.
Page 22
As you can see from the graph, your
strategy has produced better than
index returns with a very high degree
of consistency measured over all
rolling time periods. For instance, your
rolling five year excess return,
measured since 1994, has been
consistently positive. This is a good
achievement considering the varying
market circumstances we have seen
over that period. Rolling one year
excess returns have mostly been
positive as well.
The graph shows how well the MLC Australian REIT
strategy has performed compared to the market index
(“gross excess return”) to 30 June 2009.
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
1 Year Rolling Excess Return
3 Year Rolling Excess Return
While we are
sure that you
will be
disappointed
with the
negative
absolute return
that was
recorded for the
year, it is
pleasing that the
return was 5.9%
better than
index, especially
in the most
difficult year for
the sector on
record.
Jun-09
Jun-08
Dec-08
Jun-07
Dec-07
Jun-06
Dec-06
Jun-05
Dec-05
Jun-04
Dec-04
Jun-03
Dec-03
Dec-02
Jun-02
Jun-01
Dec-01
Jun-00
Dec-00
Jun-99
-8.0
Dec-99
This graph shows how well the MLC
Australian REIT strategy has
performed compared to the market
index (“excess return”). Excess
returns are shown on a rolling 1, 3
and 5 year basis, rolling through time
from periods back to 1994 through 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 previous table).
% in excess of index*
Market Relative Returns
5 Year Rolling Excess Return
The key driver of this outperformance
was your managers’ success in
minimising your exposure to some of
the worst performers within the sector,
in particular underweighting GPT
Group, Goodman Group and ING
Office Fund. Resolution Capital’s
active ‘bottom-up’ approach to trust
selection resulted in a return of 36.6%, outperforming the market
benchmark by 5.5%. Challenger’s
portfolio returned -35.9%,
outperforming the benchmark return
by 6.3%.
This is what we would expect to
emerge from the appointment of
experienced managers with
exceptional insight. By focusing on
‘investment grade’ trusts and avoiding
those with poor fundamentals, your
managers have helped cushion your
return outcome.
Strategy returns have also benefited
from the discretion we have given to
Resolution Capital which allows them
to invest a component of their portfolio
in non-Australian REITs. Giving them
this discretion has allowed Resolution
to look beyond the Australian REIT
sector, where so many REITs have
been in financial distress, and instead
choose non-Australian REITs that are
better quality. This has also helped
diversify your portfolio.
Page 23
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 manager for 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 your research has identified a
number of managers with exceptional
Australian and global REIT skills.
As we saw earlier, both managers
have delivered positive excess returns
since inception and we remain
confident in their future return
potential and role in the strategy. For
instance, Resolution Capital is the
most experienced and best resourced
REIT manager in Australia. The four
core members of the team have
worked together for over a decade
and each have significant equity
stakes in their business. Resolution
Capital conducts in-depth research on
the Australian and global REIT
universe, which is appropriate for their
“bottom-up” stock selection approach.
Challenger’s experienced team, who
have also worked together for years,
adheres to a “business cycle”
investment approach, which combines
top-down analysis of economic and
property sector fundamentals with
bottom-up trust research insights.
While both managers have performed
well in recent times, Resolution
Capital has had a more consistent
track record of outperforming the
index (as shown in the diagram of
excess returns above). Aside from
their stock selection approach, which
has helped avoid the trusts with the
highest indebtedness (and worst
share price performance), Resolution
Capital’s outperformance is also due
to them utilising the discretion
provided by MLC to invest up to 15%
of their mandate in REITs listed on
exchanges outside Australia.
A summary of your appointed managers is in the table.
Manager
Style
Tailored
mandate?
Key role in strategy
Resolution
Capital
Bottom-up,
relative
value
Yes
75%, includes AREITs and
discretion to invest in global
REITs
Challenger
Business
cycle
Yes
25%, AREITs
The excess returns graph shows Resolution Capital has
had a more consistent track record of outperforming the
index in periods to 30 June 2009.
7
6.3%
6
5.5%
5.2%
Excess Returns % pa
Your Managers
5
4.1%
4
3
2.6%
2
1
0
Resolution Capital
Challenger
1 Year
3 Years
5 Years
MLC extended this mandate
discretion to Resolution Capital for
two reasons. Firstly, we recognised
that the AREIT sector provides limited
choice and is very concentrated
(Westfield accounts for around 50% of
the sector) so allowing ownership of
non-Australian REITs helps diversify
the portfolio more than would be
possible if stock selection was limited
to just Australian REITs. Secondly,
MLC’s research of Resolution Capital
confirmed their investment team and
process is sufficient to cover the
global REIT opportunity set in the
required depth.
Page 24
Country and Sector
Exposures
Your Australian
REIT strategy is
diversified
across the major
listed property
sectors.
Retail property based REITs continue
to dominate the Australian REIT
market (approx. 60% of REIT sector
value). This is due largely to
Westfield’s dominance of the sector,
so the MLC strategy also has a
material exposure to Retail. Retail
REITs currently account for 51% of
the portfolio value with Westfield and
Colonial First State Retail the
dominant retail REIT exposures. The
next major category is Diversified
REITs who own a mix of properties in
different property categories. These
REITs, including Stockland, General
Property Trust, Mirvac and Dexus,
account for 35% of the strategy.
Office REITs account for 6.5% of the
strategy.
As we mentioned earlier, MLC has
given Resolution Capital discretion to
invest up to 15% of their portfolio
(which equates to a maximum 11.25%
of the total strategy) in global REITs.
Resolution Capital has used some of
their mandate flexibility and 4.3% of
the strategy is currently invested in
non-Australian REITs. This means
0.4% of your portfolio is invested in
Hong Kong based REITs, 1.1% in
Japanese REITs, 0.8% in USA REITs,
0.8% in UK REITs and 1.2% in
European REITs.
While you have probably read a lot
about the problems many REITs have
experienced in the last couple of
years, not all REITs have been
impacted in the same way. An
example is CFS Retail Property Trust
(“CFS”), which accounts for approx.
6.5% of the strategy and is the owner
of a well diversified portfolio of large
regional shopping centres such as
Chatswood Chase in Sydney,
Chadstone in Melbourne and the
Myer Centre in Brisbane. CFS was
the Australian REIT sector’s second
best performer over the year with a
unit price fall of 10.8%. This superior
performance compared to many other
REIT was due to CFS’s strong
financial position, with modest
borrowings, which was further
underpinned by a $325 million capital
rasing in October 2008 (which your
managers participated in). Aside from
it’s quality retail shopping centre
portfolio, CFS is one of the few REITs
who have not been forced to reduce
or cancel distributions to unitholders.
In fact, CFS has declared a
distribution of 6.3 cents per unit for
the half year to 30 June which is 5%
higher than the 6.0 cents declared in
the corresponding period of 2008.
Page 25
Global Real Estate
Investment Trust
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 26
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 27
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 28
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.
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.
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
%
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.
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.
Page 29
Global Share
Commentary
The table outlines performance of MLC Global Share
Strategy
Executive Summary:
It has been a
remarkable and
challenging year
for global share
investors.
Despair has given way to muted signs
of stabilisation. The reaction of
markets since it reached its low on
March 9 has been remarkable with a
significant rebound in perhaps the
component perceived to be the
riskiest in the market – financials.
 The rally was mostly felt in
Emerging markets which leapt
ahead with increasing investor risk
appetites. We suspect
macroeconomic news will continue
to surprise on the downside in the
developed world. Positive
earnings news and a continued
rally would be inextricably linked to
a pick up in the four key variables
most integral to the economy's
performance: employment,
production, personal income, and
sales.
 Your MLC Global Share strategy
returned -19.6% underperforming
the MSCI All Country World Index
(ACWI) which returned -15.6% for
the year. Your strategy
underperformed due to the drag
caused by companies bought by
two managers –Bernstein and
Alliance. These managers were
terminated during the strategy
enhancement implemented in
March 2009. The four new
managers (Sands Capital, Harding
Loevner, Tweedy Browne and
Mondrian) are performing the roles
they were appointed to fulfil,
although it is too early to comment
on their market relative
performance. Overall, returns from
both old and new managers
remained mixed.
Performance Overview
to 30 June 2009
5 years
3 years
1 years
3
Months
MLC Global Share Strategy,
Gross
-2.1% pa
-10.5% pa
-19.6%
5.7%
MSCI All Countries World
Index
-1.4% pa
-9.1% pa
-15.6%
5.3%
MLC Wholesale Global
Share Fund, Net
-3.1%pa
-11.0%pa
-19.3%
6.1%
Median (Mercer IDPS – Global
Shares)
-2.7% pa
-10.9% pa
-19.2%
5.6%
Quartile Ranking (Mercer
IDPS Global Share)
3rd
3rd
2nd
2nd
Percentage of time above
Median (IDPS universe, since
inception)
38
27
43
N/Av
MLC Hedged Global Share
Strategy, Gross
0.3%pa
-9.8%pa
-34.0%
17.6%
MSCI All Country World index
$AUD Hedged
2.1%pa
-7.0%pa
-27.5%
18.1%
Note: Inception is February 1998.
 Given the sharply divergent sector
returns for the year, it was
interesting to see that selections in
capital goods, consumer services
and information technology added
value to your portfolio. Notable
detractors were from materials,
energy and food sectors.

Your MLC Global Share Hedged
performance was further hindered
by a mixed year for the Australia
dollar ($A). The $A rose against
a basket of currencies which
represents the major trading
partners (TWI) in the first half of
this year (up 16.4%). However,
there was a drop of 11.9% over
the year to 30 June 2009.
The global share strategy is expected
to outperform the MSCI All Countries
World Index over rolling 5 year
periods. However, as we are focused
on growing your wealth, we won’t
chase risky returns when markets are
very strong which means we are likely
to underperform in strong markets. At
other times, and particularly when
markets are weak, we expect to
outperform the market.
Page 30
Notwithstanding the recent dip in
performance, the strategy has
consistently outperformed the market
benchmark over most periods (as can
be seen above). The last decade was
host to two of the worst asset
bubbles, and encapsulated narrowly
lead markets for significant periods.
Such markets make it difficult to show
value in active stock selection, as
good stock selections aren’t rewarded
above how the ordinary market
performs.
Your Managers
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
3 Year Rolling Excess Return
Jun-09
Jun-08
Dec-08
Jun-07
Dec-07
Jun-06
Dec-06
Jun-05
Dec-05
Jun-04
Dec-04
Jun-03
Dec-03
Jun-02
1 Year Rolling Excess Return
Dec-02
Dec-01
Jun-01
Jun-00
Dec-00
Jun-99
-20.0
Dec-99
Disappointingly, while index relative
returns have historically been quite
strong, they have recently fallen
below market, as illustrated in the
graph below which shows rolling 1, 3
and 5 year market relative returns.
This is especially the case given
recent poor markets, a time when we
would expect to outperform. The
recent performance drag was driven
by sector selections in 2008 by
Bernstein and Alliance. The quantum
of underperformance which saw your
portfolio decline in value over the next
year, should take some time recover.
The graph outlines the rolling excess returns of the MLC
Global Share Strategy to 30 June 2009.
% in excess of index*
Market Relative Returns
5 Year Rolling Excess Return
*The index for your strategy is the MSCI All Country World Index (ACWI), which includes both
developed and emerging markets. However, it was the MSCI World Index (developed
markets) prior to September 2002.
the Materials sector, although they too
enjoyed a reversal of fortunes through
bottom-up stock selection during the
rally of 2Q09.
Capital International detracted from
your portfolio due to calls in a few
sectors including materials. At a stock
level, Potash, which has been a
winner for the previous few years, had
their share price halved during the
broad market sell off in 2008.
In what has been a difficult time for
managers, their performance
continues to vary. Of the managers
who are continuing in the strategy
after the recent changes:
Dimensional enjoyed a reversal of
fortunes during the rally of 2Q09,
which was driven primarily by the
riskier, deep value and growth
oriented segments of the market. The
Emerging markets mandate with
Dimensional continued to add value
through participation in the emerging
markets rally. These two events lead
to their performance being almost on
par with the index.
Walter Scott continues to impress for
the year. They did however give back
some of the gains during the latest
market rally, which favored the more
risky parts of the market at the
expense of quality companies.
Wellington lost out on their calls on
Page 31
Sector and Regional
exposures
Global sector returns had two
marked sessions. The first to
March 9, 2009 was dominated by
defensive sectors such as health
care and consumer staples, as
shown in the middle graph to the
right.
The managers’ performance compared to market
benchmark (many of which have not been in the
portfolio for 1 or 5 years), is illustrated in the graph
(to 30 June 2009.
12%
10%
6%
4%
2%
Wellington
Management
Walter Scott
Tweedy
Browne,
Company
Sands Capital
-4%
Mondrian
-2%
Harding
Loevner
Dimensional
0%
Capital
International
Your portfolio too managed to
participate in the rally. Your sector
attribution was driven by the
managers who are part of your
portfolio and the way they are
blended. Sands, a new appointee
participated in the rally exactly as we
anticipated them to, with returns
driven from many sectors in the final
quarter. Capital goods, consumer
services along with technology
hardware & equipment sub sectors
contributed the most towards your
returns for the year. Energy,
materials and banks were amongst
the leading detractors of value from
your portfolio.
8%
Excess Returns (%)
But there was marked increase in risk
appetites with financials making a
significant comeback since 10 March
to 30 June 2009, as shown in the
bottom graph to the right.
-6%
-8%
5 year
3 year
1 year
The two graphs below show global sector excess
returns.
Excess Return vs. MSCI All Country Word Index (Unhedged) - July 1, 2008 to March 9, 2009
20.0%
15.0%
10.0%
Utilities
Information
Technology
Financials
Health Care
Telecommunication
Services
-10.0%
Consumer Staples
Consumer
Discretionary
Industrials
Materials
-5.0%
-15.0%
Excess Return vs. MSCI All Country Word Index (Unhedged) - March 10, 2009 to June 30, 2009
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
Utilities
Telecommunication
Services
Information
Technology
Financials
Health Care
Consumer Staples
-15.0%
Consumer
Discretionary
-10.0%
Industrials
0.0%
-5.0%
Materials
Potash Corporation (a fertilizer-maker
based in Canada) was the largest
detractor of value. Gazprom (the
world’s largest natural gas extractor
based in Russia) and Xstrata (a
diversified mining group) also
detracted, as commodity prices
tumbled along with other assets
0.0%
Energy
The key contributors to performance
continue to include Genentech
(considered the pioneers of
biotechnology) and General Electric
(a large diversified industrial group
based in the US). Las Vegas Sands,
a casino resort company also
contributed positively. The
importance of you having access to
emerging market companies were
shown in the contribution BM&F
Bovespa in Brazil, which is one of the
largest stock exchanges in the world,
made to your returns.
5.0%
Energy
Stock level
-20.0%
Page 32
during the year.
Page 33
Global Private Assets
Commentary
The MLC’s
private assets
portfolio
returned -23.0%
for the year to 30
June 2009 on a
fully hedged
basis,
representing a
premium of 4.5%
to public
markets (MSCI
All Country
World Index
(hedged)
returned -27.5%
for the year).
Global equity markets rebounded
during the quarter which has not yet
been reflected in private equity
portfolio valuations which typically lag
public markets.
The portfolio experienced valuation
write-downs of approximately 3% for
the quarter based on Managers’
unaudited 31 March 2009 reports.
This is largely due to mark-to-market
accounting and reflects continued
difficult trading conditions in Europe
and the US. In addition, European
markets have witnessed continued
declines in both domestic and
external demand, which is reflected in
revenue declines for portfolio
companies.
As noted in previous reports, MLC
benefits from having a diversified
portfolio invested over 12 vintage
years, with 45 managers, 103 Funds,
and across a number of geographies
and investment strategies. Overall,
your Managers were generally
disciplined, with some selling portfolio
The table outlines the gross performance of MLC
Global Private Assets Programme.
Performance Overview to
30 June 2009
5 years
(pa)
3 years
(pa)
1 year
3
months
MLC Global Private Assets
Portfolio (hedged)
10.4%
5.6%
-23.0%
-6.7%
MSCI All Country World Index
(hedged)
2.1%
-7.0%
-27.5%
18.1%
companies into strong markets and
restricting investing activity until
assets prices decline further. This
unusually slow rate of investment
activity has left MLC with almost half
its commitments ($1.7billion) in ‘dry
powder’ that will be invested through
the recessionary years ahead which
are expected to produce some
excellent buying opportunities.
A number of portfolio companies
appear to be coping satisfactorily with
the global financial crisis and
subsequent recession with adequate
cash reserves, solid financing
arrangements, and aggressive cost
cutting. Companies purchased during
the earlier periods of the portfolio
have been “delevering” considerably.
Some have taken advantage of
stressed debt markets to repurchase
their debt at significant discounts. In
certain cases market shares have
increased as competitors are acquired
or fail. While trading conditions will
continue to pressure underlying
portfolio companies, we believe this
period offers excellent opportunities
for active investors.
Despite continually gloomy economic
data there appears to have been
signs of a change in market sentiment
during the quarter, with World Bank
economists predicting a return to
growth in the US in the second half of
2009, and China also predicting
stronger performance, lending hope to
the prospects for a global recovery.
However, much of continental Europe
and parts of Asia, particularly Japan,
continue to experience falls in
industrial production and rapidly
accelerating unemployment figures.
Economists differ as to the likely
strength of any recovery with a real
prospect of many countries living with
anaemic growth for a number of years
as the US and Europe work their way
through a massive amount of
“delevering" and addressing other
serious issues. It is uncertain how
long it will take to return to healthy
economic conditions but the better
guess appears to be that it will take a
considerable period of time. The
negative wealth effect in the US has
been dramatic and is continuing.
Since mid 2007 US wealth has
declined $USD13 trillion, the fall in
equity prices has drained $30 trillion
of stock market value (55% of global
GDP), and to date $11 trillion from
residential real estate (20% of global
GDP).
Deal activity, while still subdued,
showed some positive signs in the
second quarter. Of particular note,
IPO markets in the US have shown
tentative steps to re-opening, with 6
venture or buyout backed IPOs over
the quarter, following two quarters
with no IPOs at all. In total these six
IPOs raised over $830m in new
capital, the strongest quarter since
mid-2007. Although still quite weak in
volume, this increased activity is
encouraging. Globally, private equity
deal volume was among the lowest in
the last decade and lower than the
first quarter.
Page 34
Your team travelled actively over the
quarter, spending time in the US, UK,
Nordic countries and continental
Europe meeting with both existing and
potential new managers. During the
quarter the team looked at over sixty
potential investments, with thirteen
progressing to initial due diligence,
and seven progressing to full due
diligence, including four potential coinvestments. Following large volumes
of fund-raising activity in both the
venture capital space and the buyout
world in late 2008 and early 2009, the
second quarter saw a notable
downturn in managers fund raising,
which is reflected in these activity
levels. The team continues to pursue
opportunities within the venture
capital space, as previously
inaccessible brand-name firms
become increasingly open to a
broader base of liquid and
sophisticated investors like MLC.
The graph shows the portfolio structure as at 30 June
2009 based on Net Asset Value and Undrawn
Commitments.
We made one commitment during the
quarter to a co-investment. This US
based business in the energy sector
is backed by one of your most
prestigious venture capital managers.
Private equity deal activity generally
remained quiet during the quarter
however MLC commenced due
diligence on four other potential coinvestments during the quarter.
In aggregate, the second quarter
commitment activity for 2009 totalled
$14 million bringing total
commitments for the calendar year
2009 to $146 million. As at 30 June
2009, MLC’s private asset programme
invests with 45 managers across 103
funds (including legacy investments).1
1
NAV + Undrawn is arguably a truer
indication of portfolio exposure than
Commitments as it excludes capital
already returned.
Page 35
IncomeBuilder
Commentary
The objective of
the
IncomeBuilder
strategy is to
invest in
companies that
are expected to
deliver a growing
dividend stream
over time.
The Fund is also expected to
generate tax effective returns. The
fund is expected to outperform the
S&P/ASX 200 All Industrials
Accumulation Index (“All Industrials”)
over rolling 4 year periods, but this is
not a core focus of the fund.
Executive Summary
 The All Industrials Index returned
-14.3% in the year. This was
significantly better than the
broader market’s -20.3% return
(S&P/ASX300 Accumulation
Index) which was weighed down
by the poor performance of
resource companies who are not
part of the All Industrials Index. A
June quarter increase of 11.4%
has 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.
 MLC IncomeBuilder’s results for
2008-09 were pleasing. The
The table outlines the gross performance of MLC
IncomeBuilder Portfolio.
Performance Overview to
30 June 2009
5 years
(pa)
3 years
(pa)
1 year
3
months
MLC IncomeBuilder Portfolio
4.4%
-4.1%
-8.4%
12.7%
S&P/ASX 200 All Industrials
3.3%
-6.5%
-14.3%
11.4%
underlying income distribution you
received was 8.97 cents per unit
(Unit Trust), 3% higher than last
year’s 8.71 cents per unit
distribution. This is the seventh
consecutive year of distribution
growth. While the 3% increase in
the distribution over last year
appears unremarkable, it is
actually a very good result as the
profitability and dividend paying
potential of many companies has
been hit by the global economic
recession.
 The total return of MLC
IncomeBuilder in the year ended
30 June 2009 was -8.4%. While it
is understandable for you to be
disappointed with a negative
return, the strategy return was
5.9% (pre fees and tax) better than
the All Industrials Accumulation
Index, which fell by 14.3%.
depending on the severity and
length of the economic slowdown.
However, we are very confident in
the appointed managers’ skills and
commitment to minimising as
much as possible any fall in
distribution.
 In this regard, Maple-Brown Abbott
is using the market circumstances
to acquire stock at attractive
prices. For example,
IncomeBuilder participated in the
Wesfarmers, BlueScope Steel and
Fairfax Media capital raisings,
resulting in the acquisition of stock
at heavily discounted prices.
 This sound result was due largely
to the stock selection of MapleBrown Abbott who manages 70%
of IncomeBuilder. Their stock
selection, in particular their
preference for companies with
“defensive” characteristics who
have been able to maintain
dividends has been beneficial to
you. As expected, Vanguard’s
index based approach achieved a
return similar to the All Industrial’s.
 Looking ahead though, the
economic slowdown will continue
to impact company earnings and,
as we have already seen, many
companies will decide to pay lower
dividends. This will make it very
difficult for IncomeBuilder to grow
its income distribution in the next
year, possibly the next two years,
Page 36
Looking ahead, the key issue is the
length and severity of the economic
slowdown and the impact on company
earnings and dividends. We expect that
the potential for income growth in the
2010 and 2011 financial years is very
limited, if not unlikely. Preliminary
analysis by Maple-Brown Abbott, who
manages 70% of the portfolio strategy,
suggests that distributions could be
down by 10-20% in 2010. We are
monitoring this very closely for you and
will communicate further updates on the
expected income distribution for 2010
when we are in a position to do so. This
may be after the forthcoming profit
reporting period when companies are
expected to comment on the outlook for
their businesses.
We understand the lifestyle constraints
that a lower distribution in 2010-11 may
impose on investors. The current
environment is very volatile and at this
point, it is difficult to predict with much
certainty how severe the global
economic recession will be and the
actual impact on dividend policies of
Australian companies going forward.
We may in fact be overly cautious in
flagging this to you. However, we think it
is prudent to do this so that you can
plan accordingly. Realistically,
IncomeBuilder’s ability to grow income
distributions is largely dependent on the
dividends paid by companies that the
Fund is invested in. As we saw in the
12
5.34
3.59
10
0.02
1.68
8
0.08
6
8.21
8.71
8.97
2007
2008
2009
7.64
2006
4.87
6.74
2005
4.24
2004
3.04
2003
1.86
2.73
2000
2.98
2.23
1999
2.83
2.46
1998
0.99
1.31
2002
0.35
2
0.43
2001
0.35
4
1997
MLC IncomeBuilder’s 2008-09
distribution (Unit Trust) was also
higher than last year’s. The issuance
of capital gains was also very low.
14
1996
MLC IncomeBuilder is a unique fund
because its primary focus is on
providing investors with a growing
income stream. As the chart to the
right shows, MLC IncomeBuilder has a
very strong history of growing annual
distributions. Since the Fund’s
inception in 1995, there has been only
one year (2001) when IncomeBuilder
failed to grow its underlying
distribution. This is a sound result
considering the many market and
corporate earnings cycles that have
been experienced over that period.
The graph shows MLC IncomeBuilder has a very strong
history of growing annual distributions.
Cents Per Share
A consistent growing
income stream
0
Financial Year End 30 J une
Income
Buy Backs
recent profit reporting period, Australian
companies are hurting and a number
have either cut their dividends or
warned the market that their dividend
policy may need to be revised if
earnings fall further.
In such circumstances, IncomeBuilder
investors should derive some comfort
from knowing that, in providing an
income stream, IncomeBuilder also
aims to do so in a tax-advantaged
manner. This means minimising
distributable capital gains that are
taxable. IncomeBuilder has a good
history of providing tax advantaged
income, although some market events
that can’t be controlled by MLC’s
managers could result in the
realisation and distribution of taxable
capital gains. An example is corporate
takeovers (such as the current offer
for Lion Nathan) where stock must be
sold and, by doing so, a capital gain
may be realised. Nonetheless, the
management of MLC IncomeBuilder
is done with a high degree of tax
awareness.
Total Capital Gains
IncomeBuilder’s case, the relevant
market benchmark is the
S&P/ASX200 All Industrials
Accumulation Index. To achieve the
income growth objective, MLC
IncomeBuilder’s stock selection tends
to be biased to industrial companies
(rather than resource based
companies) as, over time, they have
demonstrated a more consistent track
record of growing dividends. This
leads to a portfolio that comprises
predominantly industrial companies
who have a history of growing
dividends (with high franking levels)
and the potential to continue growing
them in the future.
The total return of MLC IncomeBuilder
in the year ended 30 June 2009 was 8.4%. While negative in an absolute
sense, the strategy return was a 5.9%
(pre fees and tax) better than the All
Industrials Accumulation Index, which
fell by 14.3%. This return was also
significantly better than many
Australian share funds available to
you in the market.
MLC IncomeBuilder also aims to
achieve a return in excess of the
market, though it should be noted that
this is secondary to the primary
objective which is to grow income. In
Page 37
Your Managers
MLC has appointed two investment
firms, Vanguard and Maple-Brown
Abbott, to manage the IncomeBuilder
strategy.
Maple-Brown Abbott manages 70% of
the portfolio on an “active” basis. This
means that Maple-Brown Abbott
restricts their stock selection to only
those companies they believe will
contribute to MLC IncomeBuilder’s
objectives. We believe Maple-Brown
Abbott is perfectly suited to the
IncomeBuilder mandate as their
investment approach (which also
tends to be low turnover) targets
attractively valued companies with
dividend growth potential to be held
for the long-term.
The table shows the value style practiced by each
manager and the allocation to each.
Style
Tailored
mandate?
Allocation
Role in Strategy
MapleBrown
Abbott
Value
Yes
70%
Active stock selection
Vanguard
Index
No
30%
Index replication
Manager
Maple-Brown Abbott made a
significant contribution to MLC
IncomeBuilder’s performance as a
result of their stock selection
strategies. Their portfolio return was
-6.3%. While negative in absolute
terms, it was nonetheless 8% better
than the -14.3% return of the
S&P/ASX200 All Industrials
Accumulation Index. This is an
outstanding result achieved in some
of the most difficult market
circumstances for many years.
Vanguard manages 30% of the
portfolio on an index basis, which
delivers a portfolio that largely mirrors
the stocks and their respective
weightings within the S&P/ASX200 All
Industrials Index. Not surprisingly, this
means the return of Vanguard is
generally close to or resembles the
performance of the index. This was
the case in the year to 31 March
2009, with Vanguard returning 13.5%.
The appointment of Vanguard is
consistent with MLC IncomeBuilder’s
primary objective to grow income
distributions in a tax effective manner
because their index-based approach
provides investors with access to the
dividend income flowing from all the
companies within the industrials
market. Vanguard’s index approach is
also beneficial from a tax perspective
as it typically entails very little portfolio
turnover.
Page 38
Sector and Stock
Exposures
As mentioned earlier in this report,
MLC IncomeBuilder’s stock
selection tends to be biased to
industrial companies (rather than
resource based companies) as, over
time, they have demonstrated a
more consistent track record of
growing dividends. While MapleBrown Abbott is not excluded from
owning resource companies, their
focus on companies that are
attractively priced and with the
capacity to provide a growing and
sustainable dividend stream has
meant that resource companies have
not been owned by IncomeBuilder
for some years.
The outperformance achieved by
IncomeBuilder in the year to 30 June
was due largely to Maple-Brown
Abbott’s stock selection, in particular
their preference for companies with
“defensive” characteristics. These are
companies with balance sheet
strength who have reasonable
earnings and dividend growth
potential in what is clearly a more
difficult domestic and global economic
environment. Companies such as
Fosters Brewing, Lion Nathan and
Coca-Cola Amatil, whose profitability
and dividend-paying capacity is less
dependant on the economic cycle,
have been particularly beneficial.
Despite the market turmoil, it is
business-as-usual for the managers
responsible for IncomeBuilder’s stock
selection. A notable feature of the
market in recent months has been the
capital raisings by numerous
companies. Your managers have
used some of these capital rasings as
an opportunity to acquire stock at very
beneficial, cheap prices.
MLC IncomeBuilder’s ten largest stock positions
appear in the table (as at 31 May, 2009).
Security Name
Strategy Weight
National Australia Bank
9.6%
Westpac
8.3%
Telstra
8.2%
ANZ Bank
8.2%
Wesfarmers
5.4%
Fosters Group
4.8%
Brambles
4.7%
Commonwealth Bank
4.2%
Coca-Cola Amatil
3.2%
Westfield Group
2.9%
In the last few months, IncomeBuilder
has participated in Wesfarmers’
discounted rights issue with shares
acquired at prices up to $15 (which
compares favourably with the $24.56
share price at the time of writing).
Additional shares in Fairfax Media
were also acquired via participation in
the company’s heavily discounted
capital raising. Shares were acquired
at $0.75 cents (current share price is
$1.37). The Stockland position was
also increased, reflecting MapleBrown Abbott’s belief that the stock
will emerge from the current difficult
period in a stronger position. And
more recently, your fund participated
in BlueScope Steel’s capital raising at
a price of $1.55 per share, an all-time
low price since the company listed on
the Stock Exchange in 2002.
Page 39
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 Debt Managers
NSIM - Cash
6.02
5.78
5.87
6.13
6.37
5.43
0.80
NSIM -Enhanced
Cash
n/a
n/a
n/a
n/a
n/a
6.16
1.36
NSIM (Short
Maturities)
n/a
n/a
n/a
6.71
7.44
10.49
0.83
UBS GAM (Short
Maturities)
n/a
n/a
n/a
6.67
7.42
10.82
0.27
NSIM (All Maturities)
7.78
6.40
6.25
6.26
6.57
11.80
-0.54
UBS GAM (All
Maturities)
7.93
6.58
6.34
6.38
6.75
11.82
-1.24
NSIM - InflationLinked
7.86
6.57
5.57
5.34
2.53
-1.27
-4.47
UBS - InflationLinked
n/a
n/a
n/a
n/a
4.03
1.04
-6.41
Global Debt Managers
Black Rock (Short
Maturities)
n/a
n/a
n/a
5.67
5.55
6.17
2.81
PimCo (Short
Maturities)
n/a
n/a
n/a
5.39
4.24
1.27
7.64
Black Rock (All
Maturities)
n/a
n/a
n/a
5.94
5.50
7.35
1.54
PimCo All Maturities
n/a
6.96
6.99
5.91
4.99
0.86
Bridgewater Global
Fixed Interest
n/a
n/a
n/a
5.64
3.27
-6.93
W.R.HUFF - Hedged
n/a
n/a
8.33
4.23
3.07
-7.26
17.41
OakTree -Hedged
n/a
n/a
n/a
n/a
3.31
-3.55
16.40
n/a
n/a
n/a
n/a
n/a
5.67
0.31
Bridgewater Pure
Alpha
-5.33
Oaktree Loan Fund Super (Hedged)
-3.93
19.70
-6.54
n/a
n/a
n/a
n/a
n/a
0.95
-4.61
-17.84
-36.60
17.98
n/a
-6.50
-20.44
-35.85
13.92
A-REIT Managers
Resolution Capital
6.89
4.85
Challenger
n/a
n/a
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 40
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
Vanguard - Income
Builder
n/a
n/a
4.77
3.47
-6.19
-13.53
11.43
Maple-Brown
Abbott- Income
Builder
n/a
n/a
5.77
4.74
-3.33
-6.31
13.36
Global Share Managers
Capital - ACWI
mandate
7.37
0.12
-1.02
-1.23
-8.53
-19.08
1.99
Capital Emerging
Markets
n/a
7.77
11.11
13.31
3.33
-10.25
15.00
Wellington
n/a
n/a
n/a
n/a
-10.21
-21.93
5.79
Walter Scott
n/a
n/a
n/a
n/a
-4.11
-4.06
1.40
Harding Loevner
n/a
n/a
n/a
n/a
n/a
n/a
4.62
Sands Capital
n/a
n/a
n/a
n/a
n/a
n/a
16.45
Mondrian
n/a
n/a
n/a
n/a
n/a
n/a
3.12
Tweedy Browne
n/a
n/a
n/a
n/a
n/a
n/a
3.07
DFA - Composite
n/a
n/a
n/a
n/a
-9.75
-15.57
13.99
Note all total returns quoted above are before the deduction of fees & taxes and are to periods ended
30 June 2009.
Page 41
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 42