mlc investment management performance review main pack: wholesale 31 december 2010

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MLC Investment Management Performance review Main pack: Wholesale 31 December 2010

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MLC Investment ManagementPerformance review

Main pack: Wholesale

31 December 2010

Slide 2

General advice warning and disclaimer

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.

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.

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 performance reported is before management fees and taxes, unless otherwise stated.

The specialist investment managers are current as at the date this communication was prepared. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you.

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 30 002 641 661 [include AFSL for PDSs/FSGs/Annual Reports]) 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.

Slide 3

Agenda

1. Key Economic Themes

2. Overall Results & Key Investment Themes

3. What has MLC been doing?

4. MLC Horizon Performance

5. Asset Class Fund Performance

6. Manager Insights & Performance

7. MLC’s Prospective Returns

Slide 4

1. Key economic themes

• Global Prospects

• Cautiously optimistic about prospects for global growth, but it remains a highly uncertain environment• Modest rates of developed world growth (de-leveraging process) but no new recession (The macro

news is not all bad)• Emerging markets drive global growth (many EMs had a good GFC!)• A more conservative investment environment (transparency, liquidity)• Modest investment returns, heightened volatility

• Australian prospects

• Massive terms of trade boost, huge pipeline of construction work, BUT..• Monetary and fiscal policy are being tightened• Strong $A is a two-edged sword• Consumers are confident, but are spending very cautiously• Global environment is still fragile

• Two-speed economy returns – WA, Queensland set to outperform?• Queensland floods will detract from near-term growth, but rebuilding will add significantly to growth

over the next year and beyond.

Slide 5

2. Overall Results & Key investment themes

• The Australian share market tended to lag overseas markets during the year, the stronger Australian dollar (which exceed parity for the first time since 1982) did add significantly to hedged global returns, this benefited our hedged global exposures in equities, private markets, property and debt.

• The disappointing performance of equity markets in the first half of the year was positive for Debt markets with the need for quantitative easing and loose fiscal policy pushing yields lower and prices up in both investment and non investment grade bonds. This demonstrated the benefits of spreading investments across a range of asset classes.

• Over the year our Strategic Overlay decisions have contributed to some positive results (eg taken profits from our high yield debt exposure).

• With corporate cash levels near record levels it is expected that during 2011 M&A activity will remain high. Cashed up companies with strong balance sheets may look to acquisitions as a growth strategy. Shareholders of the company being acquired tend to be the immediate beneficiaries of these transactions.

Slide 6

3. What has MLC been doing?• Strategic Overlay

• More positive indicators emanating out of the US has resulted in a significant evolution in the medium term scenarios with greater weighting to a very slow or muted recovery, with the emphasis skewed towards sub par growth.

• Current positions within the Strategic Overlay are:

• Overweight to Unhedged Global Shares and underweight Hedged Global Shares;

• Reduced exposure to global government bonds;

• Since the previous quarter and after an extremely positive 18 months for high yield debt, we reduced the exposure to non-investment grade bonds in October 2010.

• Changes to MLC's Australian Share Fund Strategy

• As part of our ongoing review process, we've recently made some changes to the Australian share strategies within the MLC Horizon 2-7 portfolios and the MLC Australian Share Fund. The refinements are designed to further align manager arrangements with the objectives of each strategy and the roles they are designed to play in client portfolios.

• The changes to our Australian shares strategy include:

• creating separate Australian shares strategies for the MLC Horizon portfolios and MLC Australian Share Fund

• adjusting and tailoring the manager mix and mandates of each strategy, and• terminating the mandates of Lazard Asset Management and Contango Asset Management

Slide 7

4. MLC Horizon 4 Balanced Portfolio

Source: MLC Investment Management

Highlights:• Returns for the December quarter built on the previous quarters solid results, with leading indicators in the US

suggesting growth is picking up in the worlds largest economy.• The strong second half of the year (+8.7% before fees and taxes) more than offset the weak first half, with MLC

Horizon 4 posting lacklustre, but nonetheless positive 1 year returns.• As at December, MLC Horizon 4 is above median over all time periods. Additionally, over 1 year the fund is firmly

positioned in the 1st quartile, highlighting the significant rebound in MLC’s returns post the global financial crisis.• Over the quarter the standout strategies were Global REITS (+7.0%) and Hedged Global Shares (+8.4%), both

benefited from currency hedging, with the Australian Dollar rising 5.8% over the period. Both these strategies were also amongst the top performers for the year, recording +23.9% and +14.3% respectively.

• Our strategic allocation to Australian inflation linked bonds was the strongest performing debt sector in Australia. With inflation rates rising, performance was strong, recording 8.1% (before fees and taxes) for the year.

MLC Wholesale Horizon 4 - Balanced Growth Portfolio

Performance Overview to 3 Months 1 Year 3 Years 5 Years 10 Years31-Dec-10 % % % p.a. % p.a. % p.a.MLC Wholesale/Masterkey Investment Service Fundamentals(takes into account fees)

4.82.33.0 4.7 -2.4

Slide 8

4. MLC Horizon 4 strategy – asset class contribution

Source: MLC Investment Management

Contribution to Total Return by Asset ClassMLC Wholesale Horizon 4 Balanced Portfolio

(before taking into account fees)

-2

-1

0

1

2

3

4

5

6

7

AustralianShares

Global Shares -Hedged

Global Shares -Unhedged

Global PropertySecurities

LTAR Debt Securities Total

Ret

urn

Co

ntr

ibu

tio

n %

(an

nu

alis

ed f

or

per

iod

s g

rea

ter

than

1 y

ear)

3 months to Dec-2010 1 year to Dec-2010 3 years to Dec-2010 5 years to Dec-2010

Slide 9

4. Peer relative performanceMLC Wholesale Horizon 4 Balanced Portfolio

Comparison with the Mercer Wholesale-Balanced Growth UniversePerformance before tax and after fees for periods ended December 2010

Rates of Return(%)

8

4

0

-4

-8

3 Months (% ) 1 Year (% ) 3 Years (% pa) 5 Years (% pa) 7 Years (% pa)

MLC0260AU 3.0 (17) 4.7 (9) -2.2 (15) 2.3 (19) 6.2 (17)

95th Percentile 4.0 6.3 -1.0 3.7 7.1Upper Quartile 3.3 4.4 -2.0 2.8 6.5

Median 3.0 3.2 -2.7 2.2 6.2Lower Quartile 2.6 2.6 -4.0 1.5 5.65th Percentile 2.1 1.2 -5.8 0.8 5.1

Number of Funds 45 44 41 41 38

Data Source: Morningstar and Lipper, A Thomson Reuters Company

*Based on Mercer Wholesale – Balanced Growth universe historical data to 31 December 2010.

Q2 Q1

Q2

Q2

Q2

Slide 10

4. Performance table

Absolute Performance* Against peers

1 year (%) Quartile**

Horizon 1 4.9% N/AHorizon 2 4.6% 3rd

Horizon 3 5.2% 2nd

Horizon 4 4.7% 1st

Horizon 5 4.1% 2nd

Horizon 6 3.7% 1st

Horizon 7 3.4% 2nd

Source: MLC Investment Management

*The performance represents MLC Wholesale returns after taking into account fees.** Peer universe is Mercer Wholesale Universe

Trends• Since the September quarter peer relative rankings have improved slightly for those portfolios with growth allocations. This was the result of our relative overweight to Hedged Global Equities coupled with exceptionally strong performance from the Australian Dollar

• Over the medium term returns from Hedged Global Equities will not likely receive the same tailwind from the appreciation of the Australian Dollar

Slide 11

MLC Horizon 3, 4, 5, 6 & 7 Historical Performance

Source: MLC Investment Management

Growth of $10,000 December 2002 - December 2010*

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Dec-0

2

Mar

-03

Jun-

03

Sep-0

3

Dec-0

3

Mar

-04

Jun-

04

Sep-0

4

Dec-0

4

Mar

-05

Jun-

05

Sep-0

5

Dec-0

5

Mar

-06

Jun-

06

Sep-0

6

Dec-0

6

Mar

-07

Jun-

07

Sep-0

7

Dec-0

7

Mar

-08

Jun-

08

Sep-0

8

Dec-0

8

Mar

-09

Jun-

09

Sep-0

9

Dec-0

9

Mar

-10

Jun-

10

Sep-1

0

Dec-1

0

MLC Horizon 3 - Conservative Growth Portfolio MLC Horizon 4 - Balanced Portfolio

MLC Horizon 5 - Growth Portfolio MLC Horizon 6 -Share Portfolio

MLC Horizon 7 - Accelerated Growth Portfolio

*Note Horizon 1 Bond and Horizon 2 Income Portfolios have not been included as these funds commenced post December 2002.

* The performance represents MLC Wholesale returns after taking into account fees and taxes. This product has been used to provide an indication of historical performance.

Slide 12

5. Market environment - asset class returns

Asset Class Performance

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

AustralianShares

GlobalShares

(hedged)

GlobalShares

(unhedged)

EmergingMarkets

AustralianProperty

Securities

GlobalProperty

Securities

AustralianBonds

Global Bonds(hedged)

Global HighYield Bonds

(hedged)

Inflation-LinkedBonds

Cash

Quarter to Dec-10 % p.a. 1 Year to Dec-10 % p.a. 3 Year to Dec-10 % p.a. 5 Year to Dec-10 % p.a.

Index data source: Australian Shares - S&P/ASX 300 Accumulation Index; Global Shares (hedged) - MSCI All Countries (A$ hedged); Global Shares (unhedged) - MSCI All Countries; Australian Property Securities - S&P/ASX 300 LPT Accumulation Index; Global Property Securities - UBS Global REIT (hedged); Australian Bonds - UBS Composite Bond (all mats); Global Bonds (hedged) - BCGA Global Agg (hedged); Global High Yield Bonds (hedged) - BCGA US Corp HY BB/B (hedged), Australian Inflation Linked Bonds - UBS Inflation Linked Bonds (all mats); Cash - UBS Australian Bank Bill;

Slide 13

5. MLC Asset Class Fund performance

Source: MLC Investment Management

Asset Class Fund

Absolute* Benchmark Comments

1 year (%) 1 year (%)

MLC Australian Shares Fund

-0.20% 1.90% Fund benchmark: S&P/ASX 300 Accumulation Index• The market’s barely positive result may disappoint investors but it follows a 37% return in 2009. The market return was narrowly led with mining related companies performing strongly whereas industrials were generally weaker.• Only two (JCP Investment Partners & Dimensional) managers outperformed. JCP’s return was the highest versus index due in part to their more significant exposure to specific resources companies.

MLC Global Share Fund

-1.09% -0.67% Fund benchmark: MSCI All Country World Index •Global share investors had to endure another indifferent period with absolute returns being slightly negative for the year driven by the worries over the global economy and a rising Australian dollar ($A).•The portfolio’s defensive characteristics were a drag on performance, especially during the last quarter when global share markets led by the US rallied substantially.

MLC Hedged Global Share Fund

13.34% 14.07% Fund benchmark: MSCI All Country World Index (hedged into $A)•Absolute returns were positive for the quarter and year outstripping unhedged returns and were driven by the rising $A. •The $A had another strong year, it was up +8.8% when measured against a basket of currencies.

* The absolute fund performance is represented by MLC Wholesale returns after investment and administration fees.

Slide 14

5. MLC Asset Class Fund performance

Source: MLC Investment Management

Asset Class Fund

Absolute* Benchmark Comments

1 year (%) 1 year (%)

MLC Global Property Fund

23.41% 23.78% Fund benchmark: UBS Global Investors Index (hedged into $A)• The GREIT sector continues to perform strongly. Most REIT markets delivered strong returns (e.g. US +28%, Continental Europe +17%, Japan +30%). From a number of perspectives, the sector’s fundamentals look favourable.•Fund returns after fees and tax for the year are under benchmark but in excess of benchmark for longer periods. Resolution and Morgan Stanley outperformed their respective benchmarks for the year while LaSalle’s portfolio, which tends to be more diversified, underperformed slightly.• The Fund continues to have a significant exposure to various Asian based REITS and property related companies.

MLC Diversified Debt Fund

7.61% 7.71% Fund benchmark: 50% UBS Composite Bond Index (All Maturities) & 50% Barclays Capital Global Aggregate Bond Index (hedged into $A)

Falling yields in overseas government bond markets has been a positive environment for the Fund, and global multi-sector bonds outperformed lower risk bonds over the year due to the market’s increasing appetite for risk.

LTAR 10.35% 9.32% Fund benchmark: LTAR Neutral Strategy

Hedged global equities, Ruffer’s Multi Asset Strategy and hedged global listed property had the strongest returns over the quarter. Bridgewater Pure Alpha not only performed well during the quarter, but was also up 34% for the year. Unhedged global equities continued to lag due to the strength of the Australian dollar.

* The absolute fund performance is represented by MLC Wholesale returns after investment and administration fees.

Slide 15

6. Insights from our Managers• Here are some of the insights and comments from our

Australian shares managers:• …as we look back over 2010 it would seem to us to be

a year during which many share prices became somewhat divorced from the underlying values of the companies. The resources segment seems to us to be discounting an overly “rosy” future whilst many industrial stocks have been de-rated and appear to be assuming little in the way of earnings recovery.

• We anticipate continued strong capital investment in resource production capacity which will keep the economy growing. With the share market not expensively priced, this should allow satisfactory returns over the next two to three years. The shorter term will depend on swings in sentiment which could remain volatile.

• This year, the headwinds of tightening monetary policy and a high exchange rate should be less severe than in 2010 and earnings expectations for 2011 and 2012 are more realistic. Valuation measures for the Australian market are neutral to attractive. This combination of influences – positive global and domestic economic growth, reasonable valuation and a more stable policy environment - leads us to conclude that the outlook for Australian shares should be more positive over the next 6-12 months.

Slide 16

6. Manager performance*

Source: MLC Investment Management

Australian Shares Absolute Benchmark Comments

1 year (%) 1 year (%) Benchmark: S&P/ASX 300 Accumulation Index

Dimensional 2.84% 1.90% Dimensional benefited from the performance strength of smaller companies through ownership of selected majors such as Amcor and Incitec-Pivot also made a positive contribution.

Maple-Brown Abbott 0.84% 1.90% As a disciplined value investor, MBA hasn’t owned many of the outperforming small-medium resource companies. They have been buying industrial companies that have been left behind and are therefore selling at cheaper valuations than resources.

Balanced Equity Management -1.44% 1.90% Balanced is large company oriented in approach (i.e. 50 Leaders and Top 100) which generally lagged the performance of small/medium sized companies. Underweight positions in gold stocks (Lihir, Newcrest) detracted from returns.

Concord -0.89% 1.90% As a “bottom-up” manager, Concord’s underperfomance over the year was driven by stock specific strategies, including Westpac and James Hardie.

JCP Investment Partners 7.18% 1.90% JCP was the best performer of the appointed managers in the year. Selection of resources companies such as Whitehaven Coal, Independence Group and Newcrest Mining were very beneficial as was holding takeover target Intoll.

Wallara 1.26% 1.90% Wallara focuses on quality growth oriented companies with Toll Holdings, Leighton and Fairfax detracting from returns.

Northcape -0.13% 1.90% Bottom-up strategies that caused them to underperform include QBE Insurance, Fairfax, Macquarie Bank, Ramsay Healthcare.

Northward 1.84% 1.90% Stock strategies that detracted were Nufarm, James Hardie and not owning Lihir Gold (takeover)

*The performance on this page represents our Australian Shares strategy pre fees.

Slide 17

6. Manager performance*Global Shares Absolute Benchmark Comments

1 year (%) 1 year (%) Benchmark: MSCI All Countries World Index

Walter Scott -1.77% -0.67% Had a disappointing year due to rising risk appetites, which doesn’t favour conservatively managed companies that dominate their strategy. Over the year, Novo Nordisk, Fanuc, CNOOC, Fastenal and Hutchison Whampoa contributed the most to the return of the portfolio.

Harding Loevner 2.34% -0.67% The annual performance was aided by good stock selection in Health Care, Financial and Consumer Discretionary sectors. The top contributors for the year were Swatch, Coach, Li & Fung, Fanuc and Emerson Electric.

Sands Capital 12.92% -0.67% Sands Capital’s continued excellent performance was on the back of good company selection and being underweight Western Europe and Developed Asia. The top contributors included Las Vegas Sands, Salesforce.com and Naspers Ltd.

Mondrian -6.99% -0.67% Mondrian's security selection in the UK and Europe was a drag for the year. BP and UniCredit were amongst the largest detractors within the strategy.

Tweedy, Browne 0.75% -0.67% Returns were driven by oil and gas holdings, several banks and insurance companies, and machinery stocks. The top five contributors for the year were Emerson Electric, ConocoPhillips, Linde, Union Pacific, and Richmont.

Dimensional 0.40% -0.67% Dimensional benefited from rising risk appetites over the year which helped their deep value investment philosophy.

Capital International -5.61% -0.67% Capital International detracted over the year due to security selection across a range of sectors, with Roche (Health care) and Eletricite De France (Utilities) detracting the most.

Carnegie N/A -0.67% Carnegie have only been in the strategy since May 2010 and therefore a 1 year number is not available. Over the last quarter the top 5 contributors were Peabody Energy, Samsung, Holcim, Google and Apple.

*The performance on this page represents our Global Shares strategy pre fees.

Slide 18

6. Manager performance*

Source: MLC Investment Management

Global Property Securities

Absolute Benchmark Comments

1 year (%) 1 year (%) Benchmark:

UBS Global Investors Index**

LaSalle 8.19% 8.36% LaSalle runs a more diversified portfolio which includes a higher weighting to Australian REITs than the other managers. This detracted from returns as Australia’s REIT market was weak over the year compared to most Global REIT markets, as were the two main stocks chosen, General Property Trust and Dexus Property Group.

Morgan Stanley 13.21% 8.36% Morgan Stanley’s substantial return and outperformance of their unhedged index was due to the significant overweighting of Asian based REITs and property companies such as Hong Kong Land and Hysan Development.

Resolution Capital 9.07% 8.36% Resolution Capital’s one year return benefited from overweighting Hong Kong Land, SL Green (US), Hufvudstaden (Europe) Essex Property (US), Aeon Mall (Japan) and Link REIT (Hong Kong).

*The performance on this page represents our Global Property Securities strategy pre fees and tax. ** The global property managers are benchmarked against the unhedged index.

Slide 19

7. MLC’s Outlook

• Cautiously optimistic about prospects for global growth, but it remains a highly uncertain environment

• Modest rates of developed world growth (de-leveraging process) but no new recession (The macro news is not all bad)

• Emerging markets drive global growth (many EMs had a good GFC!)

• Modest investment returns, heightened volatility

• Returns from active management, dividends, much more important

• Volatile times should be good for active managers

Slide 20

7. MLC’s Prospective Returns – Asset Class

Source: MLC Investment Management

Scenario Probability Weighted Real Returns (Dec 2010)

-10%

-5%

0%

5%

10%

15%

20%

25%

DomesticEquity

Globalequity

Unhedged

Globalequity

Hedged

EmergingMarketsWorld

Unhedged

Domesticcash

Shortduration

DiversifiedDebt

AllmaturitiesDiversified

Debt

Domesticnominal

government

Domesticnominal

corporate

Globalnominal

government

Globalnominal

corporate

Domesticinflationlinked

Global highyield debt(extended

credit)

Ret

urn

% p

.a.

-10%

-5%

0%

5%

10%

15%

20%

25%Average of best 10% tail

Average of worst 10% tail

Probability weighted expected returns

Long-term 'normal' return

(7 years, 0% tax with franking credits, pre fees, pre alpha)

Slide 21

7. MLC’s Prospective Returns - Horizon

• The return potential from equities in many markets is now close to ‘normal’ potential with PE ratios near fair value. In Global & Emerging Equity Unhedged, return expectations have increased by almost 1% p.a., or approximately 6% over the 7 year review period

• Unhedged Global equities and emerging markets are higher as a result of further appreciation in the AUD. Against the USD, the appreciation was 5.8% for the quarter

• Australian return expectations are higher as a result of better earnings which are not yet reflected in prices.

• Global sovereign bond yields have risen slightly, but prospective return potential remains very compressed.

Slide 22

7. MLC’s Prospective Returns - Horizon

Source: MLC Investment Management

Scenario Probability Weighted Real Returns (Dec 2010)

-10%

-5%

0%

5%

10%

15%

20%

MLC Horizon 1 MLC Horizon 2 MLC Horizon 3 MLC Horizon 4 MLC Horizon 5 MLC Horizon 6 MLC Horizon 7 LTAR Neutral LTAR StrategicOverlay

Re

turn

% p

.a.

-10%

-5%

0%

5%

10%

15%

20%Average of best 10% tail

Average of worst 10% tail

Probability weighted expected return

Long-term 'normal' return

(7 year scenarios, 0% tax including franking credits, pre investment fees, pre alpha)