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    • MLC Investments MLC Horizon 3 Conservative Growth Portfolio About the Portfolio Target Asset Allocation The MLC Horizon 3 MLC Horizon 3 Conservative Growth Portfolio Conservative Growth Portfolio Global Bank Loans, 1.4% aims to grow wealth for a low to Global High Yield Bonds, 2.0% Global Mortgages, 0.6% moderate level of expected Global Multi-Sector Bonds, 2.4% LTAR, 1.0% volatility. The Portfolio is Global Non-Government Australian Shares, 21.0% invested in an approximately Bonds, 6.6% Global Government equal mix of defensive and Bonds, 4.8% growth assets. Global Absolute Return Bonds, 2.6% The Portfolio is designed to be Australian Inflation-Linked a complete investment portfolio Bonds, 8.0% Global Shares (unhedged), 13.0% solution. It’s well diversified within asset classes, across asset classes and across Global Shares (hedged), 6.0% investment managers who Australian Bonds, 21.6% Global Property Securities, 3.0% invest in many companies and Global Private Assets, securities around the world. 6.0% Source: MLC Investment Management MLC Horizon 3 Conservative Growth Portfolio performance 3 month 1 year 3 year 5 year Performance to 31 March 2010 % % % p.a. % p.a. MLC MasterKey Super / Gold Star / 2.5 22.0 1.1 6.1 Business Super (before taking into account fees and tax) MLC MasterKey Super Fundamentals 1.8 19.3 -0.2 - (takes into account fees and tax) MLC MasterKey Super Gold Star / 1.7 18.4 -0.7 3.7 Business Super* (takes into account fees and tax) *MLC MasterKey Business Super commenced on 1 July 2001 and issues the same unit price as that reported for MLC MasterKey Superannuation Gold Star. The returns outlined above do not include allowance for fee rebates you may be entitled to should you be part of a large employer plan. Source: MLC Investment Management
    • Executive summary All the asset classes the Portfolio invests in provided positive returns for the year to 31 March 2010. Some asset classes were particularly strong which is why the MLC Horizon 3 Conservative Growth Portfolio produced a double-digit return. While the absolute positive returns across all the asset classes contributed significantly to offsetting the falls during the GFC, both such extreme moves are highly unusual for investors in a diversified portfolio. Future return patterns may well be more diverse and be in line with the different asset class characteristics. Global Property Securities (+85.2%), Hedged Global Shares (+51.8%) and Australian Shares (+45%) were the best performing asset classes for the year. The Bond (diversified debt) sector continued to rally (+9.6%) during the year, as credit markets continued to normalise. There was a turnaround in the one year performance in Global Private Assets (+11.5%), driven by the continuing upgrades to valuation within this portfolio. The Long-Term Absolute Return strategy (LTAR) maintained its positive momentum (+32.6%), which was a good outcome considering it has had a defensive positioning since the first half of 2009. While strong performance has extended to the latest quarter, we are cautiously optimistic about the medium-term return potential. All managers in the strategy performed in line with expectations during the year to provide positive returns, although their market relative returns differed due to their individual investment style. We continue to hold our convictions in the role each manager plays in the overall portfolio. Absolute returns The graph shows absolute total returns of this portfolio of investments over 1 year and 5 year periods. Historical Absolute Performance MLC MasterKey Super Gold Star Horizon 3 Conservative Growth Portfolio (after taking into account fees and tax) 20% 15% 10% Return % p.a. 5% 0% -5% -10% -15% -20% 2003 2004 2005 2006 2007 2008 2009 2010 1 Year Ended 31 March 5 Years Ended 31 March Source: MLC Investment Management Contributors to the investment portfolio’s absolute returns • During the quarter all asset classes contributed positively, with Australian and global shares the largest drivers of returns. • Australian Shares returned +45% for the year and was the largest contributor to returns, given the Portfolio’s high allocation to this asset class of 21%. MLC Super review for the year ending 31 March 2010 Page 2 of 9
    • • Although Hedged Global Shares (+51.8%) and Global Property Securities (+85.2%) provided strong returns, their contribution to returns were smaller given the lower allocation to these asset classes in the Portfolio of 6% and 3% respectively. • Returns from a range of global assets in the portfolio, hedged back to Australian dollars ($A), were very strong. This was due to the rise of the $A by +25% over the year, against a basket of currencies which constitute Australia’s major trading partners (Trade Weighted Index). • The Portfolio hasn’t produced a negative absolute return when measured over compounded five-year periods since inception. Detractors from the investment portfolio’s absolute returns • The three-year return is still marginally negative after fees, due to the large negative return recorded in 2008 when markets experienced one of the biggest corrections on record. • The three-year return from Global Shares and Global Property remain negative. The chart shows asset class contributors to the return Contribution to Total Return by Asset Class MLC Horizon 3 Conservative Growth Portfolio (before taking into account fees and tax) 25 (annualised for periods greater than 1 year) 20 Return Contribution % 15 10 5 0 -5 Australian Global Shares Global Shares Global Global Private LTAR Debt Total Shares - Hedged - Unhedged Property Assets Securities Securities 3 months to Mar-2010 1 year to Mar-2010 3 years to Mar-2010 5 years to Mar-2010 Source: MLC Investment Management MLC Super review for the year ending 31 March 2010 Page 3 of 9
    • Asset class role and performance Detailed commentaries for each asset class are available online. Asset Class Role in Portfolio 1 year performance Australian Shares Australian Shares aims to deliver capital growth by using The performance of the strategy was very strong. The +45% one-year return (before fees and tax) (21%) investment managers who invest and diversify across many was +3% higher than the market’s return. Manager returns were also generally strong with seven companies listed in the Australian sharemarket. Results can be of ten managers outperforming the index over the year, some by substantial margins. Dimensional 10 Managers volatile over the short term (under 3 years), but are expected to (+55.1%), Maple-Brown Abbott (+49.0%) and Balanced Equity Management (+48.6%) who employ provide growth over longer terms (in excess of 5 years). a value-oriented approach to stock selection tended to be the better performers. Stock strategies that contributed to this outperformance included overweighting Brambles, Fairfax Media, News Corporation, James Hardie and ANZ Bank. Underweighting QBE Insurance and Woolworths also made a positive contribution. Global Shares – Unhedged In addition to what’s discussed above for Australian shares, The unhedged strategy returned +19.6% for the year, before fees and taxes, beating the market by (13%) Global Shares invests in global companies listed in +1.3%. This number has been driven by strong excess returns from Sands Capital (+25.9% over 8 Managers sharemarkets from around the world. The strategy also invests in the benchmark) and Dimensional (+15.7% over the benchmark). The mix of managers with emerging markets, helping capture key opportunities from these different styles of investing helped the strategy throughout the year. All managers provided new markets. positive, double-digit absolute returns for the year. Capital (-7.9% below the benchmark) and Walter Scott (-6.7% below the benchmark) lagged the market over the year in an environment where companies with higher risk levels rose above the conservatively placed quality companies favoured by these managers. Global Shares – Hedged In addition to what’s discussed above, returns are hedged back The hedged Global Shares strategy returned +51.8% for the year. The substantial performance (6%) to the $A, significantly reducing the impact of currency difference when compared to the unhedged strategy was due to the rise in value of the $A against In addition to those managers above, movements on returns. a basket of currencies which represents Australia’s major trading partners by +25% for the year. All there are 2 specialist currency countries contributed positively, with manager performance the same as in the unhedged strategy. managers. Global Property Securities The strategy is designed to provide comprehensive exposure to The return from the Global Property strategy over the year of +85.2% was +3.3% above the (3%) global listed property securities (including REITs). It aims to market’s return. Morgan Stanley (+58.4%) was the prime contributor to the out-performance as deliver growth by using investment managers who invest and Resolution Capital (+41.4%) and LaSalle (+42.7%) underperformed. REIT strategies that 3 Managers diversify across many companies and securities within that asset contributed to this out-performance included: class. Returns from property are generally expected to be higher than those from bonds, but lower than shares over the • overweighting Manhattan office specialist SL Green medium to long term. All returns from this asset class are fully • overweighting Japanese Real Estate Operating Companies such as Mitsubishi Estate and hedged back to the Australian dollar. Mitsui Fudosan underweighting Japanese REITs which underperformed the global index by a substantial margin. Global Private Assets These are investments in assets that aren’t traded on listed There was a turnaround in the one-year performance in Global Private Assets (+11.5%), driven by (6%) exchanges. An example of this is an investment in a privately the continuing upgrades to valuations within this strategy. The rising value of the $A also helped owned business. Private assets can be volatile and are included returns. Several managers have taken the opportunity presented in 2009 to improve balance 35+ Managers in this portfolio for their growth characteristics. All returns from sheet strength and overall health of companies in the strategy through reducing or restructuring this asset class are fully hedged back to the Australian dollar. debt, controlling costs and refocusing on core businesses. The strategy is well diversified and MLC Super review for the year ending 31 March 2010 Page 4 of 9
    • Asset Class Role in Portfolio 1 year performance invests in over 2,000 companies world-wide. Australian Bonds These are investment grade bonds issued by the Australian Australia is one of the first developed countries to start raising interest rates because our economy government, semi-governments, companies etc. They tend to fared relatively well during the GFC. The market has factored in more increases, with cash rates (21.6%) perform well in environments of falling interest rates and expected to increase to 5.5% by the end of 2011. When interest rates rise, the value of bonds falls. 2 Managers inflation. In some scenarios, such as a recession or deflation, The strategy invests in bonds with longer terms to maturity to benefit from the higher interest rates these bonds are likely to do well – which means they often usually paid for longer-dated securities. Yields rose across all maturities and the Portfolio was provide excellent diversification in negative scenarios. therefore hit by the increases in Australian government bond yields. While this environment is not ideal for Australian bonds, the other sectors more than compensated overall returns this year. On a positive note, the Australian managers, UBS and Antares both still outperformed the market. They positioned their portfolios for an increase in interest rates and adopted a short duration position, which paid-off. Global Government Bonds In addition to the information on Australian bonds, global Global government bonds are one of our new specialist debt sectors, resulting from the changes government bonds are limited to sovereign or treasury issued announced in February. Previously these bonds were included in global nominal bonds and multi- (4.8%) bonds and they generally provide a good risk-return trade-off sector bond strategies. 1 Manager because they’re diversified across many countries, each with a Although the quarter didn’t see much movement, global government bond yields have been rising different interest rate environment. Government bonds perform (and returns have been weak) over the past year due to concerns about the increase in supply of well in credit crunches. bonds needed to fund huge budget deficits. Attention at the end of March was on the 10 year swap spreads (difference between AA-rated bank swap rates and US Government Bonds yields) which turned negative. Negative swap spreads reflect markets perceive AA rated banks’ risk of default to be lower than US government credit. While negative swap spreads have occurred in emerging countries in the past, this is a first for the US. We’ve less than a quarter’s performance for Goldman Sachs as they’re a new manager. Global non-government bonds These are investment grade bonds issued by government Global non-government bonds are also one of our new specialist debt sectors. Previously these (6.6%) agencies, companies etc. In addition to the information on bonds were included in global nominal bonds and multi-sector bond strategies. Australian bonds, global non-government bonds generally With interest rates in Australia rising quite quickly, being diversified across global non-government 2 Managers provide a good risk-return trade-off because they’ve a diversified bonds boosted returns this year. We saw returns from the falling yields on corporate investment exposure across many different industries, companies and grade (higher credit risk) securities from March 2009 onwards. Within corporate bonds, financials countries (each with a different interest rate environment). did particularly well. We’ve less than a quarter’s performance for Wellington Management and Rogge as they’re new managers. Global multi-sector bonds Global multi-sector bond strategies have a longer-term focus and The Portfolio has a relatively large exposure to this sector because it has a longer term focus. Prior (2.4%) the managers have discretion to invest in the different debt to the changes, the sector was named Real Return Strategies as the managers had an objective to sectors based on their own view - another source of achieve a return above inflation. The managers now have a market-oriented benchmark. A 3 Managers previous real return manager, PIMCO was re-appointed to a global multi-sector bond mandate but diversification. Bridgewater, the other real return manager was removed. Amundi and Franklin Templeton have joined PIMCO as managers in this sector. PIMCO (+18.6%) provided an excellent return this year due to their credit exposure, particularly to MLC Super review for the year ending 31 March 2010 Page 5 of 9
    • Asset Class Role in Portfolio 1 year performance corporate bonds issued by financials. This sector was the strongest contributor to returns within the debt component of the portfolio this year. Global Absolute Return Bonds These are flexible strategies where managers have discretion to We added an allocation to global absolute return bonds from February, managed by Deutsche. invest across a broad spectrum of bonds to achieve a higher Comments on returns will be possible from the June quarter onwards, as this is a new manager. (2.6%) return than cash. They are used as a low risk diversifier to 1 Manager Australian bonds and enhanced cash. Australian Inflation Linked Bonds Inflation-linked bonds are similar to conventional bonds except Breakeven inflation is the difference between the yield on nominal government bonds and inflation- that repayments are directly linked to inflation. They therefore linked bonds. It provides an indication of whether inflation-linked bonds represent good value. The (8%) offer effective medium to long-term protection in periods of high breakeven inflation rate has continued to drift higher to 3% which is higher than actual inflation and 2 Managers inflation or expected inflation, with some volatility in returns due is the top of the RBA’s target. That’s why Australian inflation-linked bonds underperformed to their long term nature. Returns can be quite soft during Australian bonds over the year. periods where markets anticipate very low levels of future inflation, such as at the start of 2009. Global High Yield Debt These are bonds issued by companies with a credit rating below The credit spread (difference between yields on high and low credit risk securities) has now (2%) investment grade. They usually pay higher rates of interest than narrowed from their peak at almost 22% in December 2008 to 6% at the end of March 2010. more credit worthy securities because they have a higher risk of Spreads are now close to long-term averages, reducing the potential for further gains. 2 Managers default. Investing in the high yield sector enables us to capture Even though exposure to the sector isn’t significant, it was still the best performer this year by a the expected long-term premium paid for investing in securities large margin. Our high yield bonds delivered a return just under 50%, so even a 5% allocation with higher risk of default. High yield bonds tend to perform well gave the Portfolio’s returns a good boost. in credit expansionary periods and global booms. WR Huff (+47.1%) and Oaktree (+42.9%) have produced excellent returns, with Oaktree only marginally underperforming the market benchmark. Global Bank Loans Global bank loans are a source of funding through which Global bank loans rebounded strongly this year (+38.3%) due to rising appetites for higher risk (1.4%) companies rated as “high yield” can finance their operations and assets. Shenkman Capital has now joined Oaktree as a manager of global bank loans. . growth aspirations. They tend to perform well in credit 2 Managers expansionary periods and global booms. Global mortgages Mortgages are bonds which use property as security. They tend From February there’s a distinct allocation to global mortgages, managed by Stone Tower. (0.6%) to perform well in credit expansionary periods and global booms. Comments on returns will be possible from the June quarter onwards. 1 Manager Previously exposure to global mortgages was via global nominal bonds, multi-sector bonds and high yield bonds. LTAR The Long-Term Absolute Return strategy has a unique mandate LTAR’s return was very strong this year as all the asset classes produced positive returns over the to provide real returns (after fees, taxes and inflation) +5.5% per quarter and year. (1%) annum, over a longer time horizon of 20 years and isn’t We’ve taken a relatively defensive asset allocation stance since the first half of 2009 even though constrained in its approach. In addition to investing in traditional market returns have continued to be strong. This stance is consistent with Portfolio’s objective of assets, the strategy has the ability to invest in unique assets ensuring that the long-term return is robust regardless of market performance – this implies such as Insurance Related Investments (IRI). reducing risk exposure when the risk of a long-term adverse outcome is relatively high. We believe this continues to be the case. MLC Super review for the year ending 31 March 2010 Page 6 of 9
    • MLC Super review for the year ending 31 March 2010 Page 7 of 9
    • Stock story Emerging market financials: African Bank (South Africa), Garanti (Turkey), ICICI Bank (India) and Bank Central Asia (Indonesia) One of the common themes we discovered over the last quarter were new positions initiated by two global share managers in financial firms listed in four different emerging markets. This was interesting given the underweight position within the aggregate Global Shares strategy to financials (15.5% for the strategy vs. 21.5% for the benchmark). Mondrian’s focus on growing dividends within the strategy made them identify two banks with strong potential payout characteristics. Meanwhile, Harding Loevners focus on growth helped identify two institutions in countries with low credit penetration. Mondrian added two financial services companies in South Africa and Turkey, namely African Bank and Garanti Bank. African Bank is very well capitalised and operates, with few competitors, in the micro- financing segment of the South African banking market. This creates opportunities for strong dividend growth over the long term through a combination of high levels of profitable loan growth and high payout ratios. Garanti is a leading private sector bank in Turkey with a robust capital position and disciplined management which combines a healthy dividend yield with attractive long-term growth potential (see Figure 1 below). Harding Loevner added Bank Central Asia of Indonesia and ICICI Bank in India, which has been owned by them in the past. Both franchises have growth opportunities in low credit penetration countries that Harding Loevner thinks are as increasingly rare and valuable. ICICI Bank, has impressed Harding Loevner with the actions taken by the former CFO, now CEO, over the past year to improve liquidity, risk management, and profitability. The Bank wants to increase their exposure to the bright long-term growth prospects of financial services in India, which remain dramatically under penetrated relative to the country’s economy. ICICI’s spread of retail and corporate lending, along with its success in building its insurance subsidiary into the largest private sector life insurer in the country, mean that it‘s strongly placed to exploit that growth, yet its shares are more modestly priced than other well managed private sector banks. Bank Central Asia, meanwhile, has the highest quality and lowest cost deposit franchise in Indonesia. Its urban focus and track record of relatively good management execution and risk control are viewed positively. As with India, there’s a long path towards greater use of financial services by Indonesians as their per capita incomes rise. Figure 1: Growth history over the last five years of Garanti Bank, Turkey Source: Garanti Bank Annual Report, 2009. MLC Super review for the year ending 31 March 2010 Page 8 of 9
    • 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 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 31 March 2010, unless otherwise stated. The specialist investment management companies are current as at 31 March 2010. Funds under management figures are as at 31 March 2010, unless otherwise stated. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you. MLC Super review for the year ending 31 March 2010 Page 9 of 9