Investing in volatile times

Investing Fundamentals and How MLC’s portfolios are designed to weather market volatility

September 2008

This document was prepared by MLC Investments Limited (ABN 30 002 641 661), and MLC Limited (ABN 90 000 000 402), members of the National group of companies, as an information service without assuming a duty of care. Accordingly, reliance should not be placed by anyone on this document as the basis for making any investment, financial or other decision. While the information included is believed to be accurate, no member of the MLC Investments Limited or any member company of the National Group of companies accepts responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis of the material included.

An investment with MLC does not represent a deposit with or a liability of National Australia Bank Limited, MLC Investments Limited, MLC Limited, or other member company of the National Group of companies and is subject to investment risk including possible delays in repayment and loss of income and capital invested.

None of National Australia Bank Limited (ABN 12 004 044 937), MLC Investments Limited, MLC Limited, other member companies in the National Group of companies, the underlying fund managers of the investments, any trustees or their respective officers guarantee the repayment of capital invested, the payment of income, the performance of the specific investments selected by investors or the performance of any MLC products except where specified on the current disclosure document.

Disclaimer

Investment Fundamentals

‘Why invest in risky assets?’

Why invest in risky assets? ‘To generate desired returns, investors must be willing to accept higher volatility.’

Source: MLC Investment Management

Expected real return and risk assumptions5 year expectations

Why invest in risky assets? ‘Riskier assets have a wider spread of returns, but higher potential returns.’

Source data based upon the following: Cash: UBSWA 90 Day Bank Bill Index (from April 1988 only), Global Bonds: Lehman Global Aggregate Hedged (from January 1986 only), Aust Bonds: UBS Composite Bond All Mats (from Nov 1989 only), Propertys: S&P/ASX 300 Property Trusts Accumulation Index, Aust Shares: S&P/ASX 300 Accumulation Index (from January 1986 only), Global Shares: MSCI World (ex Australia) in $A Gross Return

Why invest in risky assets? History shows risky assets are more likely to generate better long-term returns…

Nominal Market Returns Over Rolling 10 Year Periods (Dec 1900 - Dec 2007)

-10%

0%

10%

20%

30%

1910

1916

1922

1928

1934

1940

1946

1952

1958

1964

1970

1976

1982

1988

1994

2000

2006

Year Period Ended

% p

.a.

AUS Equity Global equity (unhedged) AUS Bond Global bonds (hedged) AUS Cash AUS Listed Property

Source: Calculated by MLC Investment Management using data presented in DMS Data Module offered through the Ibbotson Associates' software program EnCorr. Based on copyrighted books by Dimson, Marsh, and Staunton, Triumph of the Optimists, Princeton University Press, (c) 2002, and Global Investment Returns

Yearbook 2003, ABN AMRO/London Business School (c) 2003. All rights reserved. Used with permission.

Equities are investments in real companies

Investment Fundamentals

‘How to invest sensibly’

Source data: Australian Shares: All Ordinaries Accumulation Index. Global Shares: MSCI World Gross Accumulation Index ($A). Property: ASX 200 Property Trust Accumulation Index. Australian Bonds: UBS Composite Bond Index. The Diversified Portfolio is an equally weighted portfolio of all asset classes.

Invest sensibly … and make sure your portfolio is diversified…

Invest sensibly… Focus on the long-termShort-term noise, long-term clarityJanuary 1985 - September 2008

Source: S&P/ASX 200 Accumulation Index, S&P/ASX 300 Accumulation Index from end Nov 02

Short-term noise here is graphically represented by monthly performance returns

The clarity is the accumulated long-term effect of this short-term volatility

Invest sensibly… Understand market volatilityWhat goes up, must come down, occasionallyJan 1985 - September 2008

Source: S&P/ASX 300 Accumulation Index

How to invest sensibly… It’s time in, not timing, the market that matters

Missing the 10 Best Days can cost you big timeValue of $10,000 invested in 1980

Data: All Ordinaries Price Index (to Dec 2003), S&P/ASX 300 Price Index (to September 2008)

How to invest sensibly… Chasing returns can be a costly strategy

How MLC’s portfolios are built to weather the storm?

MLC Horizon Series portfolios are designed to weather market volatility

• Broad Diversification at many levels– Stocks– Countries & Currencies– Managers

• Long-Term Asset Allocation Approach– Disciplined approach for many states of the world– Regular rebalancing

• Specialist Investment Managers– Several excellent managers– Different, but complementary, manager approaches

Weathering Market Volatility…Diversification at many levels

Diversified across asset classes & sub-asset classes The current asset & asset classes used across the Horizon Series portfolios

Global Property

Global private equity

Australian Nominal Bonds

Australian Inflation Linked

Bonds

Global Nominal Bonds

Global Inflation Linked Bonds

Global shares - hedged

Emerging Markets

Global shares - unhedged

Australian shares

Weathering Market Volatility…Diversification at many levels

Diversified across investment managersThe current manager line-up for Australian shares exposure within the Horizon Series portfolios

Weathering Market Volatility…Diversification at many levels

Diversified across many different industriesThe current Australian share industry exposure within the Horizon Series portfolios

Health care

IndustrialsInformation technology

Listed property trusts

Materials

Telecommunication services

Utilities

EnergyFinancials excluding

property trusts

Consumer staples

Consumer discretionary

Weathering Market Volatility…Diversification at many levels

Diversified across companiesThe current Australian shares company exposure within the Horizon Series portfolios

QBE

MACQUARIE INF

CBA

BRAMBLES

TELSTRA

RIO TINTOWESTPAC

NABANZ

BHP BILLITON

Weathering Market Volatility…Diversification at many levels

Diversify, Diversify, DiversifyThe current manager line-up for the MLC Horizon 4 – Balanced portfolio

• Allocation to many asset classes

• 30 public market managers

• 35 private equity managers

• 40+ countries

• 60+ industries

• 1,000+ shares

• 1,000+ bonds

Oaktree

JF Capital

Lazard

Maple-Brown Abbott

NorthcapeNorthward Capital

Wallara

Fortis

AllianceBernstein

La Salle

Resolution

Morgan Stanley

NSIM Global Private Equity

Blackrock

Bridgewater

PIMCO

NSIM

LTAR

Wellington

Walter ScottDimensional

Capital

ContangoDimensionalUBS

WR HuffConcord

Balanced Equity

Weathering Market Volatility… Long-Term Asset Allocation Approach

1. Steady State2. Deflation – constructive / productivity driven

boom (1870s)3. Stagflation (1970s), includes transition to high

inflation4. Rising inflation / inflation shock (reverse of

disinflation)5. Debt driven growth6. Disinflation7. Generalised global growth boom – investor

optimism8. Investor pessimism – rise in risk premiums9. Prolonged global growth & productivity boom

BRICs Res Boom10. Economy & market bust11. Australia only bust (world econ not weak)12. Australian economic crisis (reversal of scenario

8) World Weak13. Profit share mean reversion14. Credit / monetary expansion15. Credit / monetary contraction16. Steady / trend growth with mean reversion17. Slowdown

18. Recession19. Recovery20. Aus deflation – destructive (Japan 1990s)21. Global depression or stagnation (1930s)22. Hyperinflation (Germany post war)23. Financial collapse (eg Asian financial

collapse, LTCM)24. Oil price or other commodity price shock25. Global pandemic26. Global catastrophe27. Global catastrophe adverse economic

environment28. Global conflict / war29. Protectionism30. Exogenous risk drives investor

uncertainty31. Structural collapse32. Market bust – Rise in Correlations33. Deregulation34. Paradigm shift – permanently lower vals

for equities (higher rp)35. Paradigm shift – permanently higher vals

for equities (lower rp)36. Speculative bubble

Taking into account many different possibilities Some of the current scenarios considered in determining the Horizon Series asset allocation

Weathering Market Volatility… Many Excellent Investment Managers

SUMMARY

• Recent market volatility has been merely a realisation of low volatility over last few years

• Market volatility is to be expected in any long-term investment approach

• Best approach is generally to diversify and stick to your long-term investment strategy

• MLC Horizon Series portfolios are well diversified and designed to help you reach your long-term goals