MLC Horizon 5 - Growth Portfolio MLC Annual Review

September 2009

MLC Investment Management Level 12, 105 –153 Miller Street North Sydney NSW 2060

MLC review for the year ending 30 September 2009 Page 1 of 13 MLC Horizon 5 Growth Portfolio

MLC review for the year ending 30 September 2009 Page 2 of 13 About your Portfolio Your MLC Horizon 5 Growth Portfolio is designed to be a complete portfolio solution. It is well diversified within asset classes, across asset classes and across investment managers, who invest in many companies and securities around the world. We are focussed on growing your wealth for a moderate to high level of volatility. We won’t chase risky returns when markets are very strong, which may temporarily result in a lower return than comparable funds that do. At other times, and particularly when markets are weak, we expect your Portfolio to have higher returns than comparable funds. Your MLC Horizon 5 Growth Portfolio invests with a strong bias to growth assets and long term capital growth potential.

How we design investment solutions

How we design Recent Example of this in action investment solutions to grow and protect your wealth

We design solutions based on The extreme market environment of 2007 – 2009 has highlighted the importance investors’ fundamental needs to of understanding the risk and return characteristics of different assets under grow wealth over the long-term multiple scenarios. During adverse environments, often only “risk free” assets such as cash and government guaranteed bonds deliver positive returns. Every other major asset class may fall in value. This is what occurred in 2008. In contrast in 2009, so called “risky” assets such as shares, company issued bonds and listed property recovered significantly. Cash and government guaranteed bonds were the laggards of this year. With the objective of growing and protecting your investments, MLC explicitly models extreme scenarios and their likely impact when constructing your MLC Horizon portfolio. Being clear about your investment timeframe allows us to “look through” such extreme short term environments, and form a view of an appropriate asset mix for the long term. This is your target or strategic asset allocation. Building on the insights from the multiple scenario analysis, we have recently introduced the concept of a “Strategic Overlay” (SO) to your portfolio. It has been designed to better manage your risks. Using a 5-7 year prospective assessment of the risk-return trade-off, the SO process will allow MLC to adjust your strategic asset allocation within +/-5% bands. From time to time, your manager allocations within each sector may also be adjusted. SO will typically reduce risk when sentiment is at its most optimistic and asset prices are high. Conversely, when investors are pessimistic and asset prices are low, there may be an opportunity to benefit from relatively high return potential. Patience can be required to reap this benefit. SO is likely to be introduced to your MLC Horizon Portfolio over the next three to six months. The introduction of the SO remains consistent with our belief that a strategic, rather than tactical or short term approach to asset and manager allocation is the most robust method of building and protecting your capital.

MLC review for the year ending 30 September 2009 Page 3 of 13 We manage the risk in your Emerging markets (EMs) have become a hot topic recently, given the strength of portfolio by building thoroughly their domestic economies and the magnitude of their recovery in 2009. For diversified portfolios at every example, the MSCI EM Share Index delivered a return of +30% against a fall of level – asset class, country, 0.8% in the developed world (measured by the MSCI World Index), on an currency, industry, company unhedged basis over the first nine months of 2009. and manager. As an MLC investor, you have benefited from emerging markets exposure since the early 1990’s, via your global share and global bond allocations. All your global share managers have the freedom to invest in any listed stock across any industry or country they see as good opportunity for you. In addition, two of your global bond managers – Bridgewater Associates and PIMCo may opportunistically invest in bonds issued in emerging markets. But investing in shares listed in EM’s is not the only way to capture EM opportunities. In fact, emerging market consumers are known to be very “brand” centric in their purchase decisions. And most of their preferred brands are owned by global multi-nationals, listed in the US or other developed markets. A couple of examples in your global share strategy include:  Nestlé – listed in Switzerland, Nestlé is the world’s leading Nutrition, Health and Wellness Company. It is well positioned to benefit from growing consumer demand in the emerging markets. It represented 0.15% of your total global share strategy as at 31 August 2009 and is held by two of your managers - Capital International and Harding Loevner. Nestlé’s share price rose 26% in local currency terms during CY2009.  Standard Chartered – listed in the UK, Standard Chartered is a multi- national financial services company with 90% of its profits sourced from Asia, Africa and the Middle East. It represented 0.47% of your global share strategy and is held by 3 of your managers - Capital International, Wellington Management and Harding Loevner. Standard Chartered rose by 166% during CY2009 in local currency terms.

You access exceptional There are companies that provide unique access to certain sectors which can investment managers in the only be captured by managers who have the ability to research and identify world who carefully invest your opportunities in those markets. money in the right businesses Sands Capital LLC – one of your newest global share managers is one such and assets. organisation. Appointed in February 2009, Sands Capital is responsible for 11% of your global share strategy. Based in Arlington, Virginia, USA, Sands Capital manages a total of $12 billion in funds and has a 21-year track record of growth investing. Their role in your global share strategy is upside participation in rising markets and they have delivered on this expectation in spades. Since their appointment on 23rd February 2009, Sands Capital has delivered a return of +34%, significantly outperforming the MSCI All Country World Index which has risen 2% since 1 January 2009. Examples of EM themed stocks owned by Sands Capital on your behalf include:  Naspers - Naspers is a multinational electronic and print media company listed in South Africa. It derives 70% of its revenue from South Africa. Representing 0.54% of your total global share strategy, Naspers rose by 86% during CY2009.  Mindray – a US listed Healthcare company, Mindray is China's largest medical equipment manufacturer with a home customer base. It represented 0.28% of your global share strategy as at 31 August 2009 and appreciated by 82% during CYTD2009.

We keep your investment goals We know that when you select a MLC Horizon Portfolio based on your risk/return on track because we actively objectives and investment timeframe, you expect that strategy to be maintained manage your portfolio to stay through time. true to its original intent. This is why MLC ensures your portfolio does not move far away from its strategic target. In the case of the MLC Horizon 4 Balanced Portfolio, the target debt/equity mix is 30/70 and the range is +/-5% around this target. One of the main reasons you benefited from the recent rally was the disciplined rebalancing strategy applied on a daily basis. Allowing your strategy to drift or

MLC review for the year ending 30 September 2009 Page 4 of 13 altering it dramatically could have resulted in you missing the 6 month rally to 30 September. Throughout the last 2 years your exposure to shares has been maintained within +/-2% of your target exposure. As market volatility was abnormally high over the last year, not only did MLC maintain your strategy using daily cash flows but we also formally rebalanced your portfolio a number of times during the year. For example in 2008, we sold bonds and bought Australian & global shares to maintain your strategy. So at the margin we applied the buy low/sell high principle to preserve your Debt/Equity mix. When risky assets started to recover in 2009 and daily market returns were abnormally high we formally rebalanced by selling Australian shares & buying bonds and global shares. Without this rebalancing discipline, your participation on the rally could have been significantly lower, resulting in lower returns and perhaps regret around pulling out of the market at its lowest point.

Where MLC invests Your portfolio is a complete solution to meet your financial goals. It’s diversified within asset classes, across asset classes and across your money investment managers who invest in many companies and securities around the world. The main asset classes are shown in the pie charts below. Designing a complete portfolio solution involves much more than simply combining a number of asset classes. Every aspect of our Portfolios is important; from the securities we include and the way in which we mandate investment managers, to the asset classes we use. This is not a set and forget approach; your Portfolio is continuously kept balanced using efficient processes. And your Portfolio evolves through time as we research new opportunities to increase returns or reduce risk.

Target Asset Allocation – Target Asset Allocation Super MLC MasterKey Super Fundamentals Horizon 5 Growth Portfolio

Global High Yield Debt, 1.4% Global Bank Loans, Real Return Strategies, 1.5% 3.7% Global Nominal Bonds, LTAR, 3.0% 1.6% Australian Inflation- Linked Bonds, 3.0% Australian Nominal Australian Shares, Bonds, 3.8% 35.0% Global Private Assets, 6.0%

Global REITS, 3.0%

Global Shares (hedged), 16.0%

Global Shares (unhedged), 22.0%

The actual asset allocation may be adjusted +/-5% around this target. The rebalancing range is +/-2% around the target.

MLC review for the year ending 30 September 2009 Page 5 of 13 Target Asset Allocation – Target Asset Allocation Wholesale MLC Wholesale Horizon 5 Growth Portfolio

Real Return Strategies, 4.3% Global High Yield Debt, 1.4% Global Nominal Bonds, 1.9% LTAR, 3.0% Australian Inflation- Linked Bonds, 3.0% Australian Nominal Australian Shares, Bonds, 4.4% 35.0% Global REITS, 3.0%

Global Shares (hedged), 22.0%

Global Shares (unhedged), 22.0%

MLC review for the year ending 30 September 2009 Page 6 of 13 Executive summary  After enduring almost 2 years of relentless declines in asset values, it’s wonderful to see some tangible evidence that the world is not about to end and a sustained recovery has commenced. It’s amazing what a difference 6 months can make.  As of the 13th October, the Australian sharemarket was up more than 50% from its March 2009 low, the Australian dollar ($AUD) had rallied strongly, corporate bonds yields had declined sharply, and the listed property market had begun its structural recovery. Positive returns were recorded for virtually all risk assets over the year, and the quarter to 30 September 2009.  The impact of these positive factors on your MLC Horizon 5 Growth Portfolio has been nothing short of remarkable. For example, over the year to 31 March 2009, a typical Growth Portfolio declined by -27%. Just 6 months later, thanks to the recovery in risky asset values this return improved to -2% for the year to 30 September 2009 and +13% for the quarter to 30 September 2009.  The last 6 months are testament to the benefits of maintaining your strategy, particularly if your investment timeframe is long term (>5 years). There is no doubt that the length and severity of the downturn tested the resolve of all investors, irrespective of individual risk appetites. But the enduring lesson is that markets can turn quickly and unexpectedly. Maintaining your exposure to assets such as shares that contribute to economic growth will provide you with premium returns often in short periods of time, as the last 6 months have amply demonstrated.

MLC review for the year ending 30 September 2009 Page 7 of 13 5 3 3 1 Year The table outlines Performance to 30-Sept-09 Fund / Survey Years Years Months % performance % p.a. % p.a. % MLC Horizon 5 - Growth MLC Portfolio 4.9 -2.7 1.7 14.9 Wholesale (takes into account fees) IDPS Multi- Median Manager Sector High 4.9 -2.8 -0.2 15.5 Growth Returns Consistency since January 1998 MLC 50.7 58.2 50.4 56.5 % of time rolling return Wholesale above Median MLC Horizon 5 - Growth Portfolio 5.7 -1.8 0.8 15.4 (before taking into MLC account fees) Wholesale Strategic Benchmark 5.7 -1.4 0.4 14.5

MLC MasterKey MLC Horizon 5 - Growth - - -1.5 13.2 Super Portfolio Fundamentals (takes into account fees MLC and tax) MasterKey 3.9 -2.8 - - Gold Star Personal Super Median Manager Multi-Sector 4.1 -3.1 -1.7 14.6 High Growth Returns Consistency since MLC December 2006 MasterKey - - 90.9 58.1 % of time rolling return Super above Median Fundamentals Returns Consistency since MLC September 1996 MasterKey 70.1 68.6 50.3 55.8 % of time rolling return Gold Star above Median MLC Horizon 5 - Growth Portfolio MLC 6.1 -1.5 -1.0 14.4 (before taking into MasterKey account fees and tax) Super / Gold Star Strategic Benchmark 6.1 -1.6 0.2 14.8

Absolute Returns Historical Absolute Performance MLC MasterKey Super Gold Star Horizon 5 Growth Portfolio (after taking into account fees and tax)

14%

12% .

a 10% . p

%

n 8% r u t e R

6% r a e Y

5 4%

2%

0% 2001 2002 2003 2004 2005 2006 2007 2008 2009

5 Years Ended 30 September

MLC review for the year ending 30 September 2009 Page 8 of 13 Contributors to your  By far the largest contributor to your annual return was your return substantial exposure to Australian shares. Our domestic market rose 8.5% and significantly outperformed the rest of the developed world (which fell 12% on an unhedged basis), thanks to a more robust financial sector, and ongoing demand for our raw materials supporting the resources sector.  Enhancing this was the out performance of your MLC Australian share strategy (which rose 12.6%), with 8 of your 10 active managers beating the market. Of particular note was Concord Capital (+22%) and Northcape’s (+22%) performance, driven by their timely purchase of banking stocks and selected cyclical companies (eg James Hardie +58%) which benefited from the sharp change in investor expectations of economic recovery.  The maintenance of a high $AUD hedge on your global assets added significant value. $AUD hedged assets outperformed unhedged assets due to the $AUD appreciating strongly over the year. More than 60% of your total exposure to global assets is hedged back into $AUD to help control the impact of currency fluctuations on your returns.  The performance of your global share strategy improved over the year, with the new managers appointed in February contributing solidly to returns.  Lastly, the turnaround in the corporate, high yield and emerging market sectors of the global bond market during calendar 2009 have had a positive impact on your annual returns. With a focus on delivering long term net real returns, your defensive strategy has had a relatively higher exposure to these sectors than the typical Growth fund. This was a net detractor during the height of the GFC, most notably when Lehman Bros failed in September 2008. But with credit spreads narrowing and investor expectations of economic recovery gaining strength, these sectors delivered strong positive returns over the year and outperformed the safe-haven of government issued bonds and cash.

Detractors from your  The key detractor from annual returns was your 6% exposure to return global private equity which continued to decline in value, reflecting the lagged valuation cycle of unlisted assets, such as private companies vis a vis listed assets.  Your small exposure to inflation linked bonds within your defensive strategy also marginally detracted from returns. Inflation linked bonds underperformed traditional fixed interest bonds over the year due to falling expectations of inflation adversely affecting inflation linked yields and market values.

MLC review for the year ending 30 September 2009 Page 9 of 13 The chart shows Contribution to Total Return by Asset Class contributors to MLC Masterkey Super Fundamentals Horizon 5 Growth Portfolio your return (before taking into account fees and tax)

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) 14.0 r a e y

1 12.0

n a % h

t 10.0

n r o e i t t a u e 8.0 r b g i

r s t d

n 6.0 o i o r C e

p

4.0 n r r o u f

t d e 2.0 e R s i l a

u 0.0 n n a ( -2.0

-4.0 Australian Global Global Global REITs Global Private LTAR Debt Horizon 5 Shares Shares - Shares - Assets Securities Total Return Hedged Unhedged

5 years to Sep-2009 3 years to Sep-2009 1 year to Sep-2009 3 months to Sep-2009

Returns relative to The MLC Super GS Horizon 5 Growth portfolio has delivered strong peer relative returns, with 50%, 69% and 70% of observations above competitors median over rolling 1, 3 and 5 years (respectively on a net of fees and tax basis), since inception. Whilst performance was poor during the epicentre of the GFC in both absolute and relative terms, more recently, MLC’s competitive positioning has improved.

The graph shows returns MLC Horizon 5 Growth Portfolio of your Portfolio Excess Return vs Median Manager in Personal Super Multi-Sector High Growth compared to (after taking into account fees and tax) competitors 5.0% 4.0%

) 3.0% . a . p 2.0% % (

n r 1.0% u t e R 0.0% s s e

c -1.0% x E

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n -2.0% i l l o

R -3.0%

-4.0%

-5.0% 0 3 4 6 7 7 7 8 8 8 9 9 0 1 1 1 2 2 3 4 4 5 5 5 6 7 7 8 8 8 9 9 9 0 2 3 6 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 0 0 0 0 ------r r r r r r r r r r r r c c c c c c c c c c c c g g g g g g g g g g g g g p p p p p p p p p p p p e e e e e e e e e e e e u u u u u u u u u u u u u A A A A A A A A A A A A A A A A A A A A A A A A A D D D D D D D D D D D D

1 Year MK Super Gold Star 3 Years MK Super Gold Star Data source: MLC, Retail Mercer MPA 5 Years MK Super Gold Star 1 Year MK Super Fundamentals

MLC review for the year ending 30 September 2009 Page 10 of 13 The main drivers of your returns relative to competitors

Contributors Detractors

5 Year  Having a much lower exposure to  Your relatively higher exposure to A-REITs and out performance by inflation linked bonds (+5%pa) your Global REIT managers detracted marginally, as cash contributed to your 5 year returns. (+6%pa) outperformed. A-REITS (-5%pa) substantially underperformed Australian shares  Your relatively higher exposure to (+10%pa). global shares (0%pa unhedged and +4%pa hedged) detracted slightly  Your exposure to emerging equity as global shares underperformed markets (+13%pa) helped as they Australian shares (+10%pa) over outperformed developed markets the period. (0%pa) and Australian shares (+10%pa).  The maintenance of a high $AUD hedge on your global exposures helped as the $AUD appreciated over the period.  The out performance of your hedged global private equity exposure (+10%pa) vis a vis listed global equities (0%pa) helped your returns.

3 Years  Having a much lower exposure to  Your relatively higher exposure to A-REITs, and out performance by inflation linked bonds (+3%pa) your Global REIT managers detracted marginally, as cash contributed to your 3 year returns (+6%pa) outperformed. as A-REITS (-19%pa) substantially underperformed Australian shares  Your relatively higher exposure to (+2%pa). global shares (-9%pa for unhedged and -5%pa for hedged) detracted  Your emerging equity market slightly as global shares exposure helped as emerging underperformed Australian shares equities (+2%pa) outperformed (+2%pa) over the period. developed equity markets (-9%pa) and Australian shares (+2%pa).  Positive returns from your hedged global private equity (+5%pa) program compared to negative returns from listed global equity markets (-5%pa).

1 Year  Strong out performance in your  A higher than average exposure to MLC Australian share strategy Inflation linked bonds marginally (+13%), compounding the positive detracted due to expectations of impact of the sector’s (+9%) rally in falling inflation during most of the 2009. last year.  Strong out performance in your  Underperformance in your MLC MLC global property strategy (- global share strategy due to the 18%), relative to market (-24%). residual impact of your exposure to Bernstein and Alliance, who were  Maintenance of the $AUD hedge terminated in March 2009. ratio in your global share exposure benefited from the rally in the $AUD in CY2009.  Your exposure to high yield bonds on a $AUD hedged basis benefited

MLC review for the year ending 30 September 2009 Page 11 of 13 from the sectors strong recovery in 2009 (+14%) and the appreciation of the $AUD.

3 months  Although there is little point  Thought it might be a stretch to call focussing on 3 month returns, the a positive return of +8% ($AUD September quarter is noteworthy for unhedged) and +15% ($AUD the continuance of the recovery in hedged) a detractor, nonetheless, risky asset values, and the ensuing your relatively higher exposure to positive impact on your Portfolio global shares detracted slightly return. from your quarterly return, when compared to the return earned by  Your exposure to the debt sectors Australian shares (+22%). that declined sharply in value in 2008, namely hedged high yield bonds (+11%) rallied throughout the September quarter and outperformed cash (+1%).  All listed sharemarkets bounced strongly with your high exposure to Australian shares (+22%) and hedged global shares (+16%) contributed significantly to your quarterly return.  Your global REIT strategy (+24%) also benefited from the sector’s recovery and the out performance of your global REIT managers.

Stock Story Return of Financials (ex REITs) versus Market

1.3

1.28

1.26

1.24

1.22

1.2

1.18

1.16

1.14

1.12

1.1

1.08

1.06

O ct Nov Dec Jan F eb Mar A pr May Jun Jul A ug Sep O ct 2008 2009

In recent years, the market’s attention has been largely focused on identifying the Australian companies who may be beneficiaries of China’s economic expansion. Resource and energy based companies have been singled out as the prime beneficiaries and their share prices have, until recently, been understandably strong. However, many resource and energy companies have tended to be performance laggards in the last year. Instead, the outperformance baton has been handed to the major banks. Without exception, the big 4 banks have outperformed the market by significant margins in the last twelve months. ANZ is up by 30% in the

MLC review for the year ending 30 September 2009 Page 12 of 13 year, National Australia Bank by 27%, Westpac by 22% and Commonwealth by 21%. While you may have a qualified opinion of banks, the fees they charge and their service standards, their investment appeal and recent performance has been outstanding. Their performance strength, both share price and profitability, is even more impressive considering the difficulties that many of their offshore banking counterparts have experienced during the global financial crisis. There are a number of reasons for their investment appeal and their impressive share price performance:  Australia’s big 4 banks entered the global financial crisis in relatively good shape;  The market has strongly supported bank capital raisings over the last 1-2 years, which has left the banks well capitalised and able to sustain any increase in bad debts associated with the economic slowdown;  The Federal Government’s guarantee has enhanced the banks’ safe-haven status and enabled them to attract retail deposits, which represent a comparatively cheap source of funds for lending.

However, it is the transformation of the competitive landscape in favour of the big 4 banks, with a commensurate increase in their market share, that has attracted investors. For example, Commonwealth Bank has acquired mortgage provider Wizard and a stake in Aussie Home Loans while also buying BankWest. St George Bank was purchased by Westpac and NAB has acquired the mortgage operations of Challenger. ANZ has taken a different growth path via the acquisition of Asian banking assets previously owned by Royal Bank of Scotland. It is a widely held view in the market that the dominant market shares in many areas that the banks’ have achieved should translate into higher profits, especially when Australia’s economic environment improves. Your MLC Horizon 5 Growth Portfolio has been well positioned to capture the banks’ significant share price upside. At the end of September, all four bank majors were owned and collectively accounted for approximately 22% of your MLC Australian shares strategy and approximately 8% of your total portfolio. National Australia Bank and ANZ feature more prominently than Commonwealth and Westpac while Suncorp-Metway is also a large holding.

Your Australian share managers have been adding to their bank holdings for some time, particularly via the recent capital raisings at prices that now appear to be very cheap. For example, a number of your managers participated in the Commonwealth Bank’s capital raising in December 2008. The shares they acquired for you were priced at $26.00 per share. At the end of September, these shares were selling on market at $51.75. This is an increase of 99%. More recently (July 2009), some of your managers participated in National Australia Bank’s capital raising where shares were offered at $21.50 each. At the end of September, these shares were selling at $30.76 on market, a gain of 43%.

MLC review for the year ending 30 September 2009 Page 13 of 13