mkey horizon 2 income

Investment Updatefor your MLC MasterKey Unit Trust Horizon 2Income Portfolio Year to 31 December 2007: 

Investment Update for your MLC MasterKey Unit Trust Horizon 2 Income Portfolio Year to 31 December 2007

Important information: 

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. 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. 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 mlc.com.au. For the MLC Investment Trust, a Product Disclosure Statement is available at mlcinvestmenttrust.com.au Important information

Investment update agenda: 

Investment update agenda The market environment Your portfolio in review Sector & Manager Performance Recent enhancements to your portfolio Outlook & Conclusion

The market environment: 

The market environment

Slide5: 

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

Value of $100 in Regional markets – 1 year return: 

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)

The state of play: 

The state of play Too much liquidity Too much leverage Too much complacency Voracious risk appetites A benign macroeconomic environment Have led to…. Risk being way underpriced – too little reward on offer for risks that have not been properly understood In short, returns have been too high, and volatility has been too low, and this situation is now normalising Q. Just how bad will the effects on the real economy turn out to be?

The view in the rear-view mirror looks fine…: 

The view in the rear-view mirror looks fine…

...but the windscreen view isn’t pretty (leading indicators are heading into recession territory): 

...but the windscreen view isn’t pretty (leading indicators are heading into recession territory)

Credit crisis has hit confidence: 

Credit crisis has hit confidence

Sharemarkets are well off their 2007 highs, but emerging markets have fared surprisingly well : 

Sharemarkets are well off their 2007 highs, but emerging markets have fared surprisingly well

US housing: the state of play: 

US housing: the state of play

The central banks have started the rescue operation…: 

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.

..but how much more debt can be rammed down the throats of consumers in the English speaking world?: 

..but how much more debt can be rammed down the throats of consumers in the English speaking world?

House prices in the English speaking (!?) economies: 

House prices in the English speaking (!?) economies

Global economic prospects: 

Global economic prospects US housing downturn is still a significant drag on US growth – recession risk is high European and Japanese indicators have turned down Can Asia/Emerging markets ‘de-couple’ from G7 business cycle? Central banks have started the rescue mission – interest rates have been cut in US, UK, and Canada Further rate cuts are likely, and the European Central Bank is likely to join in at some point, BUT… Interest rates weren’t all that high to begin with Household debt (at least in the English speaking economies) is already at historic highs! Bottom line: G4 economic growth rates are likely to be below trend for an extended period

Australia’s links with the US business cycle are not what they used to be : 

Australia’s links with the US business cycle are not what they used to be

Australian economic prospects: 

Australian economic prospects Australian GDP growth has accelerated over the past year Surge in business investment Gains in disposable income have boosted both spending and saving (savings rate is back into positive territory!) Employment growth has been strong, with further gains likely over coming months Another RBA rate hike is likely – above trend growth, at a time when RBA’s preferred inflation measures are above target BUT.. Monetary conditions have already tightened (real cash rates higher than decade averages, global borrowing costs have risen) Business and consumer confidence have been hit by higher interest rates, global credit crisis Impact of global downturn on Australia?

The Australian economy in snapshot: 

The Australian economy in snapshot

RBA tends to be in tightening mode when trend unemployment rate is falling: 

RBA tends to be in tightening mode when trend unemployment rate is falling

Has the RBA already done enough?: 

Has the RBA already done enough?

Australian shares have been incredibly strong. These returns were NEVER going to last: 

Australian shares have been incredibly strong. These returns were NEVER going to last

Let’s keep the recent volatility in perspective: 

Let’s keep the recent volatility in perspective

Australian LPTs have collapsed after years of strong performance…: 

Australian LPTs have collapsed after years of strong performance…

LPTs have underperformed the Australian sharemarket for years: 

LPTs have underperformed the Australian sharemarket for years

The problem isn’t “P”…: 

The problem isn’t “P”…

…it’s “E”!! (i.e. PE ratios look cheap, IF you believe that cyclically high earnings are sustainable): 

…it’s “E”!! (i.e. PE ratios look cheap, IF you believe that cyclically high earnings are sustainable)

The share of the pie (GDP) going to profits is about as high as it ever gets: 

The share of the pie (GDP) going to profits is about as high as it ever gets

Australia: profit share seems to have peaked: 

Australia: profit share seems to have peaked

Your portfolio in review: MasterKey Horizon 2Income Portfolio: 

Your portfolio in review: MasterKey Horizon 2 Income Portfolio

Slide31: 

Horizon 2 Income Portfolio Asset allocation based on MasterKey Superannuation

Slide32: 

Contribution to performance MLC MasterKey Horizon 2 Income Portfolio Contribution from each asset class for the periods ending 31 December 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

Slide33: 

Share manager performance 31 December 2006 – 31 December 2007 Returns are gross of fees and taxes Australian shares – Income Builder Maple-Brown Abbott 4.76% Vanguard Investments 8.14% Total 5.61% 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%

Top 10 Global Shares as at 31 December 2007: 

Top 10 Global Shares as at 31 December 2007 Top Ten Global Stocks – MLC MasterKey Horizon 2 - Income Portfolio Data: MLC Investments Limited

Slide35: 

Data: MLC Investments Limited Top Ten Australian Stocks – MLC MasterKey Horizon 2 - Income Portfolio Top 10 Australian Shares as at 31 December 2007

Investment ProcessThe Process is monitored by a cycle of ongoing reviews: 

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

Outlook & Conclusion: 

Outlook & Conclusion

Slide38: 

Let’s be realistic about the kind of returns that are achievable and sustainable over time

Investment thoughts/implications I: 

Investment thoughts/implications I Lower investment returns A focus on costs, and the value-added from skilled investment managers become even more important Value managers have been struggling to find opportunities, and this could persist for some time (think US 1997) Defensive asset allocation bets should eventually pay-off, but just when exactly? Resources: is it really different this time? Just how much better is the China/India story going to get for the Australian economy and resource equities?

Questions?Comments.Statements!: 

Questions? Comments. Statements!