MLC Global REIT Commentary

MLC Global Property Fund 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 9 MLC Global REIT Commentary

MLC review for the year ending 30 September 2009 Page 2 of 9 Benefits and risks of global When you invest in property securities, you effectively own part of Real Estate Investment Trusts (‘REITs’) and companies in the REITs property industry that are listed in markets around the world. This gives you exposure to future rental income, property values, gearing within REITs, development potential, fees from property and funds management. Things to consider:  Returns are driven by many factors including the economic environment in the various countries, as this determines rental demand and property values, and tends to influence profit expectations.  Investing overseas exposes your investment to movements in the exchange rate between the Australian dollar and foreign currencies. These movements can largely be removed by hedging the currency exposure back to Australian dollars.  Global REITs may be volatile and are usually included in a portfolio for their growth and income characteristics.

Investment objective The strategy is designed to be a complete portfolio for the global property securities asset class, and aims to deliver growth by using investment managers who invest and diversify across many companies and securities within that asset class.

How you can assess You can assess the performance of the Fund against its market benchmark over a full market cycle. When making this performance assessment, be aware that the market benchmark doesn’t take into account fees and taxes that may apply to your account. Your MLC Global Property Fund is benchmarked against the UBS Global Investors Index (hedged into Australian dollars).

Where MLC invests your The Fund invests primarily in property securities around the world, including listed Real Estate Investment Trusts and money companies across most major listed property sectors. It doesn’t normally invest in direct property. Foreign currency exposures will generally be substantially hedged to the Australian dollar.

MLC review for the year ending 30 September 2009 Page 3 of 9 Executive summary Throughout the September quarter, most global REIT markets continued their advance that commenced earlier this year. For instance, the UBS Global Investors Index (AUD hedged) was up by 31% this quarter. While this resulted in a less severe -24.2% return for the year to 30 September (compared to the -42.5% one year return to 30 June 2009), it’s still substantially negative. Much of this rally has been due to improving economic growth prospects, which has helped underpin forecast property fundamentals (done so in the absence of much transactional activity in the physical property market), and also the measures many global REITs have taken to improve their financial situation and balance sheets. Hong Kong was the best performing market during the year. In fact, it was one of the few markets to record a positive return in local currency terms. Hong Kong’s REITs have performed well due to the strength of their balance sheets and superior prospective earnings growth, which is linked to China’s firm economic outlook. Singapore’s REIT market performance was also positive (local currency terms) as was Europe while Japan’s was marginally negative. The worst REIT market performers over the year were Australia, USA/Canada and the UK. Your global REIT return for the year was -17.8% (before fees and tax). While your return was negative, it was 6.4% better than the market return. Our Global REIT strategy’s significant ownership of Asian REITs was very beneficial to your returns versus the market index. Your multi-manager approach has therefore helped protect you from the worst of the market’s decline in the last year. Two of your managers, Resolution Capital and Morgan Stanley, outperformed by substantial margins while La Salle underperformed.

5 3 3 1 Year The table outlines the Performance to 30-Sept-09 Fund Years Years Months % performance. % p.a. % p.a. % MLC Global Property Fund MLC - - -17.2 24.1 (takes into account fees) Wholesale MLC MLC Global Property Fund Masterkey (takes into account fees - - -18.0 24.3 Super and tax) Fundamentals MLC Global Property Fund MLC (before taking into n/a -11.3 -17.8 23.9 Wholesale / account fees and tax) Masterkey UBS Global Investors Index Super n/a -13.8 -24.2 31.0 (hedged)

MLC review for the year ending 30 September 2009 Page 4 of 9 Absolute and Market In the next chart, excess returns are shown on a 1 and 3 year basis, rolling through time from 2005 to 30 September 2009. The return of the Relative Returns market index is represented by the intersecting horizontal line. This means that if the rolling excess return line is above the horizontal line, the strategy has “outperformed” the index, and vice versa. This is a better way for you to assess the returns you are receiving from MLC, rather than looking at returns at a single point in time (as in the above table). As you can see from the following chart, this strategy has produced better than index returns with a high degree of consistency. While the performance history is limited, as the strategy was only launched in 2005, the rolling three year excess return has been consistently positive. Rolling one year excess returns have mostly been positive as well. We are particularly pleased with your 6.4% excess return for the year to 30 September which was achieved in what has probably been the most challenging and difficult year in the history of the global REIT market. The result is due to the stock selection of the managers we have appointed on your behalf, and the quality of their insight. The global REIT market contains over 220 REITs scattered across many different countries. As you would appreciate, not all are equally attractive in terms of quality or their prospective return. Some are worthy investments for you but there are a lot that aren’t. An excess return of 6.4% in the year suggests that your appointed managers have done a good job in a very difficult environment, choosing between the REITs that are investment grade and the ones that should be avoided. We do acknowledge this outperformance may provide you with little comfort when your absolute return for the year (-17.8%) is distinctly negative. However, outperformance has been a good outcome in such a difficult market and certainly preferable to underperforming.

The graph shows returns Rolling Performance in Excess of the Index MLC MasterKey Super Fundamentals Global REIT Portfolio of your Global REIT (before taking into account fees and tax) Strategy compared

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U -4.0% 7 8 9 6 7 8 9 0 0 0 0 0 0 0 ------r r r p p p p a a a e e e e M M M S S S S 1 Year 3 Years

MLC review for the year ending 30 September 2009 Page 5 of 9 Your managers Irrespective of the market environment, MLC believes appointing a number of different, experienced managers is far preferable to a strategy that relies on just one or a small number of managers for country, sector and stock selection. We don’t believe it’s appropriate for you to be dependant on a narrow range of insights, especially if it’s from just one firm, when our research has identified a number of managers with exceptional global REIT skills. We also aim to reduce your dependence on one or a narrow range of investment styles. This is why we have appointed three managers who are responsible for stock selection – the REITs to own and, just as importantly, the REITs to avoid. The diversity of the MLC global REIT strategy is evident from the following table which shows the investment style of each manager, who each manage a third of the strategy. All of the managers we appointed are providing you with tailored portfolio arrangements as well. This is an example of how MLC uses its significant scale on your behalf, in this case negotiating with your managers to provide special portfolio arrangements we believe will deliver you superior return outcomes. As mentioned earlier, the strategy outperformed the market index return by 6.4% in the year. This pleasing outcome was due to Resolution Capital’s and Morgan Stanley’s substantial outperformance. Morgan Stanley was the best performer, outperforming by 17.1% while Resolution Capital’s outperformance was by 9.4%. Morgan Stanley’s portfolio has a significant bias to selected REITs in Hong Kong, Japan and Singapore because they believe the REITs in these markets tend to have superior balance sheets and better earnings potential than REITs elsewhere in the world. Morgan Stanley’s low exposure to the US REIT market has also helped. Resolution Capital’s deliberate strategy of focussing stock selection on well managed, conservatively geared property vehicles with strong operating cashflows continues to benefit your return. LaSalle has a smaller exposure to Asian REITs and a higher exposure to US and Australian REIT markets. This has caused them to underperform the index and your other managers. While this may not sound like an ideal result, it’s normal for some managers in a multi- manager strategy to underperform. Often it’s because their style is out of favour or the market prefers REITs that the managers have chosen not to own. We retain our conviction in LaSalle.

Manager summary table

Key performance Manager Style Tailored mandate? Key role in strategy points

Blend of top-down & Stock selection LaSalle Relative Value Yes bottom-up insights detracted

Bottom-up stock o/w Hong Kong & Morgan Stanley Absolute Value Yes picker Singapore markets

Quality focus has Bottom-up stock Resolution Capital Relative Value Yes avoided REIT picker, quality focus disasters

Note: These are our judgements and the actual outcomes may differ to this. It’s difficult to explain the role of any manager in a few words. Details of overall expectations were discussed in our Strategy Enhancement document.

MLC review for the year ending 30 September 2009 Page 6 of 9 The graph shows manager Manager Performance in Excess of the Index excess returns vs MLC MasterKey Super Fundamentals Global REIT Portfolio index (before taking into account fees and tax)

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E -15% LaSalle Investment Management Morgan Stanley Resolution

5 Years to Sep-09 3 years to Sep-09 1 Year to Sep-09 Quarter to Sep-09

Strategy exposures Having three experienced global REIT managers working for you means that you’re getting access to the best investment opportunities globally. As a result of their investment decisions, your global REIT strategy is well diversified. At the end of September, it comprised 89 REITs chosen from thirteen different country REIT markets (shown in the following pie chart). Of the country REIT exposures within the strategy, America is by far the largest with 37 individual REITs owned (and one in Canada). The US property market is large and very diverse. Your European REIT exposure is spread across 12 REITs listed in six countries (Switzerland, Sweden, Norway, Netherlands, France, Finland) while your Asian REIT exposure is focused on 20 REITs in Singapore, Hong Kong and Japan. Note also that we have given your managers a genuine global mandate, which includes Australia. Australian REITs account for 11% of the strategy.

Country exposure as at 30 Global Regional Exposure September 2009 MLC MasterKey Super Fundamentals Global REIT Portfolio

Other, 0.8% Japan, 11.1%

America, 40.4%

Europe, 20.9%

Australia, 11.3%

Asia, 15.5% Source: MLC Datawarehouse

MLC review for the year ending 30 September 2009 Page 7 of 9 Sector exposure as at 30 Industry Exposure September 2009 MLC MasterKey Super Fundamentals Global REIT Portfolio

Other, 12.6% Diversified REITs, 13.5%

Specialised REITs, 5.1% Industrial REITs, 3.0%

Office REITs, 9.1%

Retail REITs, 26.6%

Real Estate Management and Development, 22.5% Residential REITs, 7.5% Source: MLC Datawarehouse

The following table shows Stock Name Region Industry Portfolio the top ten stocks Sector Weight by portfolio weight HONG KONG Real Estate in the MLC Global LAND HOLDINGS Asia Management and 5.9% REIT Portfolio as at LTD Development 30 September 2009 UNIBAIL- Europe Retail REITs 5.4% RODAMCO

SIMON PROPERTY America Retail REITs 5.0% GROUP

WESTFIELD Australia Retail REITs 5.0% GROUP

VORNADO America Diversified REITs 3.7% REALTY TRUST

Real Estate MITSUBISHI Japan Management and 3.4% ESTATE Development

STARWOOD HOTELS & Hotels Resorts and America 3.2% RESTAURANTS Cruise Lines WORLDWIDE

AVALONBAY America Residential REITs 3.2% COMMNS.

LINK REIT Asia Retail REITs 2.8%

LAND SECURITIES Europe Diversified REITs 2.8% GROUP

MLC review for the year ending 30 September 2009 Page 8 of 9 Stock story Simon Property Group Inc. (“Simon”) Simon is a retail real estate specialist with extensive interests across many retail property categories, including regional shopping malls and premium retail outlets. Simon’s strategy is to have a significant presence in each element of the retail real estate spectrum. Simon is the second largest REIT in the world (second only to Australia’s Westfield) and the largest public US real estate company. Based in Indianapolis Indiana, Simon owns and manages an exceptionally large retail property portfolio. It currently owns or has an interest in 324 retail properties in the US which generate annual sales of approx. US$60 billion. Simon’s non-US retail property portfolio is also extensive and comprises 51 shopping centres in Europe (France, Italy, Poland), one in China, seven premium outlet centres in Japan and one each in Mexico and Korea. From an investment perspective, Simon rates highly. Aside from its strong balance sheet, Simon has considerable cash reserves and access to credit. It has also received the highest investment grade rating. Simon has also declared and paid dividends every year since it was listed on the New York Stock Exchange in 1993. With investment and property credentials such as these, it is not surprising that managers in MLC’s Global REIT strategy have chosen this stock on your behalf. As a result, Simon is one of the largest investments in this strategy, accounting for 5% of the portfolio.

MLC review for the year ending 30 September 2009 Page 9 of 9