INVESTMENT UPDATE FOR
FINANCIAL ADVISERS
Wholesale Products
30 June 2015
General advice warning and disclaimer
The information in this presentation has been provided by MLC Investments Limited (ABN 30 002 641 661) a member of the NAB
Group of Companies, 105–153 Miller Street, North Sydney 2060 for advisers only. No company in the NAB group, nor MLC limited
guarantees the capital value, payment of income or performance of any fund referred to in this presentation.
Any opinions expressed in this communication constitute our judgement at the time of issue and are subject to change. We believe
that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations
are reasonably held or made as at the time of compilation. However, no warranty is made as to their accuracy or reliability (which
may change without notice) or other information contained in this communication. Any projection or forward looking statement in
this report is provided for information purposes only and no representation is made as to the accuracy or reasonableness of such
projection or that it will be met.
Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in
the market. Returns are not guaranteed and actual returns may vary from target returns described in this document. Please note
that all performance reported is before management fees and taxes, unless otherwise stated.
This communication contains general information and may constitute general advice. Any advice in this communication has been
prepared without taking account of individual objectives, financial situation or needs. It should not be relied upon as a substitute for
financial or other specialist advice.
Before making any decisions on the basis of this communication, you should consider the appropriateness of its content having
regard to your particular investment objectives, financial situation or individual 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
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The funds referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any
such fund.
2
Table of contents
1.
Market performance
2.
Investment Futures Framework
3.
Activity this quarter
4.
More analysis of returns
5.
Where to find client tools
3
1. Market performance
What happened
Our insights
Returns strong for the year
Global shares and REITs continued to attract
strong support for most of the year.
For the last few years share market returns,
supported by unusually low interest rates, have
been strong and have tended to run ahead of
actual company earnings.
After the high returns in the March quarter we
reduced exposure to Australian shares and
inflation-linked bonds prior to the adverse market
environment in June.
Market volatility increased in June
If volatility persists, the Fed could delay interest
Market weakness in June was made worse by the rates rises and further monetary stimulus in the
uncertainty about the ability of Greece to meet its eurozone and Japan to restore market
loan obligations and remaining in the euro
confidence. This may result in the strong return
together with China’s sharp share market
environment resuming. However we continue to
reversal.
be concerned about market valuations and the
continuing high levels of global debt. Australia is
vulnerable to slowing and less investment
intensive growth in China. Therefore we continue
to maintain defensive positioning in our
portfolios.
4
1. Market performance
All asset classes delivered positive returns over 1, 3 and 5 years. Global shares and REITs were
particularly strong, although Australian shares lagged over the year. Market volatility in June
resulted in negative returns in most asset classes in the quarter.
5
1. Market performance
Another strong year for global share markets
Market
1 year return to
30 June 2015
S&P500 (USA)
5.2
DAX (Germany)
11.3
CAC (France)
8.3
Nikkei (Japan)
33.5
Hang Seng (Hong Kong)
13.2
Shanghai (China)
108.8
FT100 (UK)
-3.3
S&P/ASX200 Accumulation
5.7
All Industrials
11.2
All Resources
-16.6
Japan and the eurozone were boosted by QE. Australia’s positive return was due to industrials, as
resource and energy companies lost ground. China’s shares were extremely strong, despite sharp
falls at the end of the year.
6
Source: Iress
6
1. Market performance
China’s share market bubble has bust
600
Index growth (reindexed to 100 in July 2005)
China Shanghai A Share Index
500
400
300
S&P 500 Index
200
S&P/ASX200 Accum Index
100
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Post GFC China has become over-indebted, particularly state-owned enterprises and local
government. This resulted in surplus capacity in growth areas such as real estate. As China rotates
away from investment led economic growth to relying on consumption, the debt problems are being
revealed eg many property developers are technically insolvent. Australia is not only vulnerable to
a slowing Chinese economy but moving from investment to consumption impacts demand for
Australian resources.
Source: JANA Corporate Investment Services Limited
7
1. Market performance
Our overweight to foreign currencies (ie unhedged global
assets) has paid off
50%
Rolling 1 year returns
40%
30%
20%
10%
май.15
мар.15
янв.15
ноя.14
сен.14
июл.14
май.14
мар.14
янв.14
ноя.13
сен.13
июл.13
май.13
мар.13
янв.13
ноя.12
сен.12
май.12
мар.12
янв.12
ноя.11
сен.11
июл.12
-10%
июл.11
0%
Global shares (hedged)
-20%
Global shares (unhedged)
Comment to be included
The declining AUD was responsible for more than half of the 24% return from unhedged global
shares this year. The AUD continues to depreciate in response to rising awareness of the changing
composition of China’s growth and Australia’s vulnerability to those changes given high levels of
domestic debt and reliance on inflows of foreign capital.
8
Source: JANA Corporate Investment Services Limited
8
1. Market performance
Our underweight to Australian shares has benefited
investors
50%
Rolling 1 year returns
40%
30%
20%
10%
-10%
июл.12
авг.12
сен.12
окт.12
ноя.12
дек.12
янв.13
фев.13
мар.13
апр.13
май.13
июн.13
июл.13
авг.13
сен.13
окт.13
ноя.13
дек.13
янв.14
фев.14
мар.14
апр.14
май.14
июн.14
июл.14
авг.14
сен.14
окт.14
ноя.14
дек.14
янв.15
фев.15
мар.15
апр.15
май.15
июн.15
0%
Australian shares
-20%
Global shares (unhedged)
Australian shares have generally lagged global over the last few years. We’ve maintained
underweight positions in Australian shares and in May this year we made further reductions prior to
the significant market volatility in June. Exposure to both Australian and global shares continues to
provide diversification benefits to our portfolios.
9
Source: JANA Corporate Investment Services Limited
9
1. Market performance
Australia’s share market is vulnerable
The Australian share market’s vulnerability has increased because of the concentration to
resources and banks. Resource companies are suffering from moderating demand for mineral
exports and banks may face stress if the over-extended residential property market unravels.
10
Source: JANA Corporate Investment Services Limited
10
1. Market performance
Greece in perspective
Countries comprising the MSCI All Country World Index
50
40
30
20
10
-United States
Japan
United Kingdom
Hong Kong
Canada
France
Switzerland
Germany
Australia
South Korea
Taiwan
Spain
Netherlands
Sweden
South Africa
India
Brazil
Italy
Denmark
Singapore
Mexico
Belgium
Russia
Malaysia
Finland
Indonesia
Thailand
Norway
Israel
Ireland
Poland
Turkey
Philippines
Chile
Qatar
Luxembourg
United Arab Emirates
Colombia
Austria
Portugal
New Zealand
Greece
Peru
Hungary
Egypt
Czech Republic
China
% of the MSCI All Country World Index
60
Greece’s share market is only 0.03% of the MSCI and its GDP is less than 2% of the eurozone. Our
portfolios have negligible exposure to Greece (0% Greek companies in our actively managed global
shares strategies and 0.009% Greek bonds in fixed income strategies). The risk that Greece poses
is its impact on confidence rather than any direct impact on global growth.
Source: JANA Corporate Investment Services Limited, data at 30 June 2015.
11
1. Market performance
Ruffer is defensively positioned
Ruffer, a multi-asset real return manager, has a high weighting to inflation linked bonds and gold due
to concern about inflation eventuating. Their share allocations are growth oriented. Despite their
overall defensive positioning, Ruffer returned 14.5% (before fees and taxes) this year, significantly
outperforming their real return objective.
Source: Ruffer LLP
12
2. Investment Futures Framework
The probabilities of most scenarios changed this quarter and we
redesigned the ‘China hard landing scenario’ (now the ‘Australian
stress scenario’).
Change in
probability
since last
quarter
Higher
Three speed global economy (China soft landing)
Early re-leveraging
Extended quantitative easing
(Mild) inflationary resolution (path to debt normalisation)
Australian stress scenario
Redesigned
scenario
Probability
Developed market austerity, recession, stagnation
Sovereign yield re-rating
Reform (path to growth normalisation)
One speed slow growth world
Lower
Extended risk aversion
Inflation shock
Stagflation
For a description of each scenario, please refer to ‘MLC’s scenario insights & portfolio positioning’, July 2015
Available in the Adviser section of mlc.com.au, click on Investments/prices-and-performance/fund-commentaries
13
2. Investment Futures Framework
MLC Inflation Plus positions
Potential risk or
opportunity
Change in MLC Inflation Plus portfolios
this quarter
Risk of a market
correction
Early in the quarter we made further reductions
to the allocation to Australian shares. This
significantly reduced the portfolios’ exposure to
risk prior to the adverse market environment in
June which was made worse by the uncertainty
about the ability of Greece to meet its loan
obligations and remaining in the euro together
with China’s sharp share market reversal.
There are particular vulnerabilities for Australia
flowing from slower and less investment
intensive growth in China. Therefore we
continue to maintain the portfolios’ defensive
positioning.
Risk of a rise in
interest rates
The decline in yields to extremely low levels in
the first quarter of 2015 increased the risk of
inflation linked bonds so we reduced
allocations.
MLC Inflation Plus Moderate
Asset allocation at 30 June 2015
Australian shares (3%)
Defensive global shares (unhedged) (19%)
Emerging markets strategy (unhedged) (3%)
Multi-asset real return strategy (hedged) (18%)
Low correlation strategy (8%)
Unchanged positions:
• Higher foreign currency exposure
• Rather than broad share market exposure we prefer investments in
defensive global shares, risk management strategy the low correlation
strategy and multi-asset real return strategies
• No direct allocation to long duration traditional bonds
• Australian inflation-linked bonds to manage inflation risk
Insurance related investments (hedged) (2%)
Risk management strategy (1%)
Cash (16%)
Australian non-government bonds (20%)
Australian inflation-linked bonds (5%)
Global bank loans (5%)
14
2. Investment Futures Framework
Objective-driven allocations
Target asset allocation: MLC Wholesale Inflation Plus portfolios
MLC Inflation Plus:
Conservative
Moderate
Assertive
Australian shares
-
3
4
Global shares (unhedged)
-
-
-
Global shares (hedged)
-
-
-
Defensive global shares (unhedged)
10
19
37.5
Emerging markets strategy (unhedged)
2.5
3
7
-
-
-
Enhanced cash
31
16
-
Australian non-government bonds (short maturity)
26
20
-
Australian inflation-linked bonds
5
5
4.5
Global bank loans
5
5
6.5
Insurance-related investments (hedged)
-
2
2
Low correlation strategy
6
8
13
13.5
18
24
1
1
1.5
100
100
100
Global property securities (hedged)
Multi-asset real return strategy (hedged)
Risk Management strategy
Borrowings
Total
Source: MLC as at 30 June 2015
15
2. Investment Futures Framework
MLC Horizon 4 Balanced positions
Position relative
to benchmark
Why we have position
Underweight to
growth assets
For the last few years share market returns,
supported by unusually low interest rates, have
been strong and have tended to run ahead of
actual company earnings. This increases the
risk of a market fall. To reduce exposure to this
risk we’ve increased the portfolio’s
diversification over time by investing in riskcontrolled strategies including multi-asset real
return strategies, the low correlation strategy
and defensive global shares. As we introduced
these strategies to the portfolio, we reduced
allocations to broader Australian and global
share markets.
Underweight to
interest rate risk
While government bond yields (interest rates
on bonds) could decline from their already low
levels, the potential for further falls is less than
the potential for yields to rise.
Yields on Australian inflation-linked bonds
declined to extremely low levels in the first
quarter of 2015, so we reduced the exposure.
Overweight to
foreign
currencies
Global share markets and the AUD tend to
move in the same direction. By having an
exposure to foreign currencies (ie not hedging
some of our overseas assets to the AUD) we
can help insulate the portfolio from losses
when share markets fall. This position worked
well this year. We trimmed this overweight in
May.
MLC Horizon 4 – Balanced
Asset allocation at 30 June 2015
Australian shares (28%)
Global shares (unhedged)(21%)
Global shares (hedged)(7%)
Global property securities (hedged) (4%)
Defensive global shares (unhedged) (1%)
Emerging markets strategy (unhedged)(1%)
Multi-asset real return strategy (hedged) (8%)
Low correlation strategy (1.5%)
Cash (2.5%)
Australian inflation-linked bonds (5%)
Global bank loans (1.2%)
Australian bonds (10.1%)
Global government bonds (2.1%)
Global non-government bonds(3.1%)
Global multi-sector bonds(2.5%)
Global high yield bonds (0.8%)
Global absolute return bonds(1.2%)
16
2. Investment Futures Framework
Potential real returns
40 scenario set probability weighted real returns (June 2015) (5 years, 0 tax with franking credits, pre-fees, pre-alpha)
Return potential remains compressed across shares and fixed income assets. Although markets
were weak in June, they may weaken further. While Australian shares shows a higher potential
return, as explained in earlier slides, there are particular vulnerabilities for Australia flowing from
slower growth in China.
Source: JANA Corporate Investment Services Limited
17
3. Activity this quarter
Changes to MLC Inflation Plus asset allocations
High share market returns in the March quarter increased market risk looking forward. Therefore
early in the quarter we made further reductions to the allocation to Australian shares and inflationlinked bonds. This reallocation significantly reduced the portfolio’s exposure to risk prior to the
adverse market environment in June.
18
18
3. Activity this quarter
Changes to MLC Horizon 4 Balanced asset allocation
These changes increased the portfolio’s defensive positioning, compared to its benchmark, before
the increase in volatility in share and bond markets in June.
19
3. Activity this quarter
Changes to managers
Changes made to
Manager changes over the quarter
In the fixed income strategy we:
• appointed global absolute return managers
FFTW and Insight
• removed global mortgages (and the manager
Apollo), and
• removed Peridiem from global absolute returns,
multi-sector bonds and high yield bonds due to
the closure of their business.
Inflation Plus
MLC Horizon

20
4. More analysis of returns
A. Returns for all multi-asset portfolios
B. MLC Inflation Plus portfolio returns
Relative to benchmark
Contributors to returns
C. MLC Horizon portfolio returns
Contributors to returns
Relative to peers
D. Asset class fund returns
Relative to benchmark
21
4 A. Returns for all multi-asset portfolios
Absolute returns (net of fees and tax)
MLC Wholesale
as at 30 June 2015
(net of fees and tax)
3
1 year 3 years 5 years 7 years
10
months (% pa) (% pa) (% pa) (% pa) years
(%)
(% pa)
Horizon 1 ‐ Bond Portfolio
0.4
2.5
3.2
4.0
4.4
-
Horizon 2 – Capital Stable Portfolio
-1.6
6.7
8.0
7.4
6.0
-
Horizon 3 – Conservative Growth Portfolio
-1.8
8.4
10.8
8.6
6.1
6.1
Horizon 4 – Balanced Portfolio
-2.7
10.2
13.7
10.0
6.3
6.4
Horizon 5 – Growth Portfolio
-2.9
11.6
15.8
10.9
6.3
6.5
Horizon 6 – Share Portfolio
-2.9
13.2
18.5
12.2
6.5
6.8
Horizon 7 – Accelerated Growth Portfolio
-3.8
15.7
22.8
14.2
6.3
6.6
Inflation Plus Conservative Portfolio
0.2
8.5
-
-
-
Inflation Plus Moderate Portfolio
-0.2
11.0
-
-
-
Inflation Plus Assertive Portfolio
-0.7
15.9
15.1
11.7
7.1
-
Source: MLC
22
4 B. MLC Inflation Plus
Returns relative to benchmark
MLC INFLATION PLUS ASSERTIVE RETURNS (BEFORE FEES AND TAXES) RELATIVE TO ITS TARGET
Delivered 6.3% pa real return over 7 years to 30 June 2015. Currently on track to deliver target real
return over shorter time frames too.
Source: JANA Corporate Investment Services Limited
23
4 B. MLC Inflation Plus Assertive
Contributors to returns
Source: JANA Corporate Investment Services Limited
24
4 C. MLC Horizon
Contributors to returns
Key contributors to most portfolios over the quarter
• Global shares (unhedged)
• Fixed income
• Australian shares
Key contributors to most portfolios over the year
• Global shares (unhedged)
• Australian shares
• Fixed income
25
4 C. MLC Horizon
Relative to peers – quartile performance rankings for
MLC Wholesale
Returns are above median over most timeframes
To 30 June 2015
1 year
3 years
5 years
10 years
MLC Horizon 2
Q2
Q3
Q2
Q2
MLC Horizon 3
Q3
Q3
Q2
Q2
MLC Horizon 4
Q2
Q3
Q2
Q2
MLC Horizon 5
Q2
Q2
Q2
Q3
MLC Horizon 6
Q1
Q1
Q1
Q3
Peer universe is the MLC Morningstar Wholesale universe
26
Source: Morningstar Direct
4 C. MLC Horizon
Relative to peers
Most of the MLC Horizon portfolios are above median over 1, 5 and 10 years a good result
MLC Horizon 4’s one year peer relative return is above median.
The main reasons are:
• our Australian shares strategy has outperformed, and
• the portfolio doesn’t have a direct allocation to international listed
infrastructure and commodities, which have performed very poorly for peers,
on average.
27
4 D. Asset class funds
Relative to benchmark
Performance to 30 June 2015
MLC Australian Share Fund (before fees and tax)
S&P/ASX 200 Accumulation Index
(S&P/ASX 300 prior to Sep 2012, S&P/ASX 200 Index prior to Nov 2002)
MLC Global Share Fund (before fees and tax)
MSCI All Country World Index
(MSCI World Index prior to July 2002)
MLC Hedged Global Share Fund (before fees and taxes)
MSCI All Country World Index Hedged
(MSCI World Index Hedged prior to July 2002)
MLC Global Property Fund (before fees and taxes)
EPRA/NAREIT ($A Hedged)
(UBS Global Investors Index (hedged) prior to 1 Aug 2011)
MLC Diversified Debt Fund (before fees and tax)
Excess return (relative to 50% Bloomberg AusBond Composite 0+ Yr Index &
50% Barclays Capital Global Aggregate Bond Index (hedged))
Source: JANA Corporate Investment Services Limited
1 year
%
3 years
% pa
5 years
% pa
7 years
% pa
10 years
% pa
7.3
15.5
9.2
5.8
7.1
5.7
15.0
9.6
5.2
7.0
24.8
24.8
15.1
8.6
7.0
24.3
25.1
14.7
8.7
6.9
10.0
18.1
16.1
7.3
8.3
10.7
18.9
16.1
8.5
8.9
12.9
16.6
16.6
8.8
9.1
9.9
15.2
16.6
8.3
7.4
4.7
5.3
6.8
6.7
n/a
5.6
5.4
6.9
7.8
6.8
28
28
5. Where to find client tools
Go to the Adviser section of mlc.com.au, then to
Investments/prices-and-performance/fund-commentaries
Performance overview for MLC funds
and charts
Fund performance commentaries
Presentation of fund performance, updated quarterly
Client report on fund performance for the quarter and year,
updated monthly available on Fund Profile Tool
Multi-asset portfolios: portfolio
positioning and scenario insights for
advisers
Quarterly update on our investment positions, detailed report
for financial advisers
MLC Horizon and MLC Inflation Plus
portfolios: positioning summary for
clients
Quarterly update on our investment positions, summary report
for clients
Economic update
Monthly commentary on economic and market developments,
available as video and client Q&A
Year in review
Market update prepared for calendar and financial years for
your clients
Investment insights and news
Commentary on current events and investment issues for your
clients
Manager insights
Highlights of MLC’s investment managers’ insights on markets
and their positions, updated quarterly
Stock stories
Our managers outline their rationale for purchasing specific
companies, updated quarterly
29