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MLC Horizon 7 MLC Annual Review June 2009

MLC Investment Management Level 12, 105 –153 Miller Street North Sydney NSW 2060 1 Important information 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. This material was prepared for advisers only. Any advice in this communication has been prepared without taking account of individual objectives, financial situation or needs. Because of this you should, before acting on any information 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 financial product issued by MLC Investments Limited (ABN 30 002 641 661) and MLC Nominees Pty Ltd (ABN 93 002 814 959) as trustee of The Universal Super Scheme (ABN 44 928 361 101), 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. An investment in any product offered by a member company of the National group does not represent a deposit with or a liability of the National Australia Bank Limited ABN 12 004 044 937 or other member company of the National Australia Bank group of companies and is subject to investment risk including possible delays in repayment and loss or income and capital invested. None of the National Australia Bank Limited, MLC Limited, MLC Investments Limited or other member company in the National Australia Bank group of companies guarantees the capital value, payment of income or performance of any financial product referred to in this publication. 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 return figures reported are before management fees and taxes, and for the period up to 30 June 2009, unless otherwise stated. The specialist investment management companies are current as at 30 June 2009. Funds under management figures are as at 30 June 2009, unless otherwise stated. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you.

Contents

MLC Investment Management Team Recent Comments, Updates and Articles 5 Market Overview 6 MLC Horizon 7 Accelerated Growth Portfolio 9-13 Australian Share Commentary 14-18 Global Share Commentary 19-22 Global Private Assets Commentary 23-24 Appendix: Table of Investment Manager Returns 25

Page 4 This review provides insights on the performance of MLC Horizon 7 – Accelerated Growth Portfolio. It also provides an update on our recent research and publications with the latest views on investment issues and market events, and the activity the research team has undertaken on your behalf.

MLC Investment Management Team Recent Comments, Updates and Articles

 MLC has always taken the  Kerry Napper, MLC's Capital Your investment issue of liquidity and equitable Markets Research Analyst, pricing seriously, to ensure looks at what history can tell specialists we provide our investors with us about the effect of banking daily access to their unit crises on developed and regularly linked funds. To ensure we emerging economies. produce can provide this access, MLC has a formal approach to the  Don't forget to have a look at the commentary and assessment of liquidity and Marketwatch site for an update on equitable pricing. For more the impacts of the financial crisis articles on information on this issue and economic downturn on recent please refer to MLC’s White income distributions for the MLC topical Paper entitled: ”Liquidity MasterKey Investment Trust, Unit and Equitable Unit Pricing – Trust and Investment Service and investment March 2009”. helping clients through tough times. issues. These  The Lottery Effect of Volatility – are available on MLC does not believe volatility Manager meetings and should be seen as the definitive reviews mlc.com.au measure of risk. Risk, to clients, is the likelihood they will not achieve Over the past 12 months, MLC Some of our recent updates include: their financial objectives. However, Investment Management has the dispersion of returns (volatility) undertaken 529 manager meetings.  A fully scripted ‘Performance does impact whether clients The broad asset class breakdown of Preview Pack’ for the year ended achieve their financial objectives. these manager meetings is outlined in 30 June 2009 to help facilitate This paper examines the the below chart. more meaningful client contribution the dispersion of conversations around fund returns has on outcomes. performance in challenging market 160 environments, The pack “lifts the  MLC Investment Management’s 140 lid” on the key drivers of the views and analysis on 7 year 120 return potential for asset classes 100 current economic environment, 80 how this has affected investment and the range of MLC’s diversified portfolios has been updated to 60 markets and what this means for 40 your clients. reflect end June 2009 market 20 valuations. 0  A summarized client friendly commentary on the key drivers of  Amanda Heyes, MLC Investment performance for the range of MLC Specialist, puts 'The Chaser' Multi-Manager funds over the year under the microscope and finds to June 2009 is on the client that the power of compound MarketWatch site. interest over long periods of time can have an incredible impact on  The recent financial market chaos your clients wealth. and plunge in liquidity of credit assets has helped focus  Traditional portfolio construction mainstream attention on the risk approaches have been under posed by exposure to illiquid intense scrutiny throughout the assets. This is particularly relevant recent financial crisis. In his article to many Australian - The do's and don'ts of portfolio Superannuation investors in construction, John Owen, Senior Industry Super funds with a high Investment Specialist for degree of illiquid exposure (eg Australian shares and global Direct property, Infrastructure and property provides some insights on private equity). how NOT to make the same mistakes.  

6 Market overview Comments by Brian Parker

Investment returns over the past 12 months were very poor, with the typical balanced fund likely to have Aust bonds posted a -11% return for the year. Global bonds REIT and share markets were the Cash main culprits, while Government bonds posted solid returns as Global shares (unhedged) investors continued to seek safety, Aust shares and the world’s central banks drove Aust REITs official interest rates down to unprecedented levels. Within the Global REITs (AUD hedged) bond universe, the dispersion of returns among the various sub- -50 -40 -30 -20 -10 0 10 20 classes was truly remarkable. While Returns (%) for year to end-June 2009 Government nominal bonds in the developed markets performed well, every other debt securities sub-class performed poorly in the December 2008 quarter. Corporate bond The chart shows both the steep declines in Australian spreads widened dramatically, and world share prices during the last half of 2008, and particularly after the failure of the US investment bank Lehman Brothers in also the solid recovery that has occurred since early mid-September 2008. Deflation fears March 2009 in the case of the developed markets and meant that markets had little interest in inflation protection, and October 2008 in the case of emerging share markets. consequently inflation protected securities also performed extremely Selected share price indices poorly. End-June 2008 equals 100 However the unbridled pessimism that 110 characterised market sentiment in late 90 2008 abated during 2009, and markets became less pessimistic 70 about the outlook for the global 50 economy. The functioning of world Source: MSCI, Datastream money and credit markets has 30 progressively normalised. The result has been sharply higher share prices, Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 higher commodity prices, much tighter credit spreads and higher Australia Developed markets Emerging markets Government bond yields. Economic conditions in the world on exports or business investment. economy deteriorated over the course of the year. All the world’s major Here in Australia, economic growth developed economies are now firmly has slowed to a crawl over the past ensconced in recession. In the case of year, and the economy has almost Moreover, every leading indicator of Japan and the UK, the recession is as certainly fallen into recession, despite employment is pointing to sharply severe as any in living memory. the fact that economic data released higher unemployment rates over the in recent months have tended to coming year. surprise on the upside. Retail Hopes that the major emerging spending seems to have been market economies of China and India supported by the Government’s cash could sail through this crisis relatively hand-outs. Housing finance has unscathed appear to have been picked up – particularly for new dashed. Chinese growth in particular housing construction – spurred on by slowed significantly – industrial output extremely low interest rates, and the growth fell to its slowest pace in a Government’s grants to first home decade. However, more recent data buyers. However, we have yet to see out of China suggest that some pick- the full effect of the global recession up in growth may be underway. Page 7 Trade and production data in some of In March 2008, another US In response, the world’s monetary the world’s most trade dependant investment bank, Bear Sterns, was authorities stepped up their injections economies – including Japan, non- facing failure, and because of the of liquidity and asset purchases. Later Japan Asia, and Germany – have institution’s pivotal role in the US and in the year, further capital injections been notably worse than elsewhere in global financial system, the US were made into US banks by the US the last few months. Much of this Treasury and Federal Reserve Treasury, and by year’s end, the weakness appears to reflect the engineered a bail-out of the institution major US car makers were in line for collapse of trade finance activity, and by JP Morgan, under which the emergency funding from the same indeed world trade, in the wake of the business of Bear Sterns was program that had been set-up to aid Lehman Brothers failure (see charts absorbed into JP Morgan, and the troubled financial institutions. below). There remains considerable troubled assets of the institution were President Obama’s much anticipated debate as to whether the Lehman taken on and guaranteed by the $789 billion stimulus package passed Brothers failure represents an Federal Reserve. In the wake of that through the US Congress in February. unavoidable consequence of the operation, market participants felt that Additionally, a $275 billion housing financial crisis or a policy blunder. We the rules of the game were reasonably plan aimed at preventing foreclosures lean towards the latter interpretation. clear: viz, any institution that occupied and attempting to stabilise the such a pivotal position in the system housing sector was introduced. The chart shows industrial would have the support of US Treasury and Federal Reserve if it During the past year, policymakers output in less trade faced difficulties. As a consequence, have continued to take steps to market participants felt relatively address this crisis that are dependant economies: confident in acquiring the short-term unprecedented in both their nature debt obligation of such entities, and scope. Fiscal policy measures continuing to utilise them as have been taken in many countries, counterparties for a range of including here in Australia. The transactions, and holding their equity. world’s central banks have reduced By allowing Lehman to fail, the rules official interest rates aggressively, and of the game appeared to collapse, injected huge amounts of liquidity into and with it, confidence in the system. the financial system in a bid to get money and credit markets working The failure of Lehman Brothers again. These efforts are critical, followed a period where key US because in the absence of properly institutions such as the investment functioning markets for credit, and bank Merrill Lynch, the world’s largest financial institutions willing to lend, insurer AIG, and key US mortgage traditional monetary policy is close to lenders Fannie Mae and Freddie Mac impotent, and generating a had been taken over, nationalised, or sustainable recovery in private sent into bankruptcy. Institutions in the demand will be close to impossible. The chart shows industrial UK and Europe have faced similar output in highly trade difficulties. It is now clear that during At the time of writing, conditions in the aftermath of the Lehman Brothers money and credit markets have dependant economies: failure, the world financial markets continued to improve, although they and economy stood on the edge of an have yet to return to anything that abyss. Flows of credit that are the might be described as normal trading lifeblood of the world economy in conditions. Share prices, while still many cases ceased. For exporters sharply higher than their recent lows, and importers, trade finance was have fallen across the globe. While extremely difficult to obtain. Corporate there has been some improvement debt markets became dysfunctional, evident in the economic data released and in the case of high yield across the world so far this year, the securities, there was no market to recession is far from over. Share speak of. Interbank lending markets markets seem to have gotten ahead were severely restricted, and cost of of themselves in the latter stages of funding for the world’s banks soared. the financial year, and consequently, their partial retreat appears entirely justified.

At MLC, we spend a good deal of time  In the US and elsewhere in At the end of the day, the share assessing the medium to longer-term the English speaking world, market is a snapshot of the outlook for economies and investment households have increased businesses that comprise the returns. Before this rally began in their saving. In Australia, this economy. Over time, those early March, prospective investment has been achieved (so far) businesses profit from meeting the returns for domestic and global with very little weakness in needs of their customers, pay shares, and for non-Government consumer spending, but the dividends, and reinvest in order to securities looked very favourable – US and UK have not been so grow. Share markets mostly reflect significantly higher than historical lucky, and consumer that reality. Extended periods where averages. Given the size and speed spending in those economies share markets fail to deliver are rare, of the recovery so far, those has fallen sharply. Sharply but they have happened. prospective returns have come down lower household wealth has Consequently, not everybody can or sharply, but are still reasonably triggered higher rates of should have all their eggs in the favourable. saving – a reversal of the basket labelled ‘shares’. trend of the past decade or In the short term, we believe the more. It remains unclear how Our best defence against not knowing pathway towards sustainable recovery far this trend has to go – we the unknowable is to diversify our – both in the economy and investment have no way of knowing in investments as widely as possible, returns – remains highly uncertain. advance just how high the take enough risk in our portfolios to What kind of news would we need to saving rate will need to rise in enable us to meet our clients’ return hear, what questions need to be these economies (and hence objectives and, to as much as answered and what developments how weak, and for how long, possible, fully understand the risks would we like to see in order to consumer spending will be). attached to every investment we become more optimistic? make. While the problems in the world’s Here is a list, but by no means an banking system have restrained exhaustive one. the supply of credit, the demand So far, the loan and securities losses for credit from the private sector faced by banks and other financial has been very weak. We need to institutions have mostly been see signs of a pick-up in credit related to the US housing market demand. Just when will the private collapse. Just how bad will the sector’s appetite for credit improve non-housing credit losses be in – not the kind of voracious, this recession, and do the banks unsustainable appetite for credit have enough capital to cushion that led the world to financial against those losses? The US obesity, just normal, garden variety Federal Reserve suggests that the demands for credit for home major US banks need to raise building and business investment? relatively little capital to provide Thankfully for world bond markets, that cushion. For our part, we this lack of appetite for debt has think US banks need to raise allowed Governments to have the considerably more capital than the field all to themselves when it $75 billion or so identified by the comes to borrowing money. Even Fed. after their recent sell-off, long bond rates are still very low historically.  At some point however, the competition for funds between Governments and a resurgent private sector is likely to be problematic for bond markets.

MLC Horizon 7 Accelerated Growth Portfolio

The MLC Horizon Series of portfolios is designed as a complete solution to meet an investor’s financial goals, and Target Asset Allocation* are focussed on growing real (after inflation) wealth for an expected level of risk. The portfolios are well diversified within asset classes, MLC Super Horizon 7 across asset classes and across LTAR Global investment managers, who invest in 2% private Global many companies and securities shares around the world. assets 5% (unhedged) In building the MLC Horizon Series, 24% we won’t chase risky returns when markets are very strong, which may temporarily result in a lower return Australian than comparable funds that do. At shares other times, and particularly when 40% markets are weak, we expect each Global Portfolio to have higher returns than shares comparable funds. (hedged) 29% The MLC Horizon *The actual asset allocation may be adjusted +/-5% around this 7 Accelerated target. The rebalancing range is +/-2% around the target. Growth Portfolio may be suited to you if you want to invest in growth assets, are focussed on long term capital growth and comfortable with the extra volatility associated with gearing. The portfolio’s expected volatility is very high.

The table outlines performance of MLC Horizon 7 – How we design Recent Example of this in action investment solutions Accelerated Growth Portfolio. to grow and protect your clients’ wealth Performance Overview 5 years 3 years 1 year 3 to months We design solutions based Unprecedented market 30volatility June and 2009 significant declines in assets values has tested the on investors’ fundamental discipline of all investors,MLC MasterKey regardless Super of their investment-0.8%pa time horizon.-11.8%pa -31.3% 14.4% needs to grow wealth over During such periodsHorizon of uncertainty, 7 – Accelerated maintaining a deep and broad spread of exposures in your the long-term. strategy remainedGrowth beneficial. (Net) For example, maintaining your mix of $AUD hedged and $AUD unhedged global Medianshares helped(Mercer smooth Personal the impact of1.6%pa the unexpectedly-6.4%pa large changes-18.9% in the 8.9% value of the $AUDSuper over Multi-Sectorthe year. High Growth) We manage the risk in your Your global shareMLC strategy Wholesale is managed Horizon by 8 7 active – global-0.3%pa share managers-12.2%pa who-31.6% collectively 16.8% portfolio by building invest in over 1000Accelerated companies Growth from 37 (Net)countries and 11 sectors, including emerging markets thoroughly diversified such as China, India and Russia. Median (Mercer IDPS Multi- 2.4% -6.5% -19% 9.9% portfolios at every level – To control the impact of short term currency fluctuations you have 3 passive currency Sector High Growth) asset class, country, managers who maintain a disciplined currency hedge ratio of 55%/45% $AUD hedged and Quartile Ranking (Mercer 4th 4th 4th 1st currency, industry, company unhedged on your total global share exposure. Pers. Super Multi-Sector High and manager. Growth) You access exceptional Maple-Brown Abbott,Percentage one of yourof time Australian rolling share managers57% significantly78% outperformed11% the N/Av investment managers in the market over the yearreturn to aboveJune, withMedian 5.5% (since excess returns relative to the S&P/ASX300 world who carefully invest Accumulation Index,inception) before fees and taxes. your money in the right Like many of yourMLC active MasterKey managers, Super Maple-Brown Abbott1.4% used market-11.1% circumstances-32.8% and their12.0% businesses and assets. scale to participateHorizon in the capital7 – Accelerated raisings of many quality Australian companies. For example, they bought WesfarmersGrowth at(Gross) $13.50 and $15 in the share issue in January 2009. The current share price at 20thStrategic July 2009 Market was Benchmark$24. 1.5% -10.9% -31.8% 14.0% Wesfarmers accounts forReturns approximately for 5 years and1.8% 3 yearof your are Australianfor the MLC shareMasterKey strategy. Superannuation (Gold Star) – Horizon 7 Accelerated Growth Portfolio which commenced November 2002, and includes We keep your investment Your disciplined rebalancingfull freight approach retail fees which and adviseruses a trail.+/-2% Returns rebalancing for 1 year range and 3 around months aare target for Super goals on track because we asset allocation, ensuredfundamentals exposure whichto growth commenced assets Januarywas maintained 2007. at approximately 130% actively manage your of your total strategy. ThisThe ‘buynet return low/ quotedsell high’ is sourced approach from to Mercers rebalancing Retail softwarewas applied where the administration portfolio to stay true to its consistently throughoutfee the has last NOT year, been despite deducted. the unprecedented volatility, to ensure your original intent. strategy stayed on track.There are differences in the target asset allocation between the Super and Ordinary money portfolios. The Ordinary money portfolios do not have Global Private Markets.  The strategic benchmark is a gross measure of the sum of the strategic allocation to each asset class in MLC Horizon 7 multiplied by the respective market benchmark for that asset class. It shows the value added through manager selection, stock selection and variations in asset allocation (ie it does not show the value added / detracted through our strategic asset allocation decisions).

As your portfolio invests predominantly in growth assets, the one year returns to June 2009 remain in negative territory. Longer term returns for 5 years are positive but subdued.

The graph shows the contribution of each Contributors to your sector to the return (to 30 June 2009). returns MLC Super Horizon 7 Total contribution to return (%)  The maintenance of a relatively % high $AUD hedge ratio during 10 2009 when the $AUD appreciated 5  Strong market relative

performance in the Australian 0 share strategy, with 8 of the 10 managers outperforming -5

Detractors from returns -10  The key detractor was the geared -15 (~130%) exposure to Australian Australian shares Global shares - Global shares - Private Markets LTAR Borrowing and global shares which, despite Hedged Unhedged the rally of 2009 declined sharply 5 years 3 years 1 year 3 months over the year. The attribution analysis used to calculate the contribution to return is an approximation only. Attribution is calculated on a month end basis.  The global share strategy remains Intra-month portfolio changes would therefore not be captured. As behind index due to the residual such, the graph shown is for illustrative purposes only and is not impact of AllianceBernstein and accurate to the basis point. AllianceCapital’s underperformance. Both managers were terminated in March 2009. The graph shows the rolling 1, 3 and 5 year returns of Peer relative returns the MLC Horizon 7 – Accelerated Growth Portfolio (for The graph below shows the rolling 1 MasterKey Super Gold Star ) versus the Mercer (blue), 3 (red) and 5 (green) year median manager to 30 June 2009. returns of the MLC Horizon 7 – MLC MK Sup GS - Horizon 7 Accelerated Gr Accelerated Growth Portfolio (for Excess Return in Personal Super Multi-Sector High Growth from Oct 2003 to Jun 2009 MLC0447AU versus Median (after tax and after fees) MasterKey Superannuation Gold 16.0% Star ) versus the Mercer median manager (the horizontal axis). If the 12.0% coloured lines are above the 8.0% horizontal line, the portfolio has 4.0% ) a outperformed the median manager p % (

n r u and vice versa. The portfolio has t 0.0% e R

s s e c

delivered strong peer relative returns, x E with 70%, 78% and 57% of -4.0% observations above median over rolling 1, 3 and 5 years (respectively -8.0% on a net of fees and tax basis), since -12.0% inception. -16.0% Oct 2003 Mar 2004 Aug 2004 Jan 2005 Jun 2005 Nov 2005 Apr 2006 Sep 2006 Feb 2007 Jul 2007 Dec 2007 May 2008 Oct 2008 Mar 2009

12 Month Rolling Excess Return 3 Year Rolling Excess Return 5 Year Rolling Excess Return Data Source: Morningstar

The main drivers of Contributors Detractors this peer relative  Positive returns from the global private  Higher exposure to global shares than performance have equity (+7%) strategy relative to the peers. Australian shares (+8%) been: listed equity (-2%) markets. outperformed global shares (-2%). 5 years  Relatively higher exposure to emerging market shares than peers. Global emerging market shares (+12%) outperformed developed market shares (-2%).

 Positive returns from the global private  Higher exposure to global shares than 3 years equity (+2%) program compared to peers. Australian shares (-4%) negative returns from listed equity outperformed global shares (-10%). markets (-10%).  The maintenance of a relatively high  Your global share strategy lagged the $AUD hedge ratio during 2009 when the market due to the adverse impact of $AUD appreciated, poor stock selection by 1 year AllianceBernstein and AllianceCapital. Whilst both managers were terminated in March 2009, their impact on yearly returns were still felt.  Although there is usually little point  Quarterly returns from the private equity focussing on 3 month returns, the June strategy declined by 19% on an quarter deserves a mention because of unhedged and -7% on a hedged basis, the sharp turnaround in investor reflecting the lagged devaluation of preferences. All growth sectors that private equity assets vis a vis listed declined sharply in the second half of equity markets. 2008 rallied strongly in the first half of 2009 as investors became more 3 months comfortable with the prospect the economy may not be in free fall.  Consequently Australian shares (+11%), global shares hedged (+18%) and global shares unhedged (+5%) rallied hard. MLC maintained your strategic exposure to these sectors and investors fully participated in the rally.

Australian Share Commentary

The table outlines the performance of the MLC Australian Executive Summary: Shares strategy.  The Australian market returned -20.3% in the year, its worst Performance Overview 5 years 3 years 1 years 3 mths financial year result for 27 years. A to 30 June 2009 June quarter increase of 11.5% MLC Australian Share and a phenomenal but 7.4% pa -3.0% pa -16.2% 12.7% nonetheless welcome 27.3% rise Strategy, Gross since the early March low S&P / ASX 300 Accumulation rewarded investors who were 6.8% pa -3.9% pa -20.3% 11.5% disciplined and chose to maintain Index their strategy and market MLC Wholesale Australian 6.2% pa -4.0%pa -16.9% 12.3% exposure. At the sector level, only Share Fund, Net Information Technology (0.5% of Median (Mercer Retail IDPS – the market) recorded a positive 6.8% pa -3.6% pa -17.7% 11.5% return. Sectors with defensive Australian Shares) characteristics such as Telecoms, Quartile Ranking (Mercer IDPS Consumer Staples, Healthcare and 3rd 3rd 2nd 2nd Banks delivered the best results, Australian Share) albeit negative. In contrast, cyclical Percentage of time above sectors with a more direct Median (IDPS Universe, since 0% 1% 17% n/a exposure to the economic cycle inception) (including resources) tended to lose the most ground while the Note: Inception is February 1998. Australian REIT sector, down by 42.3%, was again the worst performer. managers has delivered good  The MLC Australian shares results for you in this difficult strategy outperformed the market market and economic return by 4.2% in the year to 30 environment. June. This continues the very strong track record of performance (versus the market) since early The Australian share strategy is September 2008 where rolling 1 expected to outperform the year (gross) returns have been S&P/ASX 300 Accumulation Index consistently better than market. over rolling 5 year periods. Even though your actual return is However, as part of our focus on still disappointingly negative, we growing your wealth, we won’t are pleased that the strategy we chase risky returns when markets have built has cushioned you from are very strong. This means your the worst of the market’s fall (as returns are likely to lag or we would expect from the strategy underperform the benchmark in this type of market). return in strong markets. At other times, and particularly when  The managers we have appointed markets are weak, we expect to for you have generally performed outperform the market’s return. well in the year. Eight out of ten managers recorded returns better than the market’s and many of them did so by substantial margins. Northcape Capital was the best performer, recording a return that was 11.7% better than the market benchmark, followed by Concord (7.7% better) and Maple- Brown Abbott (5.5% better). We are pleased that the careful stock selection approach of your

The graph shows how well the MLC Australian share Market Relative Returns strategy has performed compared to the market index Excess returns are shown on a rolling 1,3 and 5 year basis, rolling through (“excess return”) to 30 June 2009. time from 2000 to 30 June 2009. The return of the market index is represented by the intersecting 6.0 horizontal line. This means that if the 5.0 4.0

rolling excess return line is above the * 3.0 x e horizontal line, the strategy has d 2.0 n i

“outperformed” the index, and vice s

s 0.0 versa. This is a better way for you to e c

x -1.0 e assess the returns you are receiving n

i -2.0

from MLC, rather than looking at % -3.0 return at a single point in time (as in -4.0 the earlier table). -5.0 -6.0 9 0 1 2 3 4 5 6 7 8 9 9 0 1 6 7 8 2 3 4 5 9 0 0 0 0 0 0 0 0 0 0 9 0 0 0 0 0 0 0 0 0 ------n n n n n n n n n n n As you can see from the graph, your c c c c c c c c c c u u u u u u u u u u u e e e e e e e e e e J J J J J J J J J J J recent returns have been significantly D D D D D D D D D D better than the market index over all 1 Year Rolling Excess Return 3 Year Rolling Excess Return 5 Year Rolling Excess Return rolling periods, especially the rolling one year excess return which was ahead of the market’s by 4.2% at the end of June. This is because most of Also, the key investment staff within your managers have delivered better MLC’s managers these firms are typically people who than index returns, which is due to the tend to be long have long track records in Australian good performance of many of the shares research and portfolio companies they have chosen on your term investors, management. behalf. While we expect that the The graph also shows there have negative absolute return from your prefer been periods when your return has investment will disappoint you, companies with lagged (underperformed) the market outperformance is a good outcome in index. This has tended to be during such a difficult market and certainly solid highly speculative periods such as the preferable to underperforming. It’s an ‘Tech Boom’ in the late 1990s and outcome that we also tend to expect fundamentals or more recently 2006-2007 when in difficult market circumstances such market returns were driven by a very as these, given the nature of the return prospects, narrow range of companies such as managers that MLC has chosen for BHP Billiton. However, in both cases, you, and the deliberate way we have rather than the what we have left behind in terms of blended them. latest market excess returns during those very positive return environments have ‘fad’, and are tended to be made up when market conditions deteriorated, such as those generally averse we are in now. While we can’t guarantee this will always be the to paying prices case, it is something that we would expect from the way we construct the they consider strategy and the types of managers excessive. that we appoint.

A summary of your appointed managers is in the table. Your Managers Manager Market cap. Irrespective of the market Tailored Strategy Style Characteristic environment, MLC believes that Mandate? Allocation appointing a number of different, s experienced managers is far Balanced preferable to a strategy that relies on Value Yes 10% Large just one or a small number of Equity managers for stock selection. We Concord Growth No 5% Mid – Large don’t believe it is appropriate for you Contango Business to be dependant on a narrow range of Yes 10% All insights, especially if it is from just one Cycle firm, when our research has identified Dimensional Deep a number of managers with Yes 10% Small exceptional Australian shares skills. Value We also aim to reduce your JF Capital Growth Yes 10% Mid-cap dependence on one or a narrow range of investment styles. This is Lazard Value No 15% Mid-Large why we have appointed ten managers who are responsible for stock Northcape Growth No 10% Large selection – the stocks to own and, just Northward GARP No 5% All as importantly, the stocks to avoid. Capital The diversity of the MLC Australian Maple-Brown Value Yes 15% All share strategy is evident from the Abbott following table which shows the investment style of each manager, Wallara Growth No 10% Large where their portfolios tend to be Key points to note from the table are: focused (small, medium or large companies) and the strategy 1. the strategy is well diversified with allocation we have made to each no manager accounting for more manager. A number of managers we than 15%. engage with provide you with tailored 2. the strategy comprises a range of portfolio arrangements as well. Note different management styles, and that the managers who don’t are able variations within the style to provide us with what is necessary categories “Value”, “Growth” and via their standard portfolio. “GARP” (Growth at a Reasonable Price). For instance, Dimensional’s approach to identifying the companies that represent the best value is very different to Maple- Brown Abbott’s. 3. the strategy is structured so that you receive full market coverage, with access to the range of small, medium and large stock opportunities.

It is pleasing to report that eight of the The benchmark relative (excess) return of the managers to ten managers have outperformed the market return and that a significant 30 June 2009 is illustrated in this graph. number of them did so by substantial margins. For instance, Northcape

Capital’s return was 11.7% better than 14 1 Year the market benchmark. We are also 12 3 Years pleased that there has been a variety 10 5 Years % of investment styles contained within 8 s n r

the strategy that have contributed well u 6 t e

to your return. However, it is worth s

s 2 remembering that this will not always e c

x 0 be the case, as we saw in the 2005- E 2007 bull market when “growth” -2 managers who owned resource and -4 energy companies tended to perform -6 better than “value” managers who didn’t have much of an exposure because they thought resource and energy companies were expensive. This is why we believe so strongly in having a diversified mix of managers and investment styles for you, so that Our oversightSlide 3 of the managers takes you are not dependant for returns on many forms, ranging from formal face- just one or a limited number of to-face reviews to reviewing the managers and styles. stocks that each manager has bought and sold. We also actively look for MLC constantly ways to generate new insights on your managers and in this regard, one of monitors and MLC’s manager research analysts recently spent a number of days reviews the working in the offices of JF Capital Partners in Melbourne. This was a appointed unique opportunity to view the day-to- day functioning of the investment managers for team and how they conduct company you. research and generate insights firsthand. In doing so, it provided further confirmation that retention of JF Capital Partners, who we first appointed in 2001, remains appropriate.

Stock Exposures While many of your managers tend to think of stock selection from a long term perspective, their processes are also dynamic. They need to be because economic, market and company circumstances change Over the year, though time, which may require action stock selection or provides opportunities to enhance the portfolio. This can mean one, was a significant some or all of the following actions by your managers – adding to or positive reducing existing holdings, adding stocks to the strategy or selling out of contributor to some stocks completely if their fundamentals have changed for the your return. better or worse. The individual and collective stock This is precisely what your managers selection decisions made by most of have been doing in this difficult market your managers meant that the (and in good markets as well). We strategy return was 4.2% better than have seen numerous examples of the market’s. A number of stocks your managers using the market’s contributed to this pleasing result, weakness as wealth building such as owning ANZ Bank, Lion opportunities on your behalf. For Nathan (now subject to takeover), example, many companies have James Hardie, National Australia come to the market to raise fresh Bank, Coca-Cola Amatil, Fosters capital via rights issues or placements Group and having a low exposure to of new shares. This has enabled selected resource companies such as MLC’s managers to buy stock, often Fortescue Metals which fell by 68% in at very cheap prices. Examples the year. Stock strategies that didn’t include: help your return in the year were smaller than index holdings of strong Wesfarmers: earlier this year, the performers such as Commonwealth company raised additional capital via Bank, Woolworths, Westpac and a rights issue and institutional Newcrest Mining. bookbuild covering additional shares. A number of MLC managers We think it is important for your participated, buying stock at $13.50 strategy to be invested in a and $15. Based on a $22.65 share meaningful way in companies that price on 30 June, there has been a your managers believe will deliver you gain of at least 51% on the additional good, long term returns. As we saw in shares acquired. the previous paragraph, not all companies perform well at the same Insurance Australia Group: additional time. During the market decline over shares were acquired for the strategy the last year and a half, some of the via participation in an issue of shares best company performers were those to institutional investors at $3.00 per who weren’t as adversely impacted by share. IAG’s 30 June share price was the economic slowdown. Companies $3.50 so the shares acquired are such as Woolworths (food), Coca- showing a gain of 17%. Cola Amatil (beverages) and Lion Nathan (beer) fall into this category and they (and others) have made a positive contribution to your return in the year just finished. However, the performance of these companies lagged the resource companies in 2005-2007 when the world economy was strong.

BlueScope Steel: a rights issue of shares priced at $1.55 per share occurred in May. With the 30 June share price at $2.53, the newly acquired shares are showing a gain of 63%. Santos: the company completed a 2 for 5 rights issue in May to raise funds for capital expenditure on the Papua New Guinea LNG project. Based on an issue price of $12.50 per share and a June 30 price of $14.64, a gain of 17% was made from the shares acquired. Stockland: MLC participated in the $2 billion capital raising in May, which will help underpin Stockland’s financial situation. Acquired at $2.70 per share, a price where Stockland traded at back in 1996, the shares are already showing a gain based on the 30 June price of $3.21.

Global Share Commentary

The table outlines performance of MLC Global Share Executive Summary: Strategy Performance Overview 5 years 3 years 1 years 3 It has been a to 30 June 2009 Months remarkable and MLC Global Share Strategy, -2.1% pa -10.5% pa -19.6% 5.7% challenging year Gross MSCI All Countries World -1.4% pa -9.1% pa -15.6% 5.3% for global share Index MLC Wholesale Global investors. -3.1%pa -11.0%pa -19.3% 6.1% Share Fund, Net Despair has given way to muted signs Median (Mercer IDPS – Global of stabilisation. The reaction of -2.7% pa -10.9% pa -19.2% 5.6% markets since it reached its low on Shares) March 9 has been remarkable with a Quartile Ranking (Mercer 3rd 3rd 2nd 2nd significant rebound in perhaps the IDPS Global Share) component perceived to be the riskiest in the market – financials. Percentage of time above Median (IDPS universe, since 38% 27% 43% N/Av  The rally was mostly felt in inception) Emerging markets which leapt ahead with increasing investor risk MLC Hedged Global Share appetites. We suspect Strategy, Gross 0.3%pa -9.8%pa -34.0% 17.6% macroeconomic news will continue to surprise on the downside in the MSCI All Country World index developed world. Positive $AUD Hedged 2.1%pa -7.0%pa -27.5% 18.1% earnings news and a continued rally would be inextricably linked to Note: Inception is February 1998. a pick up in the four key variables most integral to the economy's performance: employment, production, personal income, and sales. The global share strategy is expected to outperform the MSCI  Your MLC Global Share strategy All Countries World Index over returned -19.6% underperforming  Given the sharply divergent sector rolling 5 year periods. However, as the MSCI All Country World Index returns for the year, it was we are focused on growing your (ACWI) which returned -15.6% for interesting to see that selections in wealth, we won’t chase risky the year. Your strategy capital goods, consumer services returns when markets are very underperformed due to the drag and information technology added strong which means we are likely caused by companies bought by value to your portfolio. Notable to underperform in strong markets. two managers –Bernstein and detractors were from materials, At other times, and particularly Alliance. These managers were energy and food sectors. when markets are weak, we expect terminated during the strategy  Your MLC Global Share Hedged to outperform the market. enhancement implemented in performance was further hindered March 2009. The four new by a mixed year for the Australia managers (Sands Capital, Harding dollar ($A). The $A rose against Loevner, Tweedy Browne and a basket of currencies which Mondrian) are performing the roles represents the major trading they were appointed to fulfill, partners (TWI) in the first half of although it is too early to comment this year (up 16.4%). However, on their market relative there was a drop of 11.9% over performance. Overall, returns from the year to 30 June 2009. both old and new managers remained mixed.

The graph outlines the rolling excess returns of the MLC Global Share Strategy to 30 June 2009. Market Relative Returns Disappointingly, while index relative 20.0 returns have historically been quite 15.0

* 10.0 strong, they have recently fallen below x e d n i

5.0 market, as illustrated in the graph f o

below which shows rolling 1, 3 and 5 e c x e year market relative returns. This is -5.0 n i

especially the case given recent poor % -10.0 markets, a time when we would -15.0 expect to outperform. The recent -20.0 0 2 4 6 7 9 9 1 3 5 8 9 1 2 4 6 8 0 3 5 7 9 0 0 0 0 0 0 0 0 0 0 9 0 0 0 0 0 0 0 0 0 ------n n n n n n n n n n n performance drag was driven by c c c c c c c c c c u u u u u u u u u u u e e e e e e e e e e J J J J J J J J J J J sector selections in 2008 by Bernstein D D D D D D D D D D and Alliance. The quantum of 1 Year Rolling Excess Return 3 Year Rolling Excess Return 5 Year Rolling Excess Return underperformance which saw your portfolio decline in value over the next *The index for your strategy is the MSCI All Country World Index (ACWI), which includes both year, should take some time recover. developed and emerging markets. However, it was the MSCI World Index (developed Notwithstanding the recent dip in markets) prior to September 2002. performance, the strategy has broad market sell off in 2008. consistently outperformed the market benchmark over most periods (as can be seen above). The last decade was Your Managers host to two of the worst asset bubbles, In what has been a difficult time for and encapsulated narrowly lead managers, their performance markets for significant periods. Such continues to vary. Of the managers markets make it difficult to show value who are continuing in the strategy in active stock selection, as good after the recent changes: stock selections aren’t rewarded above how the ordinary market Dimensional enjoyed a reversal of performs. fortunes during the rally of 2Q09, which was driven primarily by the riskier, deep value and growth oriented segments of the market. The Emerging markets mandate with Dimensional continued to add value through participation in the emerging markets rally. These two events lead to their performance being almost on par with the index. Walter Scott continues to impress for the year. They did however give back some of the gains during the latest market rally, which favored the more risky parts of the market at the expense of quality companies. Wellington lost out on their calls on the Materials sector, although they too enjoyed a reversal of fortunes through bottom-up stock selection during the rally of 2Q09. Capital International detracted from your portfolio due to calls in a few sectors including materials. At a stock level, Potash, which has been a winner for the previous few years, had their share price halved during the

A summary of your appointed managers is in the table. Manager Style Tailored Key role in Key performance mandate? strategy points Capital International Materials and Consumer 130 stock portfolio staples hurt at a sector New (MLC seed Through the cycle with a mid-large cap level. Potash and Nintendo investor) performance GARP bias were the key stock detractors. Dimensional Deep value style was back in favour 2Q09, which 500 stock portfolio helped performance Volatile market with a small-mid cap Tailored almost match the relative performance deep value bias benchmark. Outperforming in emerging markets continued. Harding Loevner 50 stock portfolio with Volatile market a mid-large cap No New to strategy relative performance quality growth bias Mondrian 90-100 stock portfolio with a large cap value No Capital preservation New to strategy (dividend) bias Sands Capital 25-50 stock portfolio New (MLC seed with a mid-large cap Upside participation New to strategy investor) secular growth bias Tweedy, Browne 30-50 stock portfolio with a mid-large cap Tailored Capital preservation New to strategy value bias Walter Scott 50 stock portfolio with Focus on quality a small-mid cap real No Capital preservation companies with low debt return bias levels Wellington 50 stock portfolio with Scaled back materials and New (MLC was seed Management a mid-large cap Upside participation positioned defensively in investor) GARP bias Q109 * These are our judgements and the actual outcomes may differ to this. It is difficult to explain the role of any manager in a few words. Details of overall expectations were discussed in our Strategy Enhancement document.

The managers’ performance compared to market Sector and Regional exposures benchmark (many of which have not been in the Global sector returns had two marked portfolio for 1 or 5 years), is illustrated in the graph (to sessions. The first to March 9, 2009 30 June 2009. was dominated by defensive sectors such as health care and consumer 12% staples, as shown in the middle graph to the right. 10% 8% ) %

But there was marked increase in risk (

6% s appetites with financials making a n r

u 4% t

significant comeback since 10 March e R

to 30 June 2009, as shown in the s s l l l t t e a t a a r y n n , t bottom graph to the right. c

0% g n i o n e n y e n a e x n i o c l p o i n d o a t n r E i i m a a S v e t d p g t d

s e w r i e e C -2% a r n n

n g o m a i p o e

Your portfolio too managed to n l w r o s e a t o r l a H L l T d B n e e M C a m C t i a participate in the rally. Your sector -4% n n W a W D I M attribution was driven by the S managers who are part of your -6% portfolio and the way they are -8% blended. Sands, a new appointee 5 year 3 year 1 year participated in the rally exactly as we anticipated them to, with returns driven from many sectors in the final quarter. Capital goods, consumer The two graphs below show global sector excess services along with technology hardware & equipment sub sectors returns. contributed the most towards your returns for the year. Energy, Excess Return vs. MSCI All Country Word Index (Unhedged) - July 1, 2008 to March 9, 2009 materials and banks were amongst 20.0% the leading detractors of value from your portfolio. 15.0%

10.0% n 5.0% s o e i l y t y e

Stock level r n p s s a r s l r l g a a o l s y c a i a t e a i o n a i t e i g l i 0.0% i C r S n o r a c t m r

t o i s i u r e t l e n u h s n e m i

The key contributors to performance t t e e n a s t r l u m c h r a i E n n a o d m U c c i f v

-5.0% m M e o e n u s r F I

continue to include Genentech n o i s H I T C e c D n S e l (considered the pioneers of -10.0% o e C biotechnology) and General Electric (a T large diversified industrial group -15.0% based in the US). Las Vegas Sands, a casino resort company also Excess Return vs. MSCI All Country Word Index (Unhedged) - March 10, 2009 to June 30, 2009 contributed positively. The 30.0% importance of you having access to 25.0% emerging market companies were shown in the contribution BM&F 20.0% Bovespa in Brazil, which is one of the 15.0% largest stock exchanges in the world, 10.0% n

5.0% s o e i

made to your returns. y l y t e r n s s p r s l l r a g s a l o y a a a i

0.0% a e c o e a n t i g i t i l i i r C r t o c a r S

m n t o i i

s e l e t n h s u r u i n m e Potash Corporation (a fertilizer-maker t t n t e a

-5.0% s e u l r h c a r m E i n a U n o d c i c m f v M e o m n e s F r u

based in Canada) was the largest I n i o H I T C -10.0% e s D c S n e l detractor of value. Gazprom (the o e

-15.0% C world’s largest natural gas extractor T based in Russia) and Xstrata (a -20.0% diversified mining group) also detracted, as commodity prices tumbled along with other assets during the year. Page 24 Global Private Assets Commentary

The table outlines the gross performance of MLC Global The MLC’s Private Assets Programme (before fees are deducted). private assets Performance Overview to 5 years 3 years 3 1 year portfolio 30 June 2009 (pa) (pa) months MLC Global Private Assets returned -23.0% 10.4% 5.6% -23.0% -6.7% for the year to Portfolio (hedged) MSCI All Country World Index 2.1% -7.0% -27.5% 18.1% 30 June 2009 on (hedged) a fully hedged restricting investing activity until anaemic growth for a number of years basis, assets prices decline further. This as the US and Europe work their way representing a unusually slow rate of investment through a massive amount of activity has left MLC with almost half “delevering" and addressing other premium of 4.5% its commitments ($1.7billion) in ‘dry serious issues. It is uncertain how powder’ that will be invested through long it will take to return to healthy to public the recessionary years ahead which economic conditions but the better are expected to produce some guess appears to be that it will take a markets (MSCI excellent buying opportunities. considerable period of time. The negative wealth effect in the US has All Country A number of portfolio companies been dramatic and is continuing. World Index appear to be coping satisfactorily with Since mid 2007 US wealth has the global financial crisis and declined $USD13 trillion, the fall in (hedged) subsequent recession with adequate equity prices has drained $30 trillion cash reserves, solid financing of stock market value (55% of global returned -27.5% arrangements, and aggressive cost GDP), and to date $11 trillion from cutting. Companies purchased during residential real estate (20% of global for the year). the earlier periods of the portfolio GDP). have been “delevering” considerably. Global equity markets rebounded Some have taken advantage of Deal activity, while still subdued, during the quarter which has not yet stressed debt markets to repurchase showed some positive signs in the been reflected in private equity their debt at significant discounts. In second quarter. Of particular note, portfolio valuations which typically lag certain cases market shares have IPO markets in the US have shown public markets. increased as competitors are acquired tentative steps to re-opening, with 6 or fail. While trading conditions will venture or buyout backed IPOs over The portfolio experienced valuation continue to pressure underlying the quarter, following two quarters write-downs of approximately 3% for portfolio companies, we believe this with no IPOs at all. In total these six the quarter based on Managers’ period offers excellent opportunities IPOs raised over $830m in new unaudited 31 March 2009 reports. for active investors. capital, the strongest quarter since This is largely due to mark-to-market mid-2007. Although still quite weak in accounting and reflects continued Despite continually gloomy economic volume, this increased activity is difficult trading conditions in Europe data there appears to have been encouraging. Globally, private equity and the US. In addition, European signs of a change in market sentiment deal volume was among the lowest in markets have witnessed continued during the quarter, with World Bank the last decade and lower than the declines in both domestic and external economists predicting a return to first quarter. demand, which is reflected in revenue growth in the US in the second half of declines for portfolio companies. 2009, and China also predicting stronger performance, lending hope to As noted in previous reports, MLC the prospects for a global recovery. benefits from having a diversified However, much of continental Europe portfolio invested over 12 vintage and parts of Asia, particularly Japan, years, with 45 managers, 103 Funds, continue to experience falls in and across a number of geographies industrial production and rapidly and investment strategies. Overall, accelerating unemployment figures. your Managers were generally Economists differ as to the likely disciplined, with some selling portfolio strength of any recovery with a real companies into strong markets and prospect of many countries living with

Your team travelled actively over the The graph shows the portfolio structure as at 30 June quarter, spending time in the US, UK, 2009 based on Net Asset Value and Undrawn Nordic countries and continental Europe meeting with both existing and Commitments. potential new managers. During the quarter the team looked at over sixty potential investments, with thirteen progressing to initial due diligence, Region and Investment Strategy as at 30 June 2009 and seven progressing to full due diligence, including four potential co- investments. Following large volumes USA Growth, 3% of fund-raising activity in both the venture capital space and the buyout Australia Buy-Out, 6% world in late 2008 and early 2009, the USA Buy-Out, 20% second quarter saw a notable Asia Other, 2% USA downturn in managers fund raising, Asia Buy-Out, 3% Venture Capital, which is reflected in these activity 20% levels. The team continues to pursue Europe Other, 1% opportunities within the venture capital Europe Distressed, 1% space, as previously inaccessible USA Distressed, 4% Europe brand-name firms become Europe Venture Capital, Buy-Out, 33% increasingly open to a broader base of 4% liquid and sophisticated investors like USA Other, 1% MLC. Europe Growth, 2% We made one commitment during the quarter to a co-investment. This US based business in the energy sector is backed by one of your most prestigious venture capital managers. Private equity deal activity generally remained quiet during the quarter however MLC commenced due diligence on four other potential co- investments during the quarter. In aggregate, the second quarter commitment activity for 2009 totalled $14 million bringing total commitments for the calendar year 2009 to $146 million. As at 30 June 2009, MLC’s private asset programme invests with 45 managers across 103 funds (including legacy investments).1

1 NAV + Undrawn is arguably a truer indication of portfolio exposure than Commitments as it excludes capital already returned. Page 26 Investment 15 year 10 year 7 year 5 year 3 year 1 year 3 Manager % pa % pa % pa % pa % pa months Gross Total Returns for periods ended 30 June 2009 Australian Share Managers DFA n/a n/a n/a 7.28 -1.75 -20.45 20.18 Appendix:Lazard Asset Table of Investment Management n/a n/a 5.58 2.79 -6.57 -15.81 12.71 ManagerMaple- Brown Returns Abbott 10.80 8.32 6.88 5.57 -2.84 -14.60 15.03 Balanced Equity Management n/a n/a n/a n/a -2.77 -13.54 12.12 Contango n/a n/a 7.81 8.03 -4.66 -22.56 7.30 Concord Capital n/a 10.74 9.88 9.72 -1.12 -12.45 14.11 JF Capital n/a n/a 10.11 10.77 -1.31 -16.47 14.35 Wallara n/a n/a 8.30 7.38 -4.21 -18.30 10.70 Northcape n/a n/a n/a n/a 1.71 -8.64 11.28 Northward n/a n/a n/a n/a n/a -18.53 9.89 Global Share Managers Capital - ACWI 1.99 mandate 7.37 0.12 -1.02 -1.23 -8.53 -19.08 Capital Emerging Markets n/a 7.77 11.11 13.31 3.33 -10.25 15.00 Wellington n/a n/a n/a n/a -10.21 -21.93 5.79 Walter Scott n/a n/a n/a n/a -4.11 -4.06 1.40 Harding Loevner n/a n/a n/a n/a n/a n/a 4.62 Sands Capital n/a n/a n/a n/a n/a n/a 16.45 Mondrian n/a n/a n/a n/a n/a n/a 3.12 Tweedy Browne n/a n/a n/a n/a n/a n/a 3.07 DFA - Composite n/a n/a n/a n/a -9.75 -15.57 13.99 LTAR Managers Insurance Related 5.71 -0.05 Investments n/a -Nephila (Hedged) n/a n/a n/a n/a Goldman Sachs -58.76 17.44 -13.28 Commodities n/a n/a n/a n/a Ruffer (Hedged) 2.82 n/a n/a n/a n/a n/a n/a Note all total returns quoted above are before the deduction of fees & taxes and are to periods ended 30 June 2009.

MLC Investment Management

For more information call MLC on 132 652 8am-6pm EST Monday to Friday, or contact your financial adviser. For details on MLC’s range of products and services visit our website mlc.com.au