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INVESTMENT UPDATE FOR FINANCIAL ADVISERSSuperannuation Products
30 June 2015
General advice warning and disclaimer
The information in this presentation has been provided by MLC Limited (ABN 90 000 000 402) a member of the NAB Group of Companies, 105–153 Miller Street, North Sydney 2060 for financial advisers. 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 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.
Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) do not approve or endorse any information included in this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any part of this material.
The funds referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such fund.) in presentaitons and documents where these indices are mentioned.
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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
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1. Market performance
4
What happened Our insights
Returns strong for the yearGlobal 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 JuneMarket weakness in June 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.
If volatility persists, the Fed could delay interest rates rises and further monetary stimulus in the eurozone and Japan to restore market confidence. This may result in the strong return environment resuming. However we continue to 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.
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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.
Source: Iress
1. Market performanceAnother 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%
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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.
7Source: JANA Corporate Investment Services Limited 7
1. Market performanceChina’s share market bubble has bust
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ly 2
005)
S&P/ASX200 Accum Index
China Shanghai A Share Index
S&P 500 Index
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.
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1. Market performanceOur overweight to foreign currencies (ie unhedged global
assets) has paid offR
oll
ing
1 y
ea
r re
turn
s
Source: JANA Corporate Investment Services Limited
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.
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1. Market performanceOur underweight to Australian shares has benefited investors
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.
Source: JANA Corporate Investment Services Limited
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1. Market performanceAustralia’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.
Source: JANA Corporate Investment Services Limited
11Source: JANA Corporate Investment Services Limited, data at 30 June 2015.
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.
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1. Market performanceGreece in perspective
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I All
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Wo
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ex
Source: Ruffer LLP 12
1. Market performanceRuffer 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.
2. Investment Futures Framework
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For a description of each scenario, please refer to ‘MLC’s scenario insights & portfolio positioning’, July 2015Available in the Adviser section of mlc.com.au, click on Investments/prices-and-performance/fund-commentaries
Hig
he
rL
ow
er
Pro
bab
ilit
y
Developed market austerity, recession, stagnation
Three speed global economy (China soft landing)
Early re-leveraging
Reform (path to growth normalisation)
Stagflation
Extended quantitative easing
(Mild) inflationary resolution (path to debt normalisation)
One speed slow growth world
Extended risk aversion
Australian stress scenario
Inflation shock
Sovereign yield re-rating
Change in probability since last
quarter
The probabilities of most scenarios changed this quarter and we redesigned the ‘China hard landing scenario’ (now the ‘Australian stress scenario’).
Redesigned scenario
MLC Inflation Plus ModerateAsset allocation at 30 June 2015
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.
Unchanged positions:•Higher foreign currency exposure•Rather than broad share market exposure we prefer invest ments 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
2. Investment Futures FrameworkMLC Inflation Plus positions
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Australian shares (3%)
Global shares (hedged) (0.5%)
Defensive global shares (unhedged) (18.5%)
Emerging markets strategy (unhedged) (3%)
Multi-asset real return strategy (hedged) (14%)
Global private assets (hedged) (4%)
Low correlation strategy (8%)
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%)
Objective-driven allocations
Source: MLC as at 30 June 2015
2. Investment Futures Framework
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Target asset allocation: MLC Super Inflation Plus portfolios
MLC Inflation Plus: Conservative Moderate Assertive
Australian shares - 3 4
Global shares (unhedged) - - -
Global shares (hedged) 0.5 0.5 -
Defensive global shares (unhedged) 9.5 18.5 33.5
Global private assets (hedged) 2 4 7
Emerging markets strategy (unhedged) 2.5 3 6
Global property securities (hedged) - - -
Enhanced cash 30 16 4
Australian non-government bonds (short maturity) 27 20 2
Australian inflation-linked bonds 5 5 5
Global bank loans 4 5 4
Insurance-related investments (hedged) - 2 2
Low correlation strategy 6 8 13
Multi-asset real return strategy (hedged) 12.5 14 18
Risk Management strategy 1 1 1.5
Borrowings - - -
Total 100 100 100
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 risk-controlled 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
2. Investment Futures FrameworkMLC Horizon 4 Balanced positions
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Australian shares (28%)Global shares (unhedged)(21%)Global shares (hedged)(1%)Defensive global shares (unhedged) (1%)Global property securities (hedged) (4%)Global private assets (hedged)(6%)Multi-asset real return strategy (hedged) (8%)Emerging markets strategy (unhedged)(1%)Low correlation strategy (1.5%)Cash (2.5%)Australian inflation-linked bonds (5%)Australian bonds (10.1%)Global government bonds (2.1%)Global non-government bonds(3.14%)Global multi-sector bonds(2.5%)Global high yield bonds (0.8%)Global bank loans (1.2%)Global absolute return bonds(1.2%)
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. This quarter we reduced exposure to Australian shares prior to the adverse market environment in June.
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.
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.
MLC Index Plus – BalancedAsset allocation at 30 June 2015
2. Investment Futures FrameworkMLC Index Plus Balanced positions
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Australian shares (30.5%)
Global shares (unhedged) (24%)
Global shares (hedged) (10.5%)
Global property securities (hedged)(4%)
Cash (3.5%)
Australian inflation-linked bonds (5%)
Australian bonds (12%)
Global government bonds(2.4%)
Global non-government bonds (3.8%)
Global multi-sector bonds (2.8%)
Global absolute return bonds(1.5%)
40 scenario set probability weighted real returns (June 2015) (5 years, 0 tax with franking credits, pre-fees, pre-alpha)
2. Investment Futures FrameworkPotential real returns
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.
18Source: JANA Corporate Investment Services Limited
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3. Activity this quarterChanges 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 inflation-linked bonds. This reallocation significantly reduced the portfolio’s exposure to risk prior to the adverse market environment in June.
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3. Activity this quarterChanges to MLC Horizon 4 Balanced asset allocation
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These changes increased the portfolio’s defensive positioning, compared to its benchmark, before the increase in volatility in share and bond markets in June.
3. Activity this quarterChanges to MLC Index Plus 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.
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Manager changes over the quarter
Changes made to
Inflation Plus MLC Horizon Index Plus
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.
3. Activity this quarter Changes to managers
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A. Returns for all multi-asset portfoliosB. MLC Inflation Plus portfolio returnsRelative to benchmarkContributors to returns
C. MLC Horizon portfolio returnsContributors to returnsRelative to peers
D. MLC Index Plus portfolio returnsContributors to returns
E. Asset class fund returnsRelative to benchmark
4. More analysis of returns
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MasterKey Super Fundamentals as at 30 June 2015 (net of fees and tax)
3 months
(%)
1 year(%)
3 years (% pa)
5 years (% pa)
7 years (% pa)
Horizon 1 ‐ Bond Portfolio 0.3 2.0 2.7 3.3 3.5
Horizon 2 – Capital Stable Portfolio -0.6 6.0 7.1 6.1 4.7
Horizon 3 – Conservative Growth Portfolio -1.3 8.3 9.8 7.7 5.3
Horizon 4 – Balanced Portfolio -1.8 10.5 12.5 9.2 5.7
Horizon 5 – Growth Portfolio -2.1 11.9 14.5 10.1 5.8
Horizon 6 – Share Portfolio -2.0 13.8 16.9 11.2 5.8
Horizon 7 – Accelerated Growth Portfolio -2.3 16.0 21.7 13.5 5.9
MLC Index Plus Conservative Portfolio -1.8 7.5 10.2
MLC Index Plus Balanced Portfolio -2.6 9.0 13.0
MLC Index Growth Portfolio -2.8 10.2 15.3
Inflation Plus Conservative Portfolio 0.2 7.4
Inflation Plus Moderate Portfolio 0.1 9.7
Inflation Plus Assertive Portfolio 0.0 15.5 13.6 10.2 6.0
Source: MLC
4 A. Returns for all multi-asset portfoliosAbsolute returns (net of fees and tax)
4 B. MLC Inflation PlusReturns relative to benchmark
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MLC INFLATION PLUS ASSERTIVE RETURNS (BEFORE FEES AND TAXES) RELATIVE TO ITS TARGET
Delivered 7% 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
4 B. MLC Inflation Plus AssertiveContributors to returns
26Source: JANA Corporate Investment Services Limited
• Global shares (unhedged)
• Global private assets
• Fixed income
• Australian shares
Key contributors to most portfolios over the quarter
• Global shares (unhedged)
• Australian shares
• Fixed income
• Global private assets
Key contributors to most portfolios over the year
4 C. MLC HorizonContributors to returns
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4 C. MLC HorizonRelative to peers – quartile performance rankings for MLC Super Fundamentals
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Returns are above median over most timeframes
Source: Morningstar Direct
Peer universe is the MLC Morningstar Superannuation Universe
Most of the MLC Horizon portfolios are above median over 1 and 5 years - a good result
MLC Horizon 4’s one year peer relative return is above median. The main reasons are:
• our overweight to global private assets has had strong returns
• 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.
4 C. MLC HorizonRelative to peers
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• Global shares (unhedged)
• Fixed income
• Global shares (hedged)
Key contributors to all portfolios over the quarter
• Global shares (unhedged)
• Australian shares
• Fixed income
• Global shares (hedged)
Key contributors to all portfolios over the year
4 D. MLC Index PlusContributors to returns
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4 E. Asset class fundsRelative to benchmark
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Performance to 30 June 2015 1 year 3 years 5 years 7 years 10 years% % pa % pa % pa % pa
MLC Australian Share Fund (before fees and tax) 7.3 15.5 9.2 5.8 7.1S&P/ASX 200 Accumulation Index(S&P/ASX 300 prior to Sep 2012, S&P/ASX 200 Index prior to Nov 2002)
5.7 15.0 9.6 5.2 7.0
MLC Global Share Fund (before fees and tax) 24.8 24.8 15.1 8.6 7.0MSCI All Country World Index (MSCI World Index prior to July 2002)
24.3 25.1 14.7 8.7 6.9
MLC Hedged Global Share Fund (before fees and taxes) 10.0 18.1 16.1 7.3 8.3MSCI All Country World Index Hedged (MSCI World Index Hedged prior to July 2002)
10.7 18.9 16.1 8.5 8.9
MLC Global Property Fund (before fees and taxes) 12.9 16.6 16.6 8.8 9.1EPRA/NAREIT ($A Hedged)(UBS Global Investors Index (hedged) prior to 1 Aug 2011)
9.9 15.2 16.6 8.3 7.4
MLC Diversified Debt Fund (before fees and tax) 4.7 5.3 6.8 6.7 n/aExcess return (relative to 50% Bloomberg AusBond Composite 0+ Yr Index & 50% Barclays Capital Global Aggregate Bond Index (hedged))
5.6 5.4 6.9 7.8 6.8
Source: JANA Corporate Investment Services Limited
Performance overview for MLC funds and charts
Presentation of fund performance, updated quarterly
Fund performance commentariesClient 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 updateMonthly commentary on economic and market developments, available as video and client Q&A
Year in reviewMarket update prepared for calendar and financial years for your clients
Investment insights and newsCommentary on current events and investment issues for your clients
Manager insightsHighlights of MLC’s investment managers’ insights on markets and their positions, updated quarterly
Stock storiesOur managers outline their rationale for purchasing specific companies, updated quarterly
5. Where to find client tools
Go to the Adviser section of mlc.com.au, then to Investments/prices-and-performance/fund-commentaries
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