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Investment Update for your MLC MasterKey Horizon 5


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Investment Update for your MLC MasterKey Horizon 5

  1. 1. Investment Update for your MLC MasterKey Horizon 5 Growth Portfolio Year to 31 December 2007
  2. 2. <ul><li>Any advice in this communication has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on any advice in this communication, consider whether it is appropriate to your objectives, financial situation and needs. </li></ul><ul><li>You should obtain a Product Disclosure Statement or other disclosure document relating to any product issued by MLC Investments Limited and MLC Limited and consider it before making any decision about whether to acquire or continue to hold the product. </li></ul><ul><li>A copy of the Product Disclosure Statement or other disclosure document is available upon request by phoning the MasterKey Service Centre on 132 652 or on our website at For the MLC Investment Trust, a Product Disclosure Statement is available at </li></ul>Important information
  3. 3. Investment update agenda <ul><li>The market environment </li></ul><ul><li>Your portfolio in review </li></ul><ul><ul><li>Sector & Manager Performance </li></ul></ul><ul><ul><li>Recent enhancements to your portfolio </li></ul></ul><ul><li>Outlook & Conclusion </li></ul>
  4. 4. The market environment
  5. 5. Indices: Global bonds: Lehman Brothers Global Aggregate Index ($A hedged), Listed property: S&P/ASX 200 Property Accumulation Index, Inflation linked bonds: UBS Warburg Bank Inflation Linked (All Mat) Index, Australian bonds: UBS Warburg Composite Bond (All Mat) Index, Australian shares: S&P/ASX 300 Accumulation Index, Global shares unhedged: MSCI World Net ($A), Global shares hedged: MSCI World Net. Value of $100 in major markets – 1 year return
  6. 6. Value of $100 in Regional markets – 1 year return Indices: MSCI – Emerging Markets index, MSCI Europe Ex UK , MSCI Japan, MSCI United Kingdom and MSCI USA (All unhedged unless otherwise stated)
  7. 7. The state of play <ul><li>Too much liquidity </li></ul><ul><li>Too much leverage </li></ul><ul><li>Too much complacency </li></ul><ul><li>Voracious risk appetites </li></ul><ul><li>A benign macroeconomic environment </li></ul><ul><li>Have led to…. </li></ul><ul><li>Risk being way underpriced – too little reward on offer for risks that have not been properly understood </li></ul><ul><li>In short, returns have been too high, and volatility has been too low, and this situation is now normalising </li></ul><ul><li>Q. Just how bad will the effects on the real economy turn out to be? </li></ul>
  8. 8. The view in the rear-view mirror looks fine…
  9. 9. ...but the windscreen view isn’t pretty (leading indicators are heading into recession territory)
  10. 10. Credit crisis has hit confidence
  11. 11. Sharemarkets are well off their 2007 highs, but emerging markets have fared surprisingly well
  12. 12. US housing: the state of play
  13. 13. The central banks have started the rescue operation… Source: Thomson Financial Datastream. US rate is target rate for Federal Funds. For Europe, short-term repo rate. Canadian rate is Bank of Canada policy rate. Australian rate is the RBA cash rate target. Chinese rate is the 1yr benchmark lending rate. Indian rate is the RBI’s repo rate.
  14. 14. ..but how much more debt can be rammed down the throats of consumers in the English speaking world?
  15. 15. House prices in the English speaking (!?) economies
  16. 16. Global economic prospects <ul><li>US housing downturn is still a significant drag on US growth – recession risk is high </li></ul><ul><li>European and Japanese indicators have turned down </li></ul><ul><li>Can Asia/Emerging markets ‘de-couple’ from G7 business cycle? </li></ul><ul><li>Central banks have started the rescue mission – interest rates have been cut in US, UK, and Canada </li></ul><ul><li>Further rate cuts are likely, and the European Central Bank is likely to join in at some point, BUT… </li></ul><ul><ul><li>Interest rates weren’t all that high to begin with </li></ul></ul><ul><ul><li>Household debt (at least in the English speaking economies) is already at historic highs! </li></ul></ul><ul><li>Bottom line: G4 economic growth rates are likely to be below trend for an extended period </li></ul>
  17. 17. Australia’s links with the US business cycle are not what they used to be
  18. 18. Australian economic prospects <ul><li>Australian GDP growth has accelerated over the past year </li></ul><ul><ul><li>Surge in business investment </li></ul></ul><ul><ul><li>Gains in disposable income have boosted both spending and saving (savings rate is back into positive territory!) </li></ul></ul><ul><ul><li>Employment growth has been strong, with further gains likely over coming months </li></ul></ul><ul><li>Another RBA rate hike is likely – above trend growth, at a time when RBA’s preferred inflation measures are above target </li></ul><ul><li>BUT.. </li></ul><ul><ul><li>Monetary conditions have already tightened (real cash rates higher than decade averages, global borrowing costs have risen) </li></ul></ul><ul><ul><li>Business and consumer confidence have been hit by higher interest rates, global credit crisis </li></ul></ul><ul><ul><li>Impact of global downturn on Australia? </li></ul></ul>
  19. 19. The Australian economy in snapshot
  20. 20. RBA tends to be in tightening mode when trend unemployment rate is falling
  21. 21. Has the RBA already done enough?
  22. 22. Australian shares have been incredibly strong. These returns were NEVER going to last
  23. 23. Let’s keep the recent volatility in perspective
  24. 24. Australian LPTs have collapsed after years of strong performance…
  25. 25. LPTs have underperformed the Australian sharemarket for years
  26. 26. The problem isn’t “P”…
  27. 27. … it’s “E”!! (i.e. PE ratios look cheap, IF you believe that cyclically high earnings are sustainable)
  28. 28. The share of the pie (GDP) going to profits is about as high as it ever gets
  29. 29. Australia: profit share seems to have peaked
  30. 30. Your portfolio in review: MasterKey Horizon 5 Growth Portfolio
  31. 31. Horizon 5 Growth Portfolio Asset allocation based on MasterKey Superannuation
  32. 32. Contribution to performance MLC MasterKey Horizon 5 Growth Portfolio Contribution from each asset class for the periods ending 31December 2007 Returns are gross of all fees and taxes Contribution from each asset class = strategic asset allocation weighting x total return for the asset class Data source: MLC Investment Management
  33. 33. Source: Mercers Investment Consulting (MPA Retail Software Kit) Portfolio Returns MLC MasterKey Horizon 5 Growth Portfolio – Personal Super Absolute Rolling Period Return ( May 1997 – December 2007) Returns are gross of all fees and taxes
  34. 34. Share manager performance 31 December 2006 – 31 December 2007 Returns are gross of fees and taxes Australian shares Maple-Brown Abbott 10.00% Dimensional 10.55% Lazard Asset Management 5.39% Contango 27.73% Concord Capital 20.53% Wallara Asset Management 17.41% JF Capital Partners 22.63% Balanced Equity Management 11.09% Northcape 21.78% Total 14.83% Global shares Capital International 3.68% Alliance Growth Equites 5.18% Dimensional - Global -5.60% Dimensional - Emerging Mkts 27.45% ABN AMRO -4.26% Bernstein Value Equities -6.98% Walter Scott & Partners 0.92% Wellington 4.02% Total hedged 8.49% Total unhedged 0.38%
  35. 35. Data: MLC Investments Limited Top Ten Australian Stocks – MLC MasterKey Horizon 4 - Balanced Portfolio Top 10 Australian Shares as at 31 December 2007 1.75 Financials Excluding Property Trusts Suncorp Metway 1.80 Consumer Discretionary Fairfax Media 1.86 Financials Excluding Property Trusts QBE Insurance 2.67 Industrial Brambles 2.80 Consumer Staples Woolworths 4.11 Materials Rio Tinto 4.18 Financials Excluding Property Trusts Westpac 5.70 Financials Excluding Property Trusts ANZ Bank 6.68 Financials Excluding Property Trusts National Australia Bank 7.02 Materials BHP Billiton Portfolio (%) Industry Sector Company
  36. 36. Top 10 Global Shares as at 31 December 2007 Top Ten Global Stocks – MLC MasterKey Horizon 4 - Balanced Portfolio Data: MLC Investments Limited 0.84 Information Technology Intel 0.85 Materials Barrick Gold 0.92 Energy Schlumberger 0.93 Information Technology Microsoft 0.95 Information Technology Cisco Systems Inc 1.07 Materials Rio Tinto 1.7 Materials Potash Corp of Saskatche 1.12 Consumer Staples Nestle SA 1.18 Financials Credit Suisse 1.19 Financials JP Morgan Portfolio (%) Industry Sector Company
  37. 37. Investment Process The Process is monitored by a cycle of ongoing reviews Daily : Monitor compliance and manage cash flow / rebalancing Monthly : Review investment manager portfolio strategies and performance Six monthly : Pre-briefs, formal investment manager reviews, debriefs and marketing updates Annually+: Asset class reviews (Australian share, global share and property securities strategies refined) Ad hoc : Overseas research trips
  38. 38. Outlook & Conclusion
  39. 39. Let’s be realistic about the kind of returns that are achievable and sustainable over time
  40. 40. Investment thoughts/implications <ul><li>Lower investment returns </li></ul><ul><li>A focus on costs, and the value-added from skilled investment managers become even more important </li></ul><ul><li>Value managers have been struggling to find opportunities, and this could persist for some time (think US 1997) </li></ul><ul><li>Defensive asset allocation bets should eventually pay-off, but just when exactly? </li></ul><ul><li>Resources: is it really different this time? </li></ul><ul><li>Just how much better is the China/India story going to get for the Australian economy and resource equities? </li></ul>
  41. 41. Questions? Comments. Statements!