<p>MLC Horizon 2 - Income Portfolio MLC Annual Review June 2009 </p><p>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.</p><p>Page 2 Contents</p><p>MLC Investment Management Team Recent Activity 5 MLC Investment Management Team Recent Comments, Updates and Articles 6 Market Overview 7 MLC Horizon 2 Income Portfolio 10-14 Cash Commentary 15-17 Diversified Debt Commentary 18-21 Australian Real Estate Investment Trust Commentary 22-25 Global Real Estate Investment Trust Commentary 26-29 Global Share Commentary 30-32 Global Private Assets Commentary 33-34 IncomeBuilder Commentary 35-38 Appendix: Table of Investment Manager Returns 39-40</p><p>Page 3 Page 4 This review provides insights on the performance of MLC Horizon 2 Income 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. </p><p>Page 5 MLC Investment Management Team Recent Activity</p><p>MLC Horizon 1 and MLC During July we moved the cash Horizon 2 to invest in investments for MLC Horizon 1 Bond enhanced cash Portfolio (30%) and MLC Horizon 2 Capital Stable/Income Portfolio (9.8%) Over recent months, MLC has been from cash to the enhanced cash conducting a detailed review of the strategy managed by NSIM. There is debt securities strategy. Although the no fee impact resulting from this review has not yet been finalised, we change. took the opportunity to implement one of the changes during July. We will provide more updates as the review progresses over coming In late 2008 MLC reduced the risk months. exposures of our cash strategies to better meet the needs of investors with a low risk profile. Since this time, Manager meetings and all new investments in the cash reviews strategies have been restricted to Over the past 12 months, MLC bank deposits or discount securities Investment Management has maturing within three months, issued undertaken 529 manager meetings. by either the 4 major Australian banks The broad asset class breakdown of or other licensed banks rated A-1 or these manager meetings is outlined in better. the below chart. After reviewing the risk/return requirements of our diversified 160 portfolios that also invest in cash - i.e. 140 MLC Horizon 1 Bond Portfolio and 120 MLC Horizon 2 Capital Stable/Income 100 Portfolio - MLC has chosen to move to 80 an enhanced cash strategy within 60 these portfolios. 40 20 National Specialist Investment 0 Management (NSIM), our existing cash manager, has successfully managed an enhanced cash strategy since 2007. The enhanced cash strategy allows NSIM greater flexibility to target a higher level of excess return, than they are able to within standard cash portfolios, by opportunistically allocating to both interest rate and credit risk, subject to overall portfolio exposure limits. The enhanced cash strategy can invest in a greater range of high quality debt securities than the existing cash strategy. This is important in an environment where there are opportunities for managers to take advantage of unusually attractive pricing in high quality securities that are now excluded from the cash strategy. The investment guidelines for the enhanced cash strategy are conservative in terms of both credit and duration exposures, ensuring that capital preservation remains the overriding focus of the investment strategy.</p><p>6 MLC Investment Management Team Recent Comments, Updates and Articles seriously, to ensure we provide the effect of banking crises on Your investment our investors with daily access to developed and emerging specialists their unit linked funds. To ensure economies. we can provide this access, MLC regularly has a formal approach to the  Don't forget to have a look at the assessment of liquidity and Marketwatch site for an update on produce equitable pricing. For more the impacts of the financial crisis commentary and information on this issue please and economic downturn on recent refer to MLC’s White Paper income distributions for the MLC articles on entitled: ”Liquidity and Equitable MasterKey Investment Trust, Unit Unit Pricing – March 2009”. Trust and Investment Service and topical helping clients through tough The Lottery Effect of Volatility – times. investment MLC does not believe volatility issues. These should be seen as the definitive measure of risk. Risk, to clients, is are available on the likelihood they will not achieve their financial objectives. mlc.com.au However, the dispersion of returns (volatility) does impact whether Some of our recent updates include: clients achieve their financial  A fully scripted ‘Performance objectives. This paper examines Preview Pack’ for the year ended the contribution the dispersion of 30 June 2009 to help facilitate returns has on outcomes. more meaningful client  MLC Investment Management’s conversations around fund views and analysis on 7 year performance in challenging return potential for asset classes market environments, The pack and the range of MLC’s diversified “lifts the lid” on the key drivers of portfolios has been updated to the current economic reflect end June 2009 market environment, how this has valuations. affected investment markets and what this means for your clients.  Amanda Heyes, MLC Investment Specialist, puts 'The Chaser'  A summarized client friendly under the microscope and finds commentary on the key drivers of that the power of compound performance for the range of MLC interest over long periods of time Multi-Manager funds over the year can have an incredible impact on to June 2009 is on the client your clients wealth. MarketWatch site.  Traditional portfolio construction  The recent financial market chaos approaches have been under and plunge in liquidity of credit intense scrutiny throughout the assets has helped focus recent financial crisis. In his article mainstream attention on the risk - The do's and don'ts of portfolio posed by exposure to illiquid construction, John Owen, Senior assets. This is particularly Investment Specialist for relevant to many Australian Australian shares and global Superannuation investors in property provides some insights Industry Super funds with a high on how NOT to make the same degree of illiquid exposure (eg mistakes. Direct property, Infrastructure and private equity).  Kerry Napper, MLC's Capital Markets Research Analyst, looks MLC has always taken the issue at what history can tell us about of liquidity and equitable pricing Page 7 Market overview Comments by Brian Parker</p><p>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 The chart shows both the steep declines in Australian 2008 quarter. Corporate bond spreads widened dramatically, and world share prices during the last half of 2008, and particularly after the failure of the US also the solid recovery that has occurred since early investment bank Lehman Brothers in mid-September 2008. Deflation fears March 2009 in the case of the developed markets and meant that markets had little interest October 2008 in the case of emerging share markets. in inflation protection, and consequently inflation protected securities also performed extremely Selected share price indices poorly. End-June 2008 equals 100 110 However the unbridled pessimism that 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 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 has been sharply higher share prices, higher commodity prices, much tighter credit spreads and higher Australia Developed markets Emerging markets Government bond yields. Economic conditions in the world Hopes that the major emerging economy deteriorated over the course market economies of China and India of the year. All the world’s major housing construction – spurred on by could sail through this crisis relatively developed economies are now firmly extremely low interest rates, and the unscathed appear to have been ensconced in recession. In the case of Government’s grants to first home dashed. Chinese growth in particular Japan and the UK, the recession is as buyers. However, we have yet to see slowed significantly – industrial output severe as any in living memory. the full effect of the global recession growth fell to its slowest pace in a on exports or business investment. decade. However, more recent data Here in Australia, economic growth Moreover, every leading indicator of out of China suggest that some pick- has slowed to a crawl over the past up in growth may be underway. year, and the economy has almost employment is pointing to sharply certainly fallen into recession, despite higher unemployment rates over the the fact that economic data released coming year. in recent months have tended to surprise on the upside. Retail spending seems to have been supported by the Government’s cash hand-outs. Housing finance has picked up – particularly for new Page 8 Trade and production data in some of system, the US Treasury and Federal In response, the world’s monetary the world’s most trade dependant Reserve engineered a bail-out of the authorities stepped up their injections economies – including Japan, non- institution by JP Morgan, under which of liquidity and asset purchases. Later Japan Asia, and Germany – have the business of Bear Sterns was in the year, further capital injections been notably worse than elsewhere in absorbed into JP Morgan, and the were made into US banks by the US the last few months. Much of this troubled assets of the institution were Treasury, and by year’s end, the weakness appears to reflect the taken on and guaranteed by the major US car makers were in line for collapse of trade finance activity, and Federal Reserve. In the wake of that emergency funding from the same indeed world trade, in the wake of the operation, market participants felt that program that had been set-up to aid Lehman Brothers failure (see charts the rules of the game were reasonably troubled financial institutions. below). There remains considerable clear: viz, any institution that occupied President Obama’s much anticipated debate as to whether the Lehman such a pivotal position in the system $789 billion stimulus package passed Brothers failure represents an would have the support of US through the US Congress in February. unavoidable consequence of the Treasury and Federal Reserve if it Additionally, a $275 billion housing financial crisis or a policy blunder. We faced difficulties. As a consequence, plan aimed at preventing foreclosures lean towards the latter interpretation. market participants felt relatively and attempting to stabilise the confident in acquiring the short-term housing sector was introduced. The chart shows industrial debt obligation of such entities, continuing to utilise them as During the past year, policymakers output in less trade counterparties for a range of have continued to take steps to address this crisis that are dependant economies: transactions, and holding their equity. By allowing Lehman to fail, the rules unprecedented in both their nature of the game appeared to collapse, and scope. Fiscal policy measures and with it, confidence in the system. have been taken in many countries, including here in Australia. The The failure of Lehman Brothers world’s central banks have reduced followed a period where key US official interest rates aggressively, and institutions such as the investment injected huge amounts of liquidity into bank Merrill Lynch, the world’s largest the financial system in a bid to get In insurer AIG, and key US mortgage money and credit markets working lenders Fannie Mae and Freddie Mac again. These efforts are critical, had been taken over, nationalised, or because in the absence of properly sent into bankruptcy. Institutions in the functioning markets for credit, and UK and Europe have faced similar financial institutions willing to lend, difficulties. It is now clear that during traditional monetary policy is close to the aftermath of the Lehman Brothers impotent, and generating a The chart shows industrial failure, the world financial markets sustainable recovery in private and economy stood on the edge of an demand will be close to impossible. output in highly trade abyss. Flows of credit that are the lifeblood of the world economy in At the time of writing, conditions in dependant economies: many cases ceased. For exporters money and credit markets have and importers, trade finance was continued to improve, although they extremely difficult to obtain. Corporate have yet to return to anything that debt markets became dysfunctional, might be described as normal trading and in the case of high yield conditions. Share prices, while still securities, there was no market to sharply higher than their recent lows, speak of. Interbank lending markets have fallen across the globe. While were severely restricted, and cost of there has been some improvement funding for the world’s banks soared. evident in the economic data released across the world so far this year, the recession is far from over. Share markets seem to have gotten ahead of themselves in the latter stages of the financial year, and consequently, their partial retreat appears entirely justified. March 2008, another US investment bank, Bear Sterns, was facing failure, and because of the institution’s pivotal role in the US and global financial Page 9 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.</p><p>Page 10 MLC Horizon 2 Income Portfolio</p><p>The MLC Horizon Series of portfolios is designed as a complete solution to meet an investor’s financial goals, and are focussed on growing real wealth MLC Wholesale Income Portfolio for an expected level of risk. The portfolios are well diversified within Global asset classes, across asset classes Global and across investment managers, Cash shares shares who invest in many companies and 10% unhedged) (hedged) securities around the world. Income 4% 1% Builder In building the MLC Horizon Series, Global 12% we won’t chase risky returns when property markets are very strong, which may securities temporarily result in a lower return (hedged) than comparable funds that do. At A-REITs 4% other times, and particularly when 9% markets are weak, we expect each Diversified Portfolio to have higher returns than Debt comparable funds. 60%</p><p>The MLC Horizon *The actual asset allocation may be adjusted +/-5% around this target. The rebalancing range is +/-2% around the target. 2 Income Target Asset Allocation* Portfolio may be suited to you if you want a regular income stream with some tax advantages, a high exposure to defensive assets, and some potential for capital growth over the medium term. The portfolio’s expected volatility is low.</p><p>Page 11 How we design investment solutions Recent Example of this in action to grow and protect your clients’ wealth</p><p>We design solutions based on investors’ Your high allocations to cash (~10%), and short dated Australian fundamental needs to grow wealth over the nominal bonds (~25%), provided some capital protection against the long-term. share market decline of 2008. Your 30% exposure to global and Australian shares contributed positively to returns in 2009 due to the strong rally in world share markets. This broad diversification helps limit the declines in portfolio value in adverse environments.</p><p>We manage the risk in your portfolio by building You access property via a combination of $AUD hedged global REITS thoroughly diversified portfolios at every level – and A -REITs. asset class, country, currency, industry, Your active global REIT strategy significantly outperformed the market company and manager. over the year, thanks to strong stock selection from 2 of your 3 managers. For example, Resolution Capital outperformed the Global REIT market by 15%. One example of Resolution’s strong stock selection was Unibail- Rodamco, which accounts for 4.6% of your global REIT strategy. Resolution Capital has invested in this REIT since 2007, on the basis that unlike many REITs, Unibail-Rodamco has a conservative balance sheet, with a 26% Loan to Valuation (LTV) ratio and a strong earnings per unit and distribution per unit outlook. Unibail-Rodamco is the largest commercial REIT in Europe with 100 shopping centres in 13 European countries, office properties located mainly in the Parisian CBD and over ten convention/exhibition venues. It has a property portfolio valued at €24.6 billion at December 31, 2008.</p><p>You access exceptional investment managers Your 12% exposure to Australian shares is via the MLC IncomeBuilder in the world who carefully invest your money in strategy. Your active manager, Maple-Brown Abbott (-6.3%) strongly the right businesses and assets. outperformed the S&P/ASX300 Industrials Index (-14.3%) over the year. During the year, Maple-Brown Abbott used market circumstances to participate in selected equity raisings by quality companies, often at historically cheap prices. For example, BlueScope Steel made a rights issue in May 2009 at a price of $1.55 per share, an all time low since listing in July 2002. As of 21st July 2009, the stock was trading at $2.83, a gain of 82%. In May alone, Maple-Brown Abbott invested over $27 million in share issues by BlueScope Steel, ANZ (issued at $14.40, share price on 21st July was $16.84) and Stockland (issued at $2.70, share price on 30 June was $3.09). </p><p>We keep your investment goals on track MLC regularly reviews all strategies, but in light of the past year there because we actively manage your portfolio to is an even greater focus on whether the strategy can be improved. An stay true to its original intent. outcome of the defensive strategy review (which is still continuing) is the Fund should provide even better capital preservation in future credit crunches.</p><p>Page 12 Executive Summary 2009 has provided some welcome The table outlines performance of MLC Horizon 2 – respite from the rapid decline in asset values experienced in calendar year IncomePerformance Portfolio. 2008. Every major share market Overview to 30 June 3 3 rallied strongly between March and 2009 5 years years 1 year months June 2009. Unfortunately, this was MLC Wholesale Horizon 2 insufficient to eliminate the losses of N/Av 0% pa -4.4% 5.5% the prior calendar year. – Income, net performance Median (Mercer IDPS Multi- As most of your portfolio was invested N/Av 0.8% pa -2.7% 4.1% in cash (~10%) and short dated highly Sector Conservative) rated bonds (~60%), this provided Quartile Ranking (Mercer some protection from the ravages of IDPS Multi-Sector N/Av 3rd 3rd 1st global sharemarket declines in the Conservative) second half of 2008. As interest rates declined significantly over the year, Percentage of time rolling this had a positive effect on the return above Median (since N/Av 0% 23% N/Av market value of the bonds which was inception) passed through in your income  Returns for this period are for the MLC IDPS – Horizon 2 Income Portfolio which commenced distribution. January 2006. The flight to quality assets in the last  The net return quoted is sourced from Mercers Retail software where the administration fee quarter of 2008 also had a positive has NOT been deducted. impact on the value of these bonds. The portfolios’ low exposure to shares and listed property (approximately 30% of the portfolio) meant the adverse impact of falling share values and dividends was muted. However, your one year return to June 2009 remains in negative territory. </p><p>Page 13 Contributors to returns The graph showsContributors the rolling 1 and 3 year Detractors  Some capital protection from 3 yearsreturns Excess of the returns MLC from Horizonyour MLC 2 – Income No exposure to the Australian your 10% allocation to cash PortfolioIncomeBuilder (for MasterKey strategy (-4.1%), IDPS with ) versusResources the sector (+1.6%) which (+5.4%) and 60% exposure to Maple-Brown Abbott (-3.3%) strongly outperformed Industrials (- predominantly short dated Mercer outperformingmedian managerthe S&P/ASX30 to0 30 June6.5%) 2009. over 3 years to June 2009. This is bonds (+5.3%). Industrials Index (-6.5%) by a in line with the fund’s primary objective substantial margin.MLC Wsale - Horizon 2 Income to provide a regular income stream with Excess Return in IDPS Multi-Sector Conservative from Dec 2006 to Jun 2009 MLC0670AU versus Median (before tax and after fees) some tax advantages.  Excess returns from your MLC 4.0% IncomeBuilder strategy (-8.4%),  Relatively lower exposure to cash and with Maple-Brown Abbott (- 3.0% Australian government bonds detracted from peer relative returns over 3 years, 6.3%) outperforming the 2.0% S&P/ASX300 Industrials Index with both sectors outperforming inflation 1.0% linked bonds and the credit sectors. )</p><p>(-14.3%) by a substantial a p % (</p><p> n r u</p><p> margin. t 0.0% 1 year e  Market outperformance in your A-REIT  Despite the rally of the June quarter, the R</p><p> s s e c</p><p> x (-36%) and global REIT strategy (-37%). relatively higher exposure to inflation E  Excess returns in your A- REIT -1.0% linked bonds and the extended credit strategy (-36%) driven by sectors detracted from peer relative -2.0% Resolution (-37%) and returns over the year.</p><p>Challenger’s (-36%) -3.0% outperformance relative to the 3 month  Although there is usually little point  Yields on Australian inflation linked -4.0% focussing on 3 month returns, the June securities rose in the June quarter, S&P/ASX300 A-REIT Index (- Dec 2006 Mar 2007 Jun 2007 Sep 2007 Dec 2007 Mar 2008 Jun 2008 Sep 2008 Dec 2008 Mar 2009 Jun 2009 quarter deserves a mention because of because the market expects the 42%). 12 Month Rolling Excess Return 3 Year Rolling Excess Return Data Source: Morningstarthe sharp turnaround in investor government to issue more of these preferences. The debt sectors that were securities. This pushed the market value Detractors from returns poorly performing after Lehman’s of existing CPI bonds down. MLC has a collapse had a massive up-swing in the higher strategic exposure to CPI bonds  The key detractor was the last few months of the year. than many competitors so this was a net (~30%) exposure to Australian  As investors became more comfortable detractor from quarterly returns. and global shares which, despite with the prospect the economy may not the rally of 2009 declined be in free fall, they had a renewed sharply over the year. appetite for risk. Higher credit risk debt securities were seen to be better value than cash and government bonds which Peer relative returns have a relatively low yield. As investors The graph on the right shows the moved money into higher credit risk, rolling 1 (blue) and 3 (red) year prices of higher risk securities rose, returns of the MLC Horizon 2 – further reinforcing positive sentiment. Income Portfolio (for MasterKey MLC maintained the small strategic exposure to these sectors and investors IDPS ) versus the Mercer median benefited from the rally. manager (the horizontal axis). If the coloured lines are above the horizontal line, the portfolio has outperformed the median manager and vice versa. Due to the short life of The main drivers of this this fund – inception date is December relative performance 2006 - no reliable consistency have been: statistics can be calculated for the longer time periods. The fund outperformed the median 23% of the time over rolling 1 year periods. Performance has marginally lagged the median manager. Most of this lag is due to differences in asset allocation. The portfolio has a lower allocation to cash and short dated Australian bonds than peers, which adversely affected peer relative performance for much of the recent market downturn. Page 14 Cash Commentary</p><p>The MLC Cash Fund is expected to perform in line with the UBS Bank Bill Executive Summary Index before fees and taxes are deducted. The Fund is designed to be  Cash, being the lowest risk a complete portfolio for the cash asset strategy, has weathered the storm class, and aims to deliver growth by from the global financial crisis. using investment managers who invest and diversify across many  The problem facing cash investors companies and securities within the going forward is cash rates have cash asset class. been more than halved over the past year. The official cash rate is The MLC Cash Fund is chosen for its safety and low risk status. Therefore now only 3%. MLC’s Cash Fund is focused on  Over recent months, as debt investing in assets with a high credit securities markets have started to quality and high levels of liquidity. return to some normality, the market has raised its expectations for future cash rates.</p><p>The table outlines performance of MLC MasterKey Investment Service Fundamentals – Cash Fund. Performance Overview to 30 5 years 3 years 1 year 3 months June 2009 (pa) (pa) MLC MasterKey Investment Service 5.1% 5.3% 4.6% 0.4% Fundamentals – Cash Fund</p><p>UBS Bank Bill Index 6.1% 6.4% 5.5% 0.8%</p><p>Median (Mercer Retail – Retail Trusts 5.1% 5.3% 4.4% 0.6% Short Duration - Cash)</p><p>Page 15 The graph shows the rolling 1 (blue) and 3 (red) year returns Absolute and Market of the MLC Cash Fund (for MasterKey Investment Service) to Relative Returns 30 June 2009.</p><p>Cash, being the lowest risk strategy, MLC MK IS/UT - Cash Return in Retail Trusts Short Duration from May 1985 to May 2009 has weathered the storm from the MLC0011AU (before tax and after fees) global financial crisis. The problem 18.0% facing cash investors going forward is cash rates have been more than 12.0% halved as the government attempted to improve liquidity in the markets 6.0% ) a</p><p> after they seized up following Lehman p % ( 0.0% n r</p><p>Brothers’ collapse in September 2008. u t e R</p><p>The Reserve Bank of Australia rapidly -6.0% cut the official cash rate from 7.25% to 3.0% over the course of the year with a massive 4% being slashed in the -12.0% months following the failure of -18.0% Lehman Brothers. Your cash return May 1985 Feb 1987 Nov 1988 Aug 1990 May 1992 Feb 1994 Nov 1995 Aug 1997 May 1999 Feb 2001 Nov 2002 Aug 2004 May 2006 Feb 2008 for the last year includes the higher 12 Month Rolling Return 3 Year Rolling Return cash rates you were earning before Data Source: Morningstar the rate cuts. This “higher” return does not reflect the potential return from cash over the coming year as the The graph shows the Australian govt bond yield curve. official cash rate is now low yielding at 6.00 only 3%. 5.52 5.63 5.22 5.00 Over the last few months, as debt 4.56 securities markets have started to 4.00 4.01 return to some normality, the market has raised its expectations for future 3.00 3.00 cash rates. The graph on the right shows the Australian government 2.00 bond yield curve at 30 June 2009. It 30/06/2009 provides an indication of the market’s 1.00 expectation for interest rates over various time frames. You can see the 0.00 current cash rate is 3% and the 2 year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 bond rate is 4.01%. In other words, at Years 30 June 2009 the market expected cash rates to rise to around 4% over the next 2 years. The graph shows the rolling 1 (blue) and 3 (red) year returns of the MLC Cash Fund (for MasterKey Investment Service) You should consider that the yield versus the Mercer median manager to 30 June. curve changes over time as it is based If the coloured lines are above the horizontal line, the portfolio has outperformed on the market which is re-valued the median manager and vice versa. constantly. MLC MK IS/UT - Cash Excess Return in Retail Trusts Short Duration - Cash from May 1985 to May 2009 MLC0011AU versus Median (before tax and after fees) The graph on the right shows returns 3.0% relative to peers. Because cash is an inherently conservative asset class, 2.0% there is little opportunity to generate excess returns. That’s why there is 1.0% ) a</p><p> negligible difference between your p % (</p><p> n r u fund and the median manager’s t 0.0% e R</p><p> s s e returns. c x E</p><p>-1.0%</p><p>-2.0%</p><p>-3.0% Page 16 May 1985 Feb 1987 Nov 1988 Aug 1990 May 1992 Feb 1994 Nov 1995 Aug 1997 May 1999 Feb 2001 Nov 2002 Aug 2004 May 2006 Feb 2008</p><p>12 Month Rolling Excess Return 3 Year Rolling Excess Return Data Source: Morningstar The graph shows the manager’s excess returns to 30 Your Managers June 2009. National Specialist Investment Manager Excess Returns Management, the manager appointed % pa by MLC to manage cash, actively 2.0% manages the Fund using a tightly risk controlled investment process. That’s 1.5% why excess returns are minimal. 1.0%</p><p>0.5%</p><p>0.0%</p><p>-0.5%</p><p>-1.0%</p><p>-1.5%</p><p>-2.0% NSIM (MLC super and pension products) NSIM (MasterKey Investment Service)</p><p>3 years 1 year</p><p>Page 17 Diversified Debt Commentary</p><p>Executive Summary: The table outlines the performance of the MLC Horizon 2  One year returns still reflect the Income Fund Diversified Debt Strategy. aftermath of the sharp rise in yields on higher credit risk Performance Overview to 30 5 years 3 years 3 mths 1 year securities (credit spreads) after June 2009 (pa) (pa) Lehman Brothers collapsed in MLC Super Horizon 2 Diversified September 2008. At this point, 6.1% 5.6% 5.2% 1.6% yields on securities with any Debt credit risk “blew out” as the Customised Index 6.3% 6.3% 7.0% 0.8% market anticipated a massive rise in defaults. Credit risk is MLC Wholesale Horizon 2 6.1% 5.7% 5.3% 1.3% most pronounced in the global Diversified Debt bank loans, real return strategy and global high yield sectors. Customised Index 6.3% 6.3% 7.1% 0.6% Remember that when yields are Note: Customised indices are calculated by MLC Investment Management based on the strategic rising, the prices of the securities allocations to the underlying debt sectors. are falling which is reflected in The difference between the Super and Wholesale performance is an allocation to global alternative debt the negative returns. within the super strategy.  Although there is usually little point focussing on the last  The one year return for the The MLC Diversified Debt Strategy quarter of returns, the June quarter Strategy is positive so it is aims to deliver growth by using deserves a mention because of the providing you a small buffer to investment managers who invest and sharp turnaround in returns. The the negative returns in shares diversify across many companies and debt sectors that were poorly and property. But it is still securities within the debt asset class. performing after Lehman’s behind the market collapse had a massive up-swing benchmark. MLC tailors its debt strategies across in the last few months of the year. the MLC Horizon portfolios for interest Still not enough to bring all the 1  The Strategy’s position relative to rate risk, inflation risk, credit risk, year returns back into positive peers, and the market, that hurt currency risks, and the level of territory, but it certainly helped. performance after Lehman’s domestic assets. The debt strategy for collapse, have helped over the last MLC Horizon 5 – Growth Portfolio is  There are still obstacles that need quarter - overweight to credit risk focussed on real capital preservation to be overcome before we are “out (and underweight to government and has higher return seeking of the woods”. And a prolonged securities) and overweight to strategies. The debt strategy for MLC period of positive indicators must global nominal bonds (and Horizon 1 – Bond Portfolio is focussed happen before confidence in a underweight to Australian). on nominal capital preservation, with a turnaround really can be given any Likewise the positions of your low volatility risk return outcome. The credibility. It is certainly heading in managers have helped over the debt strategies for the rest of the MLC the right direction though with debt last few months, although 1 year Horizon portfolios is a graduated mix markets starting to return to normal excess returns are still weighed of these two book-ends. conditions. down by the months of  underperformance late in 2008.  An outcome of the debt strategy review (which is still continuing) is to provide you with greater diversification relative to shares in future credit crunches - we won’t ride the wave down and then back up as we have in the last year.</p><p>Page 18 Absolute & Market Relative Returns The graph shows returns of the different One year returns still reflect the types of debt to 30 June 2009. aftermath of the sharp rise in yields on higher credit risk securities (credit spreads) after Lehman Brothers Sector Strategy Returns collapsed in September 2008. At this % pa point, yields on securities with any 15.00% credit risk “blew out” as the market anticipated a massive rise in defaults. Credit risk is most pronounced in the 10.00% global bank loans, real return strategy and global high yield sectors. Remember that when yields are 5.00% rising, the prices of the securities are falling which is reflected in the 0.00% negative returns. Australian Australian Australian Global Nominal Global Nominal Global High Global Real Return Global Bank Nominal Bonds Nominal Bonds Inflation Linked Bonds (short) Bonds (all) Yield Debt Diversified Debt Strategies Loans Yields on Australian inflation linked (short) (all) Securities securities have also risen because the -5.00% market expects the government to increase issuance (supply) of these securities, pushing prices down. -10.00%</p><p>Solid returns in Australian and global 3 yr returns 1 yr returns nominal bonds prevented the Fund There are still obstacles that need to from producing a negative return this be overcome before we are “out of the past year. Within these sectors As investors became more woods”. And a prolonged period of Government nominal bonds were the comfortable with the prospect the positive indicators must happen best performers due to their virtual economy may not be in free fall, they before confidence in a turnaround “risk free” status. Cash was also one had a renewed appetite for risk. It really can be given any credibility. of the best performers but the Fund didn’t take long for the value of higher doesn’t have a strategic exposure to credit risk debt securities compared to cash because of its longer-term return low yielding cash and government It is certainly seeking focus. bonds to be realised. As investors put their money to work, pushing up the heading in the Although there is usually little point prices of higher risk securities, it focussing on the last quarter of further reinforced positive sentiment. right direction returns, the June quarter deserves a Credit spreads have narrowed and though with debt mention because of the sharp are at a similar level to a “normal” turnaround in returns. The debt credit crunch, such as the previous markets starting sectors that were poorly performing one in 2002. after Lehman’s collapse had a to return to massive up-swing in the last few What may be a little surprising is that months of the year. Still not enough to the strong rebound in high yield debt normal bring all the 1 year returns back into is occurring at a time when company positive territory, but it certainly defaults on loans are at record high conditions. helped. levels. It’s just that the market had previously priced in much higher Your one year return for the Strategy default rates. Late in 2008, the market is positive so it is providing a buffer to had expected default rates to be as the negative returns in shares and bad, or worse, than the Great property. Depression.</p><p>Page 19 The graph shows manager excess returns to 30 Your Managers June 2009. The positions of your managers that Manager Excess Returns hurt returns relative to market % pa benchmarks have all helped over the 4.00% last quarter. Unfortunately, the rebound in recent months was not 2.00% enough to recover the underperformance following Lehman 0.00%</p><p>Brothers collapse. That’s why some of -2.00% the 1 year excess returns are improving but many are still quite -4.00% some way behind their benchmarks. -6.00% The main causes of the underperformance for the year are: -8.00% BlackRock Bridgewater NSIM NSIM Oaktree PIMCO (real UBS UBS W.R. Huff Oaktree (global (real return (Australian (Australian (global high return seeking (Australian (Australian (global high Capital nominal seeking nominal inflation linked yield debt) strategies) nominal inflation linked yield debt) Managent  Bridgewater is one of the real bonds) strategy) bonds) securities) bonds) securities) (global bank return strategy managers, and has loans) the flexibility to move in and out of the different types of debt. The last 3 years 1 year year has not been a good one for Data shown has not had fees or taxes deducted. Bridgewater relative to their benchmark. Bridgewater’s “depression gauge” switched on during October which resulted in  NSIM had some credit exposures them moving their strategy to a in their Australian inflation linked Now that prices have started to very prudent one in which credit securities portfolio which hurt. improve, your investment managers in risk was removed and their general, have started to reduce commodities exposure was Oaktree, manager of global bank exposure to sectors and issuers that invested in gold. In May they loans for MLC’s super and pension now have a reduced “margin of reintroduced some risk back into products, has produced strong safety” should economic conditions the portfolio but are still managing outperformance in a sector that was deteriorate in future - helping protect a strategy which is cautious sold down aggressively due to its your returns in an unfavourable relative to their “normal” strategy. “higher credit risk” status. The bank environment. Their timing of both portfolio loan market rebounded this quarter moves was poor. Bridgewater’s and 22% of the loans have already The 3 year returns are in a much view is distinctively different from been repaid at face value. tighter range because the extreme PIMCO’s, the other real return returns experienced over short manager, and highlights the Also positive was the performance of periods tends to be diluted or offset importance of getting Oaktree (global high yield debt), NSIM over longer periods. diversification of views from (nominal bonds), PIMCO and UBS different managers in your (nominal bonds) who all managed to portfolio. exceed their market benchmarks. They have done well in a very tough  BlackRock, NSIM and PIMCO environment. were all overweight Financials which, in hindsight, was the sector to avoid.  PIMCO and BlackRock also had exposure to Mortgage Backed Securities which have underperformed.</p><p>Page 20 High yield stock story The graph shows WR Huff’s calculation of interest Texas Competitive Electric Holdings coverage which is in sharp contrast to the market Company LLC (TCEH) issued a bond which has a coupon (interest rate) of pricing of the bond. 10.25%pa and matures in 2015. WR TCEH bond's market price vs interest coverage (EBITDA/Interest) Huff hold this security as a part of its 2.00x 100 high yield debt mandate (in all MLC’s 95 debt strategies). 1.80x 90</p><p>TCEH is a successful power producer. 85 e e c i g</p><p>It is the 2nd largest deregulated power r a 1.60x 80 p r</p><p> e t v generator in the US. It has relatively e k o r</p><p> c 75</p><p> a t</p><p> steady operating cash flow due mostly s m</p><p> e r d</p><p> e 1.40x 70 n to the consistent demand for power in t o n I B Texas where it’s generating facilities 65 are located. It also has a rolling 5 year hedge on more than 80% of its 1.20x 60 baseload generation. It also has no 55 significant debt maturities in the next 1.00x 50 few years. Dec'07 Mar'08 Jun'08 Sep'08 Dec'08 Mar'09 Jun'09 Sep'09 Est. Dec'09 Est. Mar'10 Est. Interest Coverage 10.25% '15 Bond Price The forced selling of high yield securities following Lehman Brothers’ collapse caused the price of the bond in MLC’s portfolio to fall sharply and Despite the market pricing WR Huff its yield rose. Bonds are liquid and continued to believe the bond was therefore when market participants “money good” and TCEH continued to were forced to sell, to meet operate as normal and honour interest redemptions, they sold the liquid payments. securities, artificially pushing the price The MLC Diversified Debt Strategy down. TCEH securities are often used continued to receive the 10.25% to hedge the high yield bond market interest coupon through all the market so when the market was bearish, turbulence and, if WR Huff hold until TCEH securities were shorted which its maturity in 2015, the interest will further depressed the price. continue to be received and the face value will be received at maturity. However, as your fund is marked-to- market the market’s pricing of the bond is reflected in the unit price. Hence the apparently volatile returns of the Fund. Despite some rebound in the price since February, because the price is still so low, the yield on the TCEH bond (calculated as the interest divided by the market value of the bond) is now more than 20% for new investors in the Fund.</p><p>Page 21 Australian Real Estate Investment Trust Commentary</p><p>The MLC Australian Real Estate Investment Trust (“AREIT”) strategy is The table outlines the performance of the MLC Australian expected to outperform the S&P/ASX REIT Strategy. 300 AREIT Accumulation Index Performance Overview 3 mths (market benchmark) over rolling 5 5 years 3 years 1 year year periods. However, as part of our to 30 June 2009 focus on growing your wealth, we MLC Australian REIT won’t chase risky returns when -5.1% pa -18.4%pa -36.2% 16.8% markets are very strong. This means Strategy (Gross) your returns are likely to lag or S&P/ASX 300 AREIT -8.6% pa -23.1% pa -42.1% 16.2% underperform the benchmark return in Accumulation Index strong markets. At other times, and MLC Wholesale Property particularly when markets are weak, -5.8%pa -18.9%pa -36.5% 16.9% we expect to outperform the market’s Securities Fund (Net) return. Median (Mercer Retail IDPS – Australian Property -8.2% pa -21.8% pa -39.7% 15.1% Executive Summary: Securities)  The AREIT market staged a Quartile (Mercer IDPS 1st 1st 2nd 1st substantial recovery late in the Property Securities) year with four consecutive months of positive returns recorded Percentage of time above through to June. The market Median (IDPS universe, since 31 34 40 n/a increased 38.6% from its March 9 inception) low through to the end of the year. Note: Inception is February 1998. While this performance revival is both welcome and encouraging, the one year return of the AREIT market (-42.1%) still remains deep in negative territory.  The MLC AREIT strategy returned -36.2% for the year, which is 5.9%  A notable feature of the market better than index. While you are no has been the magnitude of new doubt disappointed with the capital ($14.8 billion) that was magnitude of the negative return raised during the year, the most in from your investment in this Fund, the sector’s history. As a result, the two managers appointed by many REITs have managed to MLC on your behalf delivered improve and underpin their returns considerably better than financial position though others are index, cushioning your return expected to need to raise more versus index. capital. While this is a good outcome, the sector remains very concentrated with Westfield accounting for 45% of sector value and the Top 5 REITs, 81%. Investors reliant on the sector for income should also be aware that the enormous amount of new shares that have been issued will dilute future distributions. </p><p>Page 22 Market Relative Returns The graph shows how well the MLC Australian REIT This graph shows how well the MLC strategy has performed compared to the market index Australian REIT strategy has performed compared to the market (“gross excess return”) to 30 June 2009. index (“excess return”). Excess returns are shown on a rolling 1, 3 8.0 and 5 year basis, rolling through time 6.0</p><p>* 4.0 x</p><p> from periods back to 1994 through to e d n i</p><p>2.0 30 June 2009. The return of the f o</p><p> s</p><p> s 0.0 market index is represented by the e c x e</p><p>-2.0</p><p> intersecting horizontal line. This n i means that if the rolling excess return % -4.0 line is above the horizontal line, the -6.0 strategy has “outperformed” the index, -8.0 9 0 1 2 3 4 5 6 7 8 9 9 0 1 2 3 4 5 6 7 8 0 0 0 0 0 9 0 0 0 0 0 0 0 0 0 0 9 0 0 0 0 ------n n n n n n n n n n n c c c c c and vice versa. This is a better way 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 for you to assess the returns you are D D D D D D D D D D receiving from MLC, rather than 1 Year Rolling Excess Return 3 Year Rolling Excess Return 5 Year Rolling Excess Return looking at returns at a single point in time (as in the previous table). The key driver of this outperformance was your managers’ success in As you can see from the graph, your minimising your exposure to some of strategy has produced better than the worst performers within the sector, index returns with a very high degree While we are in particular underweighting GPT of consistency measured over all Group, Goodman Group and ING rolling time periods. For instance, your sure that you Office Fund. Resolution Capital’s rolling five year excess return, will be active ‘bottom-up’ approach to trust measured since 1994, has been selection resulted in a return of consistently positive. This is a good disappointed -36.6%, outperforming the market achievement considering the varying benchmark by 5.5%. Challenger’s market circumstances we have seen with the portfolio returned -35.9%, over that period. Rolling one year outperforming the benchmark return excess returns have mostly been negative by 6.3%. positive as well. absolute return This is what we would expect to emerge from the appointment of that was experienced managers with exceptional insight. By focusing on recorded for the ‘investment grade’ trusts and avoiding year, it is those with poor fundamentals, your managers have helped cushion your pleasing that the return outcome. return was 5.9% Strategy returns have also benefited from the discretion we have given to better than Resolution Capital which allows them to invest a component of their portfolio index, especially in non-Australian REITs. Giving them this discretion has allowed Resolution in the most to look beyond the Australian REIT sector, where so many REITs have difficult year for been in financial distress, and instead the sector on choose non-Australian REITs that are better quality. This has also helped record. diversify your portfolio. </p><p>Page 23 Your Managers Irrespective of the market A summary of your appointed managers is in the table. environment, MLC believes that Manager Style Tailored Key role in strategy appointing a number of different, mandate? experienced managers is far preferable to a strategy that relies on Resolution Bottom-up, 75%, includes AREITs and just one manager for sector and stock Capital relative Yes discretion to invest in global selection. We don’t believe it is value REITs appropriate for you to be dependant Challenger Business on a narrow range of insights, Yes 25%, AREITs especially if it is from just one firm, cycle when your research has identified a number of managers with exceptional Australian and global REIT skills. As we saw earlier, both managers have delivered positive excess returns The excess returns graph shows Resolution Capital has had since inception and we remain a more consistent track record of outperforming the index in confident in their future return potential and role in the strategy. For periods7 to 30 June 2009. instance, Resolution Capital is the 6.3% 6 5.5% most experienced and best resourced 5.2% REIT manager in Australia. The four 5 a p core members of the team have </p><p>% 4.1%</p><p> s</p><p> n 4 worked together for over a decade r u t e</p><p> and each have significant equity R</p><p> s 3 s 2.6% stakes in their business. Resolution e c x</p><p>Capital conducts in-depth research on E the Australian and global REIT 2 universe, which is appropriate for their 1 “bottom-up” stock selection approach. Challenger’s experienced team, who 0 have also worked together for years, Resolution Capital Challenger adheres to a “business cycle” 1 Year 3 Years 5 Years investment approach, which combines MLC extended this mandate top-down analysis of economic and discretion to Resolution Capital for property sector fundamentals with two reasons. Firstly, we recognised bottom-up trust research insights. that the AREIT sector provides limited choice and is very concentrated While both managers have performed (Westfield accounts for around 50% of well in recent times, Resolution the sector) so allowing ownership of Capital has had a more consistent non-Australian REITs helps diversify track record of outperforming the the portfolio more than would be index (as shown in the diagram of possible if stock selection was limited excess returns above). Aside from to just Australian REITs. Secondly, their stock selection approach, which MLC’s research of Resolution Capital has helped avoid the trusts with the confirmed their investment team and highest indebtedness (and worst process is sufficient to cover the share price performance), Resolution global REIT opportunity set in the Capital’s outperformance is also due required depth. to them utilising the discretion provided by MLC to invest up to 15% of their mandate in REITs listed on exchanges outside Australia. </p><p>Page 24 Country and Sector Exposures Your Australian REIT strategy is diversified across the major listed property sectors. </p><p>Retail property based REITs continue While you have probably read a lot to dominate the Australian REIT about the problems many REITs have market (approx. 60% of REIT sector experienced in the last couple of value). This is due largely to years, not all REITs have been Westfield’s dominance of the sector, impacted in the same way. An so the MLC strategy also has a example is CFS Retail Property Trust material exposure to Retail. Retail (“CFS”), which accounts for approx. REITs currently account for 51% of 6.5% of the strategy and is the owner the portfolio value with Westfield and of a well diversified portfolio of large Colonial First State Retail the regional shopping centres such as dominant retail REIT exposures. The Chatswood Chase in Sydney, next major category is Diversified Chadstone in Melbourne and the Myer REITs who own a mix of properties in Centre in Brisbane. CFS was the different property categories. These Australian REIT sector’s second best REITs, including Stockland, General performer over the year with a unit Property Trust, Mirvac and Dexus, price fall of 10.8%. This superior account for 35% of the strategy. Office performance compared to many other REITs account for 6.5% of the REIT was due to CFS’s strong strategy. financial position, with modest As we mentioned earlier, MLC has borrowings, which was further given Resolution Capital discretion to underpinned by a $325 million capital invest up to 15% of their portfolio rasing in October 2008 (which your (which equates to a maximum 11.25% managers participated in). Aside from of the total strategy) in global REITs. it’s quality retail shopping centre Resolution Capital has used some of portfolio, CFS is one of the few REITs their mandate flexibility and 4.3% of who have not been forced to reduce the strategy is currently invested in or cancel distributions to unitholders. non-Australian REITs. This means In fact, CFS has declared a 0.4% of your portfolio is invested in distribution of 6.3 cents per unit for the Hong Kong based REITs, 1.1% in half year to 30 June which is 5% Japanese REITs, 0.8% in USA REITs, higher than the 6.0 cents declared in 0.8% in UK REITs and 1.2% in the corresponding period of 2008. European REITs.</p><p>Page 25 Global Real Estate Investment Trust Commentary</p><p>The MLC global property strategy is The table outlines performance of MLC Global Property expected to outperform the UBS Real Strategy. Estate Investors Trust Index (AUD Performance Overview to 30 hedged) over rolling 5 year periods. 3 years 1 year 3 mths However, as part of our focus on June 2009 growing your wealth, we won’t chase MLC Global Property Strategy (AUD risky returns when markets are very -14.9% pa -36.8% 31.8% strong. This means your returns are hedged), Gross likely to lag or underperform the UBS Real Estate Investors Trust Index -18.5% pa -42.5% 23.5% benchmark return in strong markets. (AUD hedged) At other times, and particularly when MLC Wholesale Global Property Fund markets are weak, we expect to N/Av -37.2% 35.7% outperform the market’s return. Class A, Net Median (Mercer Retail IDPS – Global -19.0% pa -43.4% 24.0% Property (Hedged)) Quartile Ranking (Mercer IDPS Global N/Av 1st 1st Property) Percentage of time above Median (IDPS N/Av 79 N/Av universe, since inception) Note: Inception is January 2007.</p><p>Executive Summary: and growing confidence based on China’s economic resilience have  As we saw in most global equity helped. Japan’s and Singapore’s markets during the June quarter, REIT markets weren’t as firm as Global Real Estate Investment Hong Kong’s but were nonetheless Trust (“GREIT”) markets also superior performers compared to performed strongly. The UBS Real the Australian, US, UK and Estate Investors Trust Index (AUD European REIT markets. hedged) returned 23.5% in the June quarter. However, while this  The MLC GREIT strategy is a welcome development for outperformed the GREIT market GREIT investors, the one year return by a substantial 8.3%, return remains significantly bringing the 1 year excess return negative with the UBS Index down to 5.7%. The strategy’s significant by 42.5% to 30 June. This poor ownership of Asian REITs was return reflects in part the issue that very beneficial to your returns has dominated the performance of versus the GREIT index. While the Australian REIT market. That your return for the year is negative, is, the indebtedness of many we are pleased that the strategy REITs which, in the difficult credit we have built has helped market and economic environment cushioned you from the worst of of the last year and a half, has the market’s fall. required them to undertake drastic measures (equity raisings,  Both Resolution Capital and property sales, etc) to repair their Morgan Stanley have produced financial position. Thankfully, there considerable excess returns, and is evidence that these measures while La Salle has are working. underperformed, we retain our conviction in the manager to  Asian REIT markets continue to be deliver strong long-term the best global performers. Hong performance. Kong’s REIT market was the best, falling by 11.6%, where stable office and residential property fundamentals, the best REIT balance sheets on a global basis Page 26 The graph shows how well the MLC Global REIT strategy Market Relative Returns has performed compared to the market index (“excess Excess returns are shown on a rolling 1 and 3 year basis, rolling through return”) to 30 June 2009. time from 2005 to 30 June 2009. The 12.0 return of the market index is represented by the intersecting 9.0</p><p>* 6.0 horizontal line. This means that if the x e d n i</p><p> rolling excess return line is above the 3.0 f o</p><p> horizontal line, the strategy has s</p><p> s 0.0 e</p><p>“outperformed” the index, and vice c x e</p><p>-3.0 n versa. This is a better way for you to i</p><p> assess the returns you are receiving % -6.0 from MLC, rather than looking at -9.0 returns at a single point in time (as in -12.0 8 8 9 9 6 6 7 7 7 8 6 7 the earlier table). 6 7 7 8 8 8 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ------r r r t t t n n n g n g g c c b b c b c p p p c c u u u u u u u e e e e e e A A A J J J J O O O A F A F A F As you can see from the graph, your D D D strategy has produced better than 1 Year Rolling Excess Return 3 Year Rolling Excess Return index returns with a high degree of consistency. While there is a limited performance history, as the strategy was only launched in 2005, the rolling This satisfactory excess return We do acknowledge that this three year excess return has been outcome was achieved in what has outperformance may provide you with consistently positive. Rolling one year probably been the most challenging little comfort when the strategy’s excess returns have mostly been and difficult year in the history of the absolute return for the year (-36.8%) positive as well. global REIT market. The result is due is distinctly negative. However, to the stock selection of the managers outperformance is a good outcome in that we have appointed on your such a difficult market and certainly We are behalf. The global REIT market preferable to underperforming. contains over 220 REITs scattered particularly across many different countries. As you would appreciate, not all are pleased with the equally attractive in terms of quality or strategy’s rolling their prospective return. Some are worthy investments for you but there one year return are a lot that aren’t. An excess return of 5.7% in the year suggests that your at the end of appointed managers have done a good job in a very difficult June, which was environment, choosing between the REITs that are investment grade and 5.7% better than the ones that should be avoided. index. </p><p>Page 27 A summary of your appointed managers is in the table. Your Managers Manager Style Tailored Key role in mandate Irrespective of the market strategy environment, MLC believes that ? appointing a number of different, experienced managers is far LaSalle Relative Value Yes 33.3% preferable to a strategy that relies on Morgan Stanley Absolute Yes 33.3% just one or a small number of Value managers for country, sector and stock selection. We don’t believe it is Resolution Capital Quality Value Yes 33.3% appropriate for you to be dependant on a narrow range of insights, especially if it is from just one firm, As we mentioned earlier, the strategy LaSalle’s returns lagged those of when our research has identified a outperformed the market index return Resolution and Morgan Stanley. Their number of managers with exceptional by 5.7% in the year. This pleasing 5.4% underperformance was due in global REIT skills. We also aim to outcome was due to Resolution part to their smaller exposure to Asian reduce your dependence on one or a Capital’s and Morgan Stanley’s REITs and a higher exposure to US narrow range of investment styles. substantial outperformance. Morgan and Australian REIT markets. MLC This is why we have appointed three Stanley was the best performer, has been constructing multi manager managers who are responsible for outperforming by 16.6% while strategies for nearly 25 years and we stock selection – the REITs to own Resolution Capital’s outperformance know in any multi-manager strategy it and, just as importantly, the REITs to was by a margin of 15.1%. Morgan is normal for some managers to avoid. Stanley’s portfolio has a significant underperform. Often it is because bias to selected REITs in Hong Kong, their style is out of favour or the The diversity of the MLC global REIT Japan and Singapore because the market prefers companies that the strategy is evident from the table REITs in these markets tend to have managers have chosen not to own. above which shows the investment superior balance sheets and better We retain our conviction in LaSalle. style of each manager and the earnings potential than REITs allocation we have made to each elsewhere in the world. Another manager. All of the managers we notable but rewarding feature of have appointed are providing you with Morgan Stanley’s portfolio is their low tailored portfolio arrangements as exposure to the US REIT market well. This is an example of how MLC where there are expectations of a uses its significant scale on your 30% - 40% drop in real estate behalf, in this case negotiating with property values (though Morgan your managers to provide special Stanley believe this is already portfolio arrangements that we believe factored into US REIT prices). will deliver superior return outcomes Resolution Capital’s deliberate for you. strategy of focussing stock selection on well managed, conservatively geared property vehicles with strong operating cashflows continues to benefit your return. </p><p>Page 28 The chart shows the global REIT strategy country exposures as at 30 June 2009. Netherlands SwedenSwitzerland Country and Sector France 2% 1% 1% Canada Exposures 5% 0% Singapore The global REIT strategy is well 7% diversified. At the end of June, the strategy comprised 88 REITs chosen United States mainly from eleven different country Australia 41% REIT markets (shown in the pie chart 9% on the right). As you can see from the lower diagram, the strategy owns Hong Kong significantly more in Hong Kong, 10% Japanese and Singaporean REITs and less in US, Australian and Canadian REITs compared to index. United Kingdom Japan 11% We have listed some of the largest 13% REIT investments in the strategy with a description of each for you. Hong Kong Land Holdings: One of Asia's leading property investment, The chart shows the major country exposures of the global management and development REIT strategy versus the index composition as at 30 June groups. Founded in Hong Kong in 1889, the Group has business 2009. interests across the region. In Hong Kong, the Group owns and manages some five million square feett of prime commercial space that defines the United States heart of the Central Business District. Australia</p><p>In Singapore, it is helping to create Canada the city-state's new Central Business District with the expansion of its joint United Kingdon venture portfolio of new Singapore developments. Hongkong Land's properties in these and other Asian Japan centres are recognised as market Hong Kong leaders and house the world's -10 -8 -6 -4 -2 0 2 4 6 8 foremost financial, business and % luxury retail names. Mitsubishi Estate: Mitsubishi Estate Starwood Hotels: One of the world's Company, Limited is a Japan-based real estate company engaged in largest hotel companies, it owns, various property related business operates, franchises and manages activities, including the development, hotels, resorts, spas, residences, and leasing, operation and management vacation ownership properties under of buildings, the operation of parking its nine owned brands. lots and housing construction and Mitsui Fudosan: Based in Tokyo, management. Mitsui Fudosan is Japan’s leading property company engaged in a range of property related businesses, including property investment, development and management.</p><p>Page 29 Global Share Commentary</p><p>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 investors. MLC Wholesale Global -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 significant rebound in perhaps the 3rd 3rd 2nd 2nd component perceived to be the IDPS Global Share) riskiest in the market – financials. Percentage of time above  The rally was mostly felt in Median (IDPS universe, since 38 27 43 N/Av Emerging markets which leapt inception) 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 $AUD Hedged 2.1%pa -7.0%pa -27.5% 18.1% earnings news and a continued rally would be inextricably linked to Note: Inception is February 1998. a pick up in the four key variables most integral to the economy's performance: employment, production, personal income, and The global share strategy is expected sales. to outperform the MSCI All Countries World Index over rolling 5 year  Your MLC Global Share strategy  Given the sharply divergent sector periods. However, as we are focused returned -19.6% underperforming returns for the year, it was on growing your wealth, we won’t the MSCI All Country World Index interesting to see that selections in chase risky returns when markets are (ACWI) which returned -15.6% for capital goods, consumer services very strong which means we are likely the year. Your strategy and information technology added to underperform in strong markets. At underperformed due to the drag value to your portfolio. Notable other times, and particularly when caused by companies bought by detractors were from materials, markets are weak, we expect to two managers –Bernstein and energy and food sectors. outperform the market. Alliance. These managers were  Your MLC Global Share Hedged terminated during the strategy performance was further hindered enhancement implemented in by a mixed year for the Australia March 2009. The four new dollar ($A). The $A rose against managers (Sands Capital, Harding a basket of currencies which Loevner, Tweedy Browne and represents the major trading Mondrian) are performing the roles partners (TWI) in the first half of they were appointed to fulfil, this year (up 16.4%). However, although it is too early to comment there was a drop of 11.9% over on their market relative the year to 30 June 2009. performance. Overall, returns from both old and new managers remained mixed.</p><p>Page 30 The graph outlines the rolling excess returns of the MLC Market Relative Returns Global Share Strategy to 30 June 2009. Disappointingly, while index relative returns have historically been quite 20.0 strong, they have recently fallen below 15.0</p><p>* 10.0 x market, as illustrated in the graph e d n i</p><p>5.0 f</p><p> below which shows rolling 1, 3 and 5 o</p><p> s</p><p> s 0.0 year market relative returns. This is e c x e</p><p>-5.0 n especially the case given recent poor i markets, a time when we would % -10.0 expect to outperform. The recent -15.0 performance drag was driven by -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 c c c c c c c c c c</p><p> sector selections in 2008 by Bernstein 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 and Alliance. The quantum of D D D D D D D D D D underperformance which saw your 1 Year Rolling Excess Return 3 Year Rolling Excess Return 5 Year Rolling Excess Return portfolio decline in value over the next year, should take some time recover. *The index for your strategy is the MSCI All Country World Index (ACWI), which includes both Notwithstanding the recent dip in developed and emerging markets. However, it was the MSCI World Index (developed performance, the strategy has markets) prior to September 2002. consistently outperformed the market expense of quality companies. benchmark over most periods (as can be seen above). The last decade was Wellington lost out on their calls on host to two of the worst asset bubbles, the Materials sector, although they too and encapsulated narrowly lead enjoyed a reversal of fortunes through markets for significant periods. Such bottom-up stock selection during the markets make it difficult to show value rally of 2Q09. in active stock selection, as good Capital International detracted from stock selections aren’t rewarded your portfolio due to calls in a few above how the ordinary market sectors including materials. At a stock performs. level, Potash, which has been a winner for the previous few years, had their share price halved during the broad market sell off in 2008. Your Managers In what has been a difficult time for managers, their performance continues to vary. Of the managers who are continuing in the strategy after the recent changes: Dimensional enjoyed a reversal of 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 </p><p>Page 31 Sector and Regional exposures The managers’ performance compared to market Global sector returns had two marked benchmark (many of which have not been in the sessions. The first to March 9, 2009 was portfolio for 1 or 5 years), is illustrated in the graph (to dominated by defensive sectors such as health care and consumer staples, as 30 June 2009. shown in the middle graph to the right. 12%</p><p>But there was marked increase in risk 10% appetites with financials making a 8% )</p><p> significant comeback since 10 March % (</p><p>6% to 30 June 2009, as shown in the s n r</p><p> u 4% bottom graph to the right. t e R</p><p>2% s s</p><p>Your portfolio too managed to l l l t t e a t a a r y n n , t c</p><p>0% g n i o n e n y e n a e x</p><p> participate in the rally. Your sector 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</p><p> s e w r i e e C -2% a r</p><p> attribution was driven by the n n</p><p> n g o m a i p o e 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 managers who are part of your C t i a -4% n n W a W D I M portfolio and the way they are S blended. Sands, a new appointee -6% participated in the rally exactly as we -8% anticipated them to, with returns 5 year 3 year 1 year driven from many sectors in the final quarter. Capital goods, consumer services along with technology The two graphs below show global sector excess hardware & equipment sub sectors contributed the most towards your returns. returns for the year. Energy, materials and banks were amongst Excess Return vs. MSCI All Country Word Index (Unhedged) - July 1, 2008 to March 9, 2009 the leading detractors of value from 20.0% your portfolio. 15.0%</p><p>Stock level 10.0% n 5.0% s o e i l y t y e r n p s s a r s l r l g a a o l s y c a i</p><p>The key contributors to performance 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</p><p> t o i s i u r e t l e n u h s n e m i</p><p> continue to include Genentech 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</p><p>-5.0% m M e o e n u s r F I</p><p>(considered the pioneers of n o i s H I T C e c D n S e l biotechnology) and General Electric (a -10.0% o e C large diversified industrial group T based in the US). Las Vegas Sands, -15.0% a casino resort company also contributed positively. The Excess Return vs. MSCI All Country Word Index (Unhedged) - March 10, 2009 to June 30, 2009 importance of you having access to 30.0% emerging market companies were 25.0% shown in the contribution BM&F Bovespa in Brazil, which is one of the 20.0% largest stock exchanges in the world, 15.0% made to your returns. 10.0% n</p><p>5.0% s o e i y l y t e r n s s p r s l l r a g s a l o y a a</p><p>Potash Corporation (a fertilizer-maker a i</p><p>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</p><p> m n t o i i</p><p> s e l e t n h s u r u i n m e based in Canada) was the largest t t n t e a</p><p>-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</p><p> detractor of value. Gazprom (the I n i o H I T C -10.0% e s D c S n e l world’s largest natural gas extractor o e</p><p>-15.0% C based in Russia) and Xstrata (a T diversified mining group) also -20.0% detracted, as commodity prices tumbled along with other assets during the year. </p><p>Page 32 Global Private Assets Commentary</p><p>The MLC’s The table outlines the gross performance of MLC Global private assets Private Assets Programme. restricting investing activity until prospect of many countries living with portfolio Performance Overview to 5 years 3 years 3 1 year returned -23.0% 30 June 2009 (pa) (pa) months MLC Global Private Assets 10.4% 5.6% -23.0% -6.7% for the year to 30 Portfolio (hedged) June 2009 on a MSCI All Country World Index 2.1% -7.0% -27.5% 18.1% fully hedged (hedged) basis, representing a assets prices decline further. This anaemic growth for a number of years unusually slow rate of investment as the US and Europe work their way premium of 4.5% activity has left MLC with almost half through a massive amount of its commitments ($1.7billion) in ‘dry “delevering" and addressing other to public powder’ that will be invested through serious issues. It is uncertain how markets (MSCI the recessionary years ahead which long it will take to return to healthy are expected to produce some economic conditions but the better All Country excellent buying opportunities. guess appears to be that it will take a considerable period of time. The World Index A number of portfolio companies negative wealth effect in the US has appear to be coping satisfactorily with been dramatic and is continuing. (hedged) the global financial crisis and Since mid 2007 US wealth has subsequent recession with adequate declined $USD13 trillion, the fall in returned -27.5% cash reserves, solid financing equity prices has drained $30 trillion for the year). arrangements, and aggressive cost of stock market value (55% of global cutting. Companies purchased during GDP), and to date $11 trillion from the earlier periods of the portfolio Global equity markets rebounded residential real estate (20% of global have been “delevering” considerably. GDP). during the quarter which has not yet Some have taken advantage of been reflected in private equity stressed debt markets to repurchase Deal activity, while still subdued, portfolio valuations which typically lag their debt at significant discounts. In showed some positive signs in the public markets. certain cases market shares have second quarter. Of particular note, The portfolio experienced valuation increased as competitors are acquired IPO markets in the US have shown write-downs of approximately 3% for or fail. While trading conditions will tentative steps to re-opening, with 6 the quarter based on Managers’ continue to pressure underlying venture or buyout backed IPOs over unaudited 31 March 2009 reports. portfolio companies, we believe this the quarter, following two quarters This is largely due to mark-to-market period offers excellent opportunities with no IPOs at all. In total these six accounting and reflects continued for active investors. IPOs raised over $830m in new capital, the strongest quarter since difficult trading conditions in Europe Despite continually gloomy economic and the US. In addition, European mid-2007. Although still quite weak in data there appears to have been volume, this increased activity is markets have witnessed continued signs of a change in market sentiment declines in both domestic and external encouraging. Globally, private equity during the quarter, with World Bank deal volume was among the lowest in demand, which is reflected in revenue economists predicting a return to declines for portfolio companies. the last decade and lower than the growth in the US in the second half of first quarter. As noted in previous reports, MLC 2009, and China also predicting benefits from having a diversified stronger performance, lending hope to portfolio invested over 12 vintage the prospects for a global recovery. years, with 45 managers, 103 Funds, However, much of continental Europe and across a number of geographies and parts of Asia, particularly Japan, and investment strategies. Overall, continue to experience falls in your Managers were generally industrial production and rapidly disciplined, with some selling portfolio accelerating unemployment figures. companies into strong markets and Economists differ as to the likely strength of any recovery with a real Page 33 Your team travelled actively over the quarter, spending time in the US, UK, The graph shows the portfolio structure as at 30 June Nordic countries and continental 2009 based on Net Asset Value and Undrawn Europe meeting with both existing and potential new managers. During the Commitments. quarter the team looked at over sixty potential investments, with thirteen Region and Investment Strategy as at 30 June 2009 progressing to initial due diligence, and seven progressing to full due diligence, including four potential co- USA Growth, 3% investments. Following large volumes 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, 20% which is reflected in these activity Europe Other, 1% levels. The team continues to pursue opportunities within the venture capital Europe Distressed, 1% USA Distressed, 4% space, as previously inaccessible Europe Europe Venture Capital, brand-name firms become 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 </p><p>1 NAV + Undrawn is arguably a truer indication of portfolio exposure than Commitments as it excludes capital already returned. Page 34 IncomeBuilder Commentary</p><p>The table outlines the gross performance of MLC The objective of IncomeBuilder Portfolio. the Performance Overview to 5 years 3 years 3 1 year IncomeBuilder 30 June 2009 (pa) (pa) months strategy is to MLC IncomeBuilder Portfolio 4.4% -4.1% -8.4% 12.7% invest in S&P/ASX 200 All Industrials 3.3% -6.5% -14.3% 11.4% companies that are expected to deliver a growing underlying income distribution you depending on the severity and received was 8.97 cents per unit length of the economic slowdown. dividend stream (Unit Trust), 3% higher than last However, we are very confident in year’s 8.71 cents per unit the appointed managers’ skills and over time. distribution. This is the seventh commitment to minimising as consecutive year of distribution much as possible any fall in The Fund is also expected to growth. While the 3% increase in distribution. generate tax effective returns. The the distribution over last year fund is expected to outperform the appears unremarkable, it is  In this regard, Maple-Brown Abbott S&P/ASX 200 All Industrials actually a very good result as the is using the market circumstances Accumulation Index (“All Industrials”) profitability and dividend paying to acquire stock at attractive over rolling 4 year periods, but this is potential of many companies has prices. For example, not a core focus of the fund. been hit by the global economic IncomeBuilder participated in the recession. Wesfarmers, BlueScope Steel and Executive Summary Fairfax Media capital raisings,  The total return of MLC resulting in the acquisition of stock  The All Industrials Index returned IncomeBuilder in the year ended at heavily discounted prices. -14.3% in the year. This was 30 June 2009 was -8.4%. While it significantly better than the is understandable for you to be broader market’s -20.3% return disappointed with a negative (S&P/ASX300 Accumulation return, the strategy return was Index) which was weighed down 5.9% (pre fees and tax) better than by the poor performance of the All Industrials Accumulation resource companies who are not Index, which fell by 14.3%. part of the All Industrials Index. A June quarter increase of 11.4%  This sound result was due largely has rewarded investors who were to the stock selection of Maple- disciplined and chose to maintain Brown Abbott who manages 70% their strategy and market of IncomeBuilder. Their stock exposure. At the sector level, only selection, in particular their Information Technology (0.5% of preference for companies with the market) recorded a positive “defensive” characteristics who return. Sectors with defensive have been able to maintain characteristics such as Telecoms, dividends has been beneficial to Consumer Staples, Healthcare and you. As expected, Vanguard’s Banks delivered the best results, index based approach achieved a albeit negative. In contrast, cyclical return similar to the All Industrial’s. sectors with a more direct exposure to the economic cycle  Looking ahead though, the (including resources) tended to economic slowdown will continue lose the most ground while the to impact company earnings and, Australian REIT sector, down by as we have already seen, many 42.3%, was again the worst companies will decide to pay lower performer. dividends. This will make it very difficult for IncomeBuilder to grow  MLC IncomeBuilder’s results for its income distribution in the next 2008-09 were pleasing. The year, possibly the next two years, </p><p>Page 35 A consistent growing The graph shows MLC IncomeBuilder has a very strong income stream history of growing annual distributions. MLC IncomeBuilder is a unique fund because its primary focus is on providing investors with a growing 14 income stream. As the chart to the right shows, MLC IncomeBuilder has a 12 very strong history of growing annual 5.34 e r distributions. Since the Fund’s a 10 3.59 h 0.02</p><p> inception in 1995, there has been only S</p><p> r 1.68</p><p> one year (2001) when IncomeBuilder e 8</p><p>P 0.08 failed to grow its underlying s distribution. This is a sound result t 6 n considering the many market and e 0.35</p><p>C 8.97 corporate earnings cycles that have 4 8.21 8.71 0.43 0.99 1.31 6.74 7.64 been experienced over that period. 0.35 2 4.24 4.87 2.73 3.04 2.83 2.98 MLC IncomeBuilder’s 2008-09 1.86 2.46 2.23 distribution (Unit Trust) was also 0 6 9 3 6 9 7 8 0 1 2 4 5 7 8 9 9 0 0 0 higher than last year’s. The issuance 9 9 0 0 0 0 0 0 0 9 9 9 9 0 0 0 0 0 0 0 0 0 0 of capital gains was also very low. 1 1 1 1 2 2 2 2 2 2 2 2 2 2 Looking ahead, the key issue is the Financial Year End 30 June length and severity of the economic Income Buy Backs Total Capital Gains slowdown and the impact on company earnings and dividends. We expect that Fund is invested in. As we saw in the objective which is to grow income. In the potential for income growth in the recent profit reporting period, Australian companies are hurting and a number IncomeBuilder’s case, the relevant 2010 and 2011 financial years is very market benchmark is the limited, if not unlikely. Preliminary have either cut their dividends or warned the market that their dividend S&P/ASX200 All Industrials analysis by Maple-Brown Abbott, who Accumulation Index. To achieve the manages 70% of the portfolio strategy, policy may need to be revised if earnings fall further. income growth objective, MLC suggests that distributions could be IncomeBuilder’s stock selection tends down by 10-20% in 2010. We are In such circumstances, IncomeBuilder to be biased to industrial companies monitoring this very closely for you and investors should derive some comfort (rather than resource based will communicate further updates on the from knowing that, in providing an companies) as, over time, they have expected income distribution for 2010 income stream, IncomeBuilder also demonstrated a more consistent track when we are in a position to do so. This aims to do so in a tax-advantaged record of growing dividends. This may be after the forthcoming profit manner. This means minimising leads to a portfolio that comprises reporting period when companies are distributable capital gains that are predominantly industrial companies expected to comment on the outlook for taxable. IncomeBuilder has a good who have a history of growing their businesses. history of providing tax advantaged dividends (with high franking levels) We understand the lifestyle constraints income, although some market events and the potential to continue growing that a lower distribution in 2010-11 may that can’t be controlled by MLC’s them in the future. impose on investors. The current managers could result in the realisation and distribution of taxable The total return of MLC IncomeBuilder environment is very volatile and at this in the year ended 30 June 2009 was point, it is difficult to predict with much capital gains. An example is corporate takeovers (such as the current offer -8.4%. While negative in an absolute certainty how severe the global sense, the strategy return was a 5.9% economic recession will be and the for Lion Nathan) where stock must be sold and, by doing so, a capital gain (pre fees and tax) better than the All actual impact on dividend policies of Industrials Accumulation Index, which Australian companies going forward. may be realised. Nonetheless, the management of MLC IncomeBuilder is fell by 14.3%. This return was also We may in fact be overly cautious in significantly better than many flagging this to you. However, we think it done with a high degree of tax awareness. Australian share funds available to is prudent to do this so that you can you in the market. plan accordingly. Realistically, MLC IncomeBuilder also aims to IncomeBuilder’s ability to grow income achieve a return in excess of the distributions is largely dependent on the market, though it should be noted that dividends paid by companies that the this is secondary to the primary Page 36 Your Managers The table shows the value style practiced by each MLC has appointed two investment manager and the allocation to each. firms, Vanguard and Maple-Brown Manager Style Tailored Allocation Role in Strategy Abbott, to manage the IncomeBuilder mandate? strategy. Maple- Maple-Brown Abbott manages 70% of Brown Value Yes 70% Active stock selection the portfolio on an “active” basis. This Abbott means that Maple-Brown Abbott restricts their stock selection to only Vanguard Index No 30% Index replication those companies they believe will contribute to MLC IncomeBuilder’s objectives. We believe Maple-Brown Abbott is perfectly suited to the turnover. IncomeBuilder mandate as their investment approach (which also tends to be low turnover) targets attractively valued companies with dividend growth potential to be held for the long-term. Maple-Brown Abbott made a significant contribution to MLC IncomeBuilder’s performance as a result of their stock selection strategies. Their portfolio return was -6.3%. While negative in absolute terms, it was nonetheless 8% better than the -14.3% return of the S&P/ASX200 All Industrials Accumulation Index. This is an outstanding result achieved in some of the most difficult market circumstances for many years. Vanguard manages 30% of the portfolio on an index basis, which delivers a portfolio that largely mirrors the stocks and their respective weightings within the S&P/ASX200 All Industrials Index. Not surprisingly, this means the return of Vanguard is generally close to or resembles the performance of the index. This was the case in the year to 31 March 2009, with Vanguard returning -13.5%. The appointment of Vanguard is consistent with MLC IncomeBuilder’s primary objective to grow income distributions in a tax effective manner because their index-based approach provides investors with access to the dividend income flowing from all the companies within the industrials market. Vanguard’s index approach is also beneficial from a tax perspective as it typically entails very little portfolio Page 37 Sector and Stock MLC IncomeBuilder’s ten largest stock positions Exposures appear in the table (as at 31 May, 2009). As mentioned earlier in this report, Security Name Strategy Weight MLC IncomeBuilder’s stock selection tends to be biased to National Australia Bank 9.6% industrial companies (rather than resource based companies) as, over Westpac 8.3% time, they have demonstrated a Telstra 8.2% more consistent track record of growing dividends. While Maple- ANZ Bank 8.2% Brown Abbott is not excluded from owning resource companies, their Wesfarmers 5.4% focus on companies that are Fosters Group 4.8% attractively priced and with the capacity to provide a growing and Brambles 4.7% sustainable dividend stream has Commonwealth Bank 4.2% meant that resource companies have not been owned by IncomeBuilder Coca-Cola Amatil 3.2% for some years. Westfield Group 2.9% The outperformance achieved by IncomeBuilder in the year to 30 June was due largely to Maple-Brown Abbott’s stock selection, in particular In the last few months, IncomeBuilder their preference for companies with has participated in Wesfarmers’ “defensive” characteristics. These are discounted rights issue with shares companies with balance sheet acquired at prices up to $15 (which strength who have reasonable compares favourably with the $24.56 earnings and dividend growth share price at the time of writing). potential in what is clearly a more Additional shares in Fairfax Media difficult domestic and global economic were also acquired via participation in environment. Companies such as the company’s heavily discounted Fosters Brewing, Lion Nathan and capital raising. Shares were acquired Coca-Cola Amatil, whose profitability at $0.75 cents (current share price is and dividend-paying capacity is less $1.37). The Stockland position was dependant on the economic cycle, also increased, reflecting Maple- have been particularly beneficial. Brown Abbott’s belief that the stock will emerge from the current difficult Despite the market turmoil, it is period in a stronger position. And business-as-usual for the managers more recently, your fund participated responsible for IncomeBuilder’s stock in BlueScope Steel’s capital raising at selection. A notable feature of the a price of $1.55 per share, an all-time market in recent months has been the low price since the company listed on capital raisings by numerous the Stock Exchange in 2002. companies. Your managers have used some of these capital rasings as an opportunity to acquire stock at very beneficial, cheap prices.</p><p>Page 38 Investment 15 year 10 year 7 year 5 year 3 year 1 year 3 months Manager % pa % pa % pa % pa % pa % % Gross Total Returns for periods ended 30 June 2009 Australian Debt Managers NSIM - Cash 6.02 5.78 5.87 6.13 6.37 5.43 0.80 Appendix:NSIM -Enhanced Table of Investment Cash n/a n/a n/a n/a n/a 6.16 1.36 ManagerNSIM (Short Returns Maturities) n/a n/a n/a 6.71 7.44 10.49 0.83 UBS GAM (Short Maturities) n/a n/a n/a 6.67 7.42 10.82 0.27 NSIM (All Maturities) 7.78 6.40 6.25 6.26 6.57 11.80 -0.54 UBS GAM (All Maturities) 7.93 6.58 6.34 6.38 6.75 11.82 -1.24 NSIM - Inflation- Linked 7.86 6.57 5.57 5.34 2.53 -1.27 -4.47 UBS - Inflation- Linked n/a n/a n/a n/a 4.03 1.04 -6.41 Global Debt Managers Black Rock (Short Maturities) n/a n/a n/a 5.67 5.55 6.17 2.81 PimCo (Short Maturities) n/a n/a n/a 5.39 4.24 1.27 7.64 Black Rock (All Maturities) n/a n/a n/a 5.94 5.50 7.35 1.54 5.67 PimCo All Maturities n/a 6.96 6.99 5.91 4.99 0.86</p><p>Bridgewater Global 0.31 Fixed Interest n/a n/a n/a 5.64 3.27 -6.93 W.R.HUFF - Hedged n/a n/a 8.33 4.23 3.07 -7.26 17.41 OakTree -Hedged n/a n/a n/a n/a 3.31 -3.55 16.40 Bridgewater Pure Alpha -5.33 n/a n/a n/a n/a n/a -3.93 Oaktree Loan Fund - 19.70 Super (Hedged) -6.54 n/a n/a n/a n/a n/a A-REIT Managers Resolution Capital 6.89 4.85 0.95 -4.61 -17.84 -36.60 17.98 Challenger n/a n/a n/a -6.50 -20.44 -35.85 13.92 G-REIT Managers LaSalle Investment n/a n/a n/a n/a -22.21 -36.59 12.62 Morgan Stanley n/a n/a n/a n/a -10.61 -7.32 31.33 Resolution Capital n/a n/a n/a n/a n/a -16.09 13.20 Note all total returns quoted above are before the deduction of fees & taxes and are to periods ended 30 June 2009.</p><p>Page 39 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 Vanguard - Income Builder n/a n/a 4.77 3.47 -6.19 -13.53 11.43 Maple-Brown Abbott- Income Builder n/a n/a 5.77 4.74 -3.33 -6.31 13.36 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 Note all total returns quoted above are before the deduction of fees & taxes and are to periods ended 30 June 2009.</p><p>Page 40 MLC Investment Management</p><p>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</p><p>Page 41 </p>