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Explaining MLC’s manager ofmanagers investment process
Adviser use only
Important InformationFor Adviser use only
The information contained within this brochure has been published as an information service only withoutassuming a duty of care. The information is effective as at 30 November 2005. Over time, MLC may makeenhancements or changes to the details and processes described within this brochure without any noticeto advisers. This brochure will be updated from time to time.
This brochure has been published by MLC Limited (ABN 90 000 000 402, AFSL 230 694) and MLC InvestmentsLimited (ABN 30 002 641 661, AFSL 230 705), 105-153 Miller Street, North Sydney, NSW 2060. This brochure issolely for the use of authorised investment advisers and is not intended for distribution to investors.
This brochure is intended to provide general information only and should not be used as the basis for any invest-ment, financial or other decision and has been prepared without taking into account any particular person’s objec-tives, financial situation or needs. Advisers should, before advising a client about MLC products and services, consid-er the appropriateness of this information having regard to their client’s personal objectives financial situation andneeds.
Before making any decision about whether to acquire any underlying financial product that may be invested in orthrough MLC, we recommend investors obtain financial advice specific to their situation. Advisers and their clientsshould obtain and consider the Product Disclosure Statement for a financial product before making any decisionabout whether to acquire that product.
An investment in any MLC product or service does not represent a deposit with or liability of National Australia BankLimited (ABN 12 004 044 937) or other member company of the National group of companies and is subject toinvestment risk including possible delays in repayment and loss of income and capital invested.
None of National Australia Bank Limited, MLC Limited or other member company in the National group of companiesor appointed investment managers, guarantee the capital value or performance of any MLC product or service.
MLC reserves the right to change in future the fees, investment managers, asset allocations, business rules andprocesses disclosed in this brochure. For detail about MLC products and services please contact your MLC represen-tative.
About MLC and the NationalThe Citizen Life Assurance Company was incorporated in 1866, and later became the Mutual Lifeand Citizens Assurance Company (MLC). In 1985, MLC pioneered the manager of managersinvestment process in Australia.
In 1858, the National Bank of Australia was formed in Melbourne. The National is listed on theAustralian Stock Exchange and is one of the largest financial services institutions by market capi-talisation (approximately $52.72 billion as at 30 September 2005).
The National acquired MLC from Lend Lease on 30 June 2000. As at 30 June 2005 MLC hadapproximately $47.4 billion in funds under management in its manager of managers investmentprocess. This scale for a multi-manager operation is the largest in Australia.
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Contents
INTRODUCTION 2
MLC’s investment philosophy 3
A LONG-TERM APPROACH TO INVESTMENT STRATEGY 4
Formulating the investment strategy 4
Strategic vs tactical asset allocation 7
Not your typical investment strategy 8
The evolution of MLC’s investment strategy 10
Benefits of MLC's long-term approach to investment strategy 11
SELECTING EXCELLENT INVESTMENT MANAGERS 12
Indepth manager research 12
Identifying a sustainable competitive edge 14
Why MLC does not rely on past performance 15
The power of specialists 16
Ongoing review 17
Changing managers 17
Customised mandates with managers 18
Benefits of MLC's manager selection process 19
COMBINING DIFFERENT INVESTMENT MANAGERS 20
Why combine investment managers? 20
Why have many managers? 21
Determining the allocation to each manager 22
Benefits of MLC's approach to combining managers 23
IMPLEMENTING PORTFOLIOS EFFICIENTLY 24
Rebalancing and managing cash flows 24
Managing transitions 25
How is your money managed? 26
Reducing taxation and transaction costs of manager trading 28
Benefits of MLC's efficient portfolio implementation 29
CHOOSING A MULTI-MANAGER SOLUTION FOR CLIENTS 30
Why use a multi-manager solution? 30
What you should look for 31
A sophisticated solution for all types of clients 32
Results of MLC's investment process 33
PROVIDING ADVICE WITH MLC’S INVESTMENT PROCESS 34
Accessing MLC's investment process 35
MLC's adviser-to-client tools 36
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Introduction
How would you assemble an orchestra?
Great music comes from great musicians. And if you’re talking about an orchestra, an expert conductorcan make all the difference.
A good conductor knows how to get the most out of those around them. With the right combination of instruments, and the best individuals to play them, the conductor can ensure the delivery of anoutstanding performance.
MLC adopts a similar approach to investing.
After searching the world for the best individual managers – each expert at their chosen discipline –MLC combines them into multi-manager portfolios. These portfolios are then monitored and rebalancedto keep them true to their objectives.
MLC does this work so you don’t have to. And with your clients’ investment strategy taken care of, youcan focus on the areas where you can add the most value – servicing your clients and managing yourbusiness.
This booklet details MLC’s manager of managers investment process, how this process is applied toconstruct MLC’s portfolios, and what sets it apart from other investment approaches. It also gives youthe tools you need to educate your clients on investing with MLC.
It’s been 20 years since MLC introduced the manager of managers investment process to Australia.And it’s no surprise that MLC is still Australia’s biggest multi-manager*. This booklet explains why.
* Cerulli Associates - The Cerulli Edge, Asia-Pacific Edition, Third Quarter 2005.
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MLC’s investment philosophy
MLC’s manager of managers investment process is based on a number of fundamental investmentbeliefs:• skilled investing is the best way to grow wealth.• deep research is the only reliable way to identify skilled investment managers – brand and past
performance are not helpful.• diversification leads to more consistent investment outcomes.• a long-term approach should be used if your goals are long-term.• efficient implementation reduces the costs of running a portfolio.
These beliefs are continually applied by MLC’s dedicated team of investment professionals to createthe four key elements of MLC’s manager of managers investment process:
1) A long-term approach to investment strategy
MLC has a long-term investment approach designed to provide reliable performance over differenteconomic and market environments by broadly diversifying across investment strategies, investmentmanagers and securities. Reliable performance is achieved by making many small investmentdecisions, rather than just a few large investment decisions. Small decisions would be investing in lotsof securities while a large decision would be adjusting a portfolio in response to perceived short-termmarket trends.
2) Selecting excellent investment managers
When it comes to selecting investment managers, past performance tells us nothing about the future.MLC commits extensive resources to finding excellent investment managers from around the world.MLC researches a broad range of investment managers over a long period of time to form a view oftheir competitive edge. The investment managers selected are continually reviewed to ensure youalways have excellent investment managers looking after your clients’ money. MLC also encourageseach investment manager to be the best they can be. This often involves the investment managerscreating customised portfolios for MLC.
3) Combining different investment managers
Because each investment manager has a different approach to investing, they select differentsecurities. By carefully combining a number of these investment managers to manage each portfolio,MLC is able to generate more consistent performance than would be possible with just one investmentmanager.
4) Implementing portfolios efficiently
MLC has 20 years experience as a manager of managers, and the scale, decision-making processesand investment structures to enable the efficient implementation of portfolios. MLC’s team ofimplementation specialists carefully manage portfolio costs and taxes.
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MLC's investment philosophy was designed with one simple goal in mind:generating better returns with lower risk.
Investment strategy is a comprehensive descriptor which includes asset allocation, and strategies suchas currency hedging, borrowing and derivatives to generate returns from a portfolio.
MLC takes a long-term approach to investment strategy – aiming to provide reliable performance overdifferent economic and market environments by broadly diversifying across investment strategies,asset classes, investment managers and securities.
Because investors have different risk tolerances, time horizons and return expectations, MLC hascreated a range of diversified portfolios with different objectives to meet the needs of various investors.The investment strategy for each portfolio is based on the specific goals of the product, including:• investment objective• expected long-term returns• expected volatility• investment time horizon• likelihood of a negative return over specified periods• need for investment income• tax and legal framework for different products and investments.
Formulating the investment strategy
The investment strategy for each of MLC’s portfolios is set using the following process:
Step 1 – Based on the requirements of a particular portfolio, a candidate investment strategy isdeveloped (see below).
Step 2 – The candidate investment strategy is subjected to extensive quantitative analysis and testing(see opposite).
Step 3 – If testing confirms the rigour of the candidate strategy, the investment strategy is adopted.If not, refinements are made and the new candidate strategy is re-tested.
Developing a candidate investment strategy
Judgement and experience play an important role in developing an investment strategy, as MLCconsiders a range of factors such as:1) the goals and objectives of each diversified portfolio, and 2) the characteristics of the underlying asset classes and investment strategies – including factoring in
the introduction of any new asset classes or strategies, or any future changes within a sector thathave implications for asset class risk/return characteristics.
These factors are used by the Capital Markets Research Team to develop what they believe is asuitable candidate investment strategy, which is then subjected to extensive quantitative analysis andtesting.
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A long-term approach toinvestment strategy
Portfoliorequirements
Candidatestrategy
Quantitativeanalysis & testing
Strategy refined
Final robuststrategy
Testingsuccessful
Testingunsuccessful
The MLC difference
The thorough testingundertaken by MLC’s CapitalMarkets Research Teamprovides comfort to advisersand investors that the finalinvestment strategy shouldprovide robust returns over thelong term, through manydifferent market and economicenvironments.
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Analysis and testing of the candidate strategy
MLC uses a range of quantitative analysis and testing procedures to reduce the dependence on anysingle measure. The data used in these procedures is based on a combination of historical, economicand investment relationships over at least 100 years. MLC also incorporates forward-looking researchinto the analysis, and generates thousands of possible market environments.
Quantitative analysis
Quantitative (statistical) analysis is conducted to determine the investment strategy that maximises theexpected return for a given level of risk (ie. the most efficient investment strategy). This can includeanalysis of the risk/return profile of the candidate investment strategy as well as asset classcorrelations.
Testing the investment strategy
MLC conducts scenario tests and back tests on the candidate investment strategy over short, mediumand long time periods. Neither test is relied on in isolation, and the results of the tests are used toensure the robustness of the candidate investment strategy.
1) Scenario testing
As well as quantitative analysis, judgement and experience are critical to ensuring MLC’s investmentstrategies are reflective of the real world. To help achieve this, MLC undertakes ‘scenario analysis’to ensure that the candidate investment strategy is robust across a number of different scenarios.Some scenarios which have been used in the past include:• Great Depression• Global supply-side shock (eg. unfavourable 1970s)• Global supply-side shock (eg. favourable 1990s)• War • Prolonged domestic boom• Substantial improvements to terms of trade• Stagflation (simultaneously high levels of unemployment and inflation)• Pure inflation shock (eg. hyper inflation)• Change in tax regime• Widespread global calamity (eg. escalation of terrorism)• Prices set after-tax• Increase return/risk ratio for growth asset classes• Increase return/risk ratio for debt classes• Increased correlations between asset classes• Decreased correlations between asset classes• Blockage of Saudi oil supply combined with synchronised global recession• Blockage of Saudi oil supply but deep global recession avoided• No blockage of Saudi oil supply but synchronised global recession
2) Back testing
Back testing is a reasonableness check that helps identify historical market conditions in which thecandidate investment strategy would not have performed as expected. Historical marketperformance data for the last 100+ years is used to ensure the testing is not overly impacted byrecent economic and market environments.
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A long-term approach toinvestment strategy continued
Australian equities
International equities (hedged)
CashInternational bondsInflation-linked bondsAustralian bondsListed property
International equities (unhedged)
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Rising inflation asset allocationDeflation asset allocationDisinflation asset allocationMulti-scenario asset allocation
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How scenario analysis works
To illustrate how MLC’s scenario analysis works, consider three economic scenarios:1) A rising inflation environment (eg. 1942-1952) 2) Deflation (eg. 1929-1939)3) Disinflation (eg. 1990s)
In isolation, each of these scenarios would have a different optimal investment strategy given the risk and return expectations (see Chart 1).For example, in an inflationary environment it would be beneficial to have a higher allocation to inflation-linked bonds, whereas in a disinflationenvironment a higher weighting to property would be beneficial. If the investment strategy is set based upon just one of these scenarios, andthat scenario eventuates, the strategy will be very effective in exploiting the available return potential. However, if the wrong scenario is picked,the outcome may be very disappointing (see Chart 2).
Rather than betting on a particular outcome an investment strategy based on the probability of all three scenarios is produced. Under thisapproach the multiple scenario returns (aqua bars in Chart 2) would have provided marginally lower returns than if the right scenario waspicked, but also provides better results than if the wrong scenario is picked. Averaging across the three scenarios, the multiple scenarioapproach generates the highest returns. The need to predict exactly what the future will hold is eliminated.
Chart 1 – Asset allocation by scenario Chart 2 – Real return outcomes
Source: MLC Investments
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Strategic vs tactical asset allocation
A strategic approach to asset allocation means setting specific target asset allocations to meet amedium to long-term objective (ie. over several years). A tactical asset allocation approach tries topredict short-term (ie. over weeks and months) return relativities of different asset classes, andincrease the allocation to those asset classes that are expected to generate better relative returns.
History has indicated that returns are more volatile over the short term. And the more volatile theperiod, the more unpredictable the environment is. Tactical asset allocation relies on making frequent,large and successful short-term bets to generate returns.
Why MLC uses a strategic asset allocation approach
Generally, tactical bets are derived from a single manager’s insight, which in turn can lead to multiplechanges in the asset mix. For example, consider a tactical manager that re-positions a portfolio basedon a particular view on forecasted economic growth. This can result in multiple changes to the assetallocation, all as a result of one particular view.
This lack of diversification (or the dependence on one view) is why MLC believes there is morecertainty in getting consistent performance from making many small decisions, rather than focusing ona few large bets.
A strategic overlay for genuinely long-term investors
Investors with a genuinely long-term timeframe (where performance is measured over decades ratherthan years) can often take advantage of the shorter timeframe of most other participants to avoidcapital losses as a result of market ‘bubble’ collapses. Such an approach is only appropriate forgenuinely long-term investors, such as those who invest in the MLC Long-Term Absolute ReturnPortfolio (see page 35).
The MLC difference
Rather than trying to time markets and engage in tactical asset allocation, MLC regularly
reviews the investment strategy of each portfolio to ensure it reflects available information,
research and investment assumptions.
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A long-term approach toinvestment strategy continued
Not your typical investment strategy
The way MLC formulates its investment strategy is different to most market participants, meaningMLC’s asset allocations can vary significantly from its peers. This diagram shows some of thedistinctive features of MasterKey Horizon 4 – the balanced portfolio*.
Property
MLC’s property allocation is based on the followingbeliefs:
1) The long-term return expectations are higher inshares and private markets than listed propertysecurities, and
2) There are better income-producing opportunitieswithin the diversified bond strategy than exist in listedproperty.
MLC includes allocations to Australian and global listedproperty within its portfolios to provide somediversification benefits, and to provide superior returns insome economic conditions.
australian shares 31%
propertysecurities 4%
global shares– unhedged 16%†
Managing global share currency exposures
MLC believes that, over the long term, currency exposure (ie. hedging) neither adds to
nor reduces the overall return of a portfolio. There are, however, diversification benefits
associated with hedging. MLC uses hedging in its portfolios to the point where the
diversification benefits outweigh the related costs. Few multi-managers provide this
additional level of diversification to investors, or tailor it to each individual portfolio.
* Strategic asset allocation as at 30 November 2005.
∞ The bond exposure consists of two components: short-maturity and all-maturity bonds.
# The allocation to alternative/non-traditional assets consists of a 6% allocation to private markets and a 3%allocation to the MLC Long-Term Absolute Return Portfolio. The actual allocation to private markets is currentlyless than the strategic allocation, and further allocations will be made as and when investment opportunitiesarise. Until such time, the allocation will be invested in hedged global shares.
† The global share exposure has been split into two components. One component is passively hedged back to theAustralian dollar via a passive currency overlay managed by Bridgewater. The second component is unhedged.
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Alternative/non-traditional assets
MLC Long-Term Absolute Return Portfolio
A genuinely long-term approach to investing allows MLC touse different investment strategies (including gearing,shorting, and investing in non-traditional assets) to focus ongenerating a real after-tax return.
Private markets
MLC uses a global multi-manager strategy to manage itsprivate markets exposure, which may include investmentssuch as private equity, direct property and infrastructure.These investments provide a high-risk and high-returnexposure within diversified products. MLC has one of thelargest private markets strategies within Australia, with $1.5billion invested across more than 20 managers in the UnitedStates, Europe, Asia and Australia (as at 30 June 2005).MLC’s scale enables daily priced portfolios to access privatemarkets, which are generally illiquid assets.
Tailored bond allocations
MLC recognises that investors needs from bonds differaccording to their risk/return profile, investment timehorizon, and capital preservation needs. Because of this,bond allocations are tailored across a number of bondsub-asset classes – better aligning the bond strategywith investors’ needs. This approach results in the moreaggressive portfolios, for example, having a greaterexposure to:• inflation protected securities,• longer duration bonds,• emerging markets and high yield debt, and• real return focused strategies.
Similarly, the more conservative portfolios have a higherexposure to government bonds and shorter durationbonds in order to focus more on capital preservation.
Cash allocation
MLC doesn’t include a strategic allocation tocash in more aggressive portfolios, as thisgenerally creates a performance drag on therest of the portfolio. Instead MLC invests in adiversified mix of bonds to increase thepotential returns of the portfolio.
diversified bonds– all-maturity 25.5%∞
diversifiedbonds– short-maturity 4.5%∞
Alternative/non-traditional assets 9%#
global shares – hedged 10%†
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A long-term approach toinvestment strategy continued
The evolution of MLC’s investment strategy
MLC’s culture of innovation, and its determination to provide portfolios with optimal investmentstrategies for their risk/return profile, has ensured the continual evolution of the investment strategy.The following diagram shows some of the major changes to MLC’s investment strategy over time.
Asset classes introduced Behind the scenes initiatives
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Emulation introduced to improve the efficiency of managing portfolios
Started employing unconventional long-term investment strategies
Diversified debt strategies tailored to each portfolio's risk/return objective
Managers employed with explicit real return objectives
Tax-effectiveness of a manager's investment approach became an important consideration
Started employing managers with high conviction portfolios within Australian shares
Move away from regional global share mandates, allowing managers broader investment choice
A lower bias to the Australian market than its competitors improves diversification
MLC introduces the manager of managers investment process to Australia
Global property
High yield corporate and emerging markets debt
Strategic currency hedging within global shares
Emerging markets
Global bonds/Inflation-linked bonds
Private markets
The MLC difference
MLC’s extensive researchmeans it is often the first, orone of the first, Australian multi-managers to introduce newasset classes or enhancementsto its investment strategies –such as inflation-linked bonds,emerging markets, privatemarkets, and tailored debtstrategies.
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Benefits of MLC’s long-term approach to investment strategyInvestors• Superior long-term returns from a disciplined asset allocation process, and access to
different asset classes.• Superior long-term returns by avoiding chasing short-term returns, trends or market fads.• Tight risk control from a disciplined asset allocation and rebalancing approach.• Tight risk control from better diversification across asset classes.• A continuously reviewed and constantly evolving asset allocation that takes advantage of
new and innovative asset classes and strategies.• A range of multi-sector portfolios to suit different investors.• More reliable performance over a range of market and economic conditions through broad
diversification, quantitative analysis and testing.
Advisers• A range of tailored ‘true to label’ portfolios to suit different clients.• Comfort that clients are receiving an asset allocation that has been thoroughly tested for
robustness over many different economic scenarios and market conditions.• Efficiency in using fully-implemented portfolios.• Ability to focus on the highest value-add component of a client’s financial plan – technical
advice and strategy.
Selecting excellent investmentmanagersNo single investment manager will be the best performer in a single asset class at all times acrossdifferent economic and market environments. Based on this, MLC identifies and hires from among thebest investment managers in the world.
MLC introduced this approach to Australia in 1985 and has been using it ever since. And, while thisprocess continues to evolve and improve over time, the fundamentals behind it have remained largelyunchanged.
Indepth manager research
In identifying what are believed to be the world’s best investment managers, MLC commits resourcesdedicated to finding managers who can demonstrate a sustainable competitive edge.
There are actually very few firms in any asset class that have a real and sustainable competitive edge.And there is ample academic evidence, in addition to MLC’s experience, that clearly shows brand andpast performance are not helpful in identifying investment skill.
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An example of MLC’s research process – JF Capital Partners
JF Capital Partners (‘JFCP’) is an Australian share specialist firm that was established late in1998. MLC appointed JFCP in the second half of 2001.
The appointment followed a series of formal reviews – conducted to achieve a thoroughunderstanding of JFCP, and to confirm they had a sustainable competitive edge in themanagement of Australian share portfolios. The aspects of JFCP that MLC reviewed included:ownership structure (JFCP is a 50/50 joint venture between the investment staff andJP Morgan Fleming Asset Management), investment philosophy and process, investment teamcomposition and experience, stock research, stock selection and portfolio constructionprocesses, and implementation.
MLC's first review of JFCP was in October 1999, after all members of the firm’s investmentteam had been appointed. This meeting revealed JFCP’s commitment to deep, comprehensiveresearch via detailed financial modelling of companies. The stock modelling observed wassome of the most detailed MLC had seen in Australia. Though at this early stage of the firm'sdevelopment, not all company models had been completed. MLC considered JFCP a managerof high interest, worthy of detailed review once organisational and stock research matters werefinalised.
An intensive review of JFCP commenced in 2001, with five meetings held in the first half of theyear. The first two meetings were designed to achieve a thorough understanding of all aspectsof the firm and its investment process. At the third meeting, MLC reviewed all seven membersof the investment team to judge their individual and collective quality.
Prior to JFCP's appointment in the second half of 2001, MLC conducted a due diligence reviewof the firm's internal portfolio management, compliance and dealing systems. MLC alsoconducted a detailed review of JFCP’s portfolio style characteristics via MLC’s DataWarehouseportfolio diagnostics tool. This analysis confirmed MLC’s expectations that JFCP’s processresulted in portfolios with pronounced growth features, and they were different from the stylecharacteristics of other appointed managers.
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A rigorous selection process
Since 1994, MLC has conducted over 3,000 manager meetings – averaging more than one every
working day and amounting to over 10,000 man hours. No individual investor could possibly replicate
this depth of research. Nor could most research houses, multi-managers or dealership researchers.
But this level of research is necessary to have any reasonable level of confidence about the sustainable
competitive edge of a manager. Which is why MLC can take several years to be confident enough in a
manager to employ them.
The MLC difference
The only way to identify excellent managers is to perform in-depth qualitative research, andquantitative analysis of each managers’ portfolios. MLC’s size and scale allows a team ofexperienced research specialists to do whatever it takes to identify a manager’s competitiveedge, rather than having to rely on unreliable measures such as brand and past performance.
MLC’s selectedcomplementary investment
managers
Sub-set of investment managers ofconsiderable interest
Global universe encompassing thousands of investment managers
Millions of securities from around the world
Selecting excellent investmentmanagers continued
Identifying a sustainable competitive edge
MLC’s opinion on whether an investment manager has a sustainable competitive edge is based on howthat manager meets key criteria:
Investment philosophy
A manager’s investment philosophy represents their core set of investment beliefs. Having a logical anddefensible investment philosophy is essential to being a successful investment manager. If a managercannot enunciate their philosophy, it probably does not exist.
Investment approach
This refers to the process the manager uses to effect their investment philosophy. If the philosophyinvolves fundamental research, does the manager have excellent research resources? If it involvesquantitative models, have the models been developed rigorously, and are they implemented efficiently?
Investment staff
MLC reviews the quality of the staff, their investment and industry experience, formal educationalqualifications, the synergy of the team, appropriateness of the team size and structure, incentivestructure, and firm culture.
Ownership structure
MLC examines the stability and composition of the ownership structure, equity participation byinvestment professionals, and incentives resulting from the ownership structure.
Research
The validity of a manager’s screening processes, its criteria to identify research opportunities, availableresources for research, model-building expertise, sources of insight and willingness to research someor all of the markets are considered.
Portfolio construction
The role of the benchmark, risk management, definition of risk, use of quantitative tools and/ortechniques, how stock weighting decisions are made, and portfolio construction guidelines are justsome of the areas that MLC examines.
Implementation
A manager’s decision-making structure, dealing process, compliance issues, and whether their currentassets impede their ability to execute the necessary trades in a timely and cost-effective manner areconsidered.
Assets under management
MLC reviews managers’ business plans, growth in assets under management, absolute level of assetsunder management, and the ability to implement their investment philosophy given assets undermanagement.
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The MLC difference
The decision to appoint amanager is ultimatelyjudgmental. MLC’s investmentteam benefits from an averageof 12 years valuable industryexperience.
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Why MLC does not rely on past performance
When selecting managers, MLC looks beyond past performance. As markets move in cycles, certainmarket conditions will suit certain types of managers. Even the best managers are likely to experienceshort-term underperformance if market conditions don’t suit their investment strategy.
MLC believes the fundamentals of an investment manager, such as those outlined above, are muchbetter indicators of a manager’s skill than past performance.
Investors lose fromchasing performance
Many investors struggle tooutperform the market, andchasing performance is one ofthe most common investmentmistakes. A 2004 study byDalbar – a Boston-basedmarket research firm –compared returns from the USshare market to thoseachieved by the averageinvestor over the previous 20 years.
The study found the US sharemarket (S&P 500) returned anaverage of 12.98% p.a. overthis period – effectively turninga $100,000 investment intoalmost $1.15 million. Bycontrast, investors who tried topick winners, (invariably usingpast performance as a guide)received only 3.5% p.a., oraround $200,000 in dollarterms. By chasingperformance, investorseffectively missed out onalmost 10% p.a., or about$950,000 on their original$100,000 investment.Source: ‘Quantitative Analysis ofInvestor Behaviour’ – Dalbar,2004.
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Case Study – MLC and Capital International
Capital International (‘Capital’) is a good example of a manager who has experienced periodsof over and under performance at various intervals since MLC included them as a global sharemanager in 1985. Their excess performance (measured against the MSCI World (ex-Australia)Index) over rolling 1-year periods is illustrated below.
When Capital was first appointed, and at various times during their appointment, theyexperienced prolonged underperformance relative to the index. While Capital hasunderperformed at times, MLC has not lost conviction in their competitive edge and their abilityto add value over the long term. By keeping Capital as a global share manager, MLC investorshave been rewarded by subsequent out-performance. Since their inclusion as a global sharemanager within MLC’s portfolios in 1985, Capital has generated an average of almost 3% p.a.(as at 30 September 2005) above the index.
Capital InternationalExcess annual returns vs MSCI World Index, June 1986 to September 2005 (before fees and taxes)
Source: MLC Investments
The power of specialists
MLC’s investment process typically results in the appointment of managers who specialise in aparticular asset class – rather than managers who try to cover all asset classes.
The theory behind this is quite simple – it’s easier to be good at one discipline than a range of them.
Take the example of an Olympic decathlete. They must spread their training, focus and physicalstrength across ten different events – as opposed to being able to concentrate on one specificdiscipline.
There’s no doubt a decathlete is an outstanding athlete, but when you compare their performances ineach individual event with that of the specialists, it’s clear an all-rounder cannot compete withindividuals who specialise in just one event.
The amount the Sydney 2000 Olympic decathlon champion wasoutperformed by all the individual event champions
MLC researches, selects and combines the best specialists so you don’t have to. By choosing one ofMLC’s manager of managers portfolios, your clients have instant access to the managers MLC believesare among the best of the best.
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Selecting excellent investmentmanagers continued
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Ongoing review
MLC’s manager review and evaluation process does not end when a manager is appointed. MLCcontinuously reviews appointed and potential managers with the primary focus on ensuring theircompetitive edge is retained over time. This process is illustrated in the following diagram:
Daily: Monitor transactions and manage cash flows
Monthly: Review portfolio characteristics, style analysis andperformance, to ensure continuity of manager style and
highlight any structural changes in the portfolio
Quarterly: Strategy review of portfolio strategy andperformance by entire manager research team
Six-monthly: Formal reviews on all appointed managers
Annually+: Asset class strategy review
Changing managers
Just as a sustainable competitive edge is what attracts MLC to a certain manager, the loss of this edgecan lead to a manager’s removal. Structural changes to MLC’s investment strategy may also lead tochanges to the manager line-up, with some managers not having a role to play in the new strategy.
MLC will not remove a manager as a result of poor performance alone. Poor performance contains verylittle information about future performance, and every manager has periods of poor performance whentheir investment strategy is not favoured by the prevailing economic and market conditions.
Poor performance is only used as a prompt for MLC to reaffirm the original reasoning behind themanager’s appointment, and that their competitive edge remains intact. If MLC continues to holdconviction in a manager, it will ride out the periods of poor performance that all investment managersexperience from time to time.
Customised mandates with managers
When MLC hires an investment manager, they are assigned a specific mandate. This means themanager will look after securities separately for MLC, rather than pooling them with other investors.This gives rise to a number of key benefits to investors:• MLC can work with investment managers to tailor a ‘high conviction’ portfolio with higher expected
long-term after-tax returns.• MLC’s investors are not detrimentally affected by transactions initiated by other investors within a
larger investment pool.• Transaction costs and capital gains tax are reduced – both day-to-day and when manager changes
occur (see page 25 for more information).
Why go high conviction?
High conviction portfolios are so named because they generally contain only that manager’s best (or‘highest conviction’) ideas. This differs from many standard portfolios which often include ‘filler’ stocks– stocks that are held largely to help ensure the manager’s performance doesn’t vary significantly fromthe market as a whole.
Because high conviction portfolios typically hold fewer securities than the manager’s standard portfolio,they are expected to generate higher returns, and experience greater volatility – as illustrated in thediagram below.
High conviction portfolios are generally not available to individual investors, as few managers arewilling to accept the business risk of offering a portfolio that has the potential to dramaticallyunderperform the market as a whole. Likewise few investors can tolerate the volatility that can oftenaccompany a single manager’s high conviction approach.
MLC, because of its scale and established manager relationships, can encourage managers to run highconviction strategies on its behalf. It then combines a number of high conviction strategies in a singleportfolio – reducing volatility through diversification while still maximising potential returns. This allowseach manager to pick only its best stocks, but ensures the overall portfolio is not overly exposed to anyone particular manager’s choice of stocks.
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Selecting excellent investmentmanagers continued
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The MLC difference
Tax-awareness is a strongfocus at MLC. Each investmentmanager’s ability to producesuperior returns is evaluatedon an after-tax basis. Forexample, managers with lowerturnover generally generatelower taxable capital gains.MLC looks for managers itbelieves will generate strongafter-tax returns.
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High conviction works
The following graph shows the performance of high conviction managers against the full universe ofAustralian share managers, with high conviction managers generating superior excess returns (relativeto the S&P/ASX300 Accumulation Index) in all periods considered.
High conviction managers outperformOutperformance relative to ASX300
Source: InTech
Benefits of MLC’s manager selection process
Investors• More consistent returns by using specialist managers with an identified competitive edge,
rather than responding to or chasing past performance.• Better returns by accessing preferred managers not normally available to investors
(eg. boutiques and institutional only managers).• Superior returns through use of customised mandates and high conviction portfolios.• Lower volatility of returns due to broad diversification across managers.• Lower risk due to continual monitoring of managers.• Confidence their portfolio is researched and backed by Australia’s largest multi-manager.
Advisers• Reduced compliance and implementation requirements associated with manager changes
within client portfolios.• Ability to give clients access to portfolios based on the speed, scale and depth of MLC’s
manager research.• Confidence manager research is undertaken and implemented without any potential conflicts
of interest.• Efficiency in using fully implemented portfolios, including consistent portfolios across all
clients.• Ability to focus on the highest value-add component of a client’s financial plan – technical
advice and strategy.
10%
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High convictionFull universe
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Combining different investmentmanagersWhy combine investment managers?
Every investment manager has periods where their investment process is not favoured by prevailingeconomic and market conditions. Therefore, an investment manager’s performance will fluctuate overtime. As a result, it is not enough to find what you believe to be the best manager, as this will result insignificant volatility of returns within that asset class.
In order to reduce the volatility of returns associated with a strategy dependent on a single investmentmanager, MLC combines managers with different, but complementary, insights into investmentmarkets. And as long as you continue to select the ‘best’ investment managers, combining severaldifferent managers will not dilute long-term performance.
The graph below illustrates that while each manager is individually good, their excess returns fluctuate,and may even move in opposite directions (eg. due to different styles such as ‘value’ and ‘growth’). Bycombining different but complementary investment managers, the volatility of returns is reduced –creating more consistent returns without compromising long-term returns.
Combining managers reduces volatilityExcess returns versus the S&P/ASX300 (All Ords before April 2000).Rolling 12 month periods – July 1996 to September 2005 (monthly)
Source: Mercers Investment Consulting
This simplistic example with two managers highlights the benefits of combining different investmentstrategies. But there are a number of other considerations when combining managers – such asgetting the right number of managers, and working out how much to allocate to each to get the rightbalance.
JFCPDimensional50% Dimensional and 50% JFCP
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The MLC difference
Diversifying across a widerange of the world’s bestinvestment managers – andimplementing the strategyefficiently – takes significantscale and resources. MLC’ssize and expertise not onlyallows it to research andemploy a large number ofmanagers, it helps reduce theassociated costs andinefficiencies that wouldotherwise diminish potentialreturns.
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Why have many managers?
Because MLC encourages its managers to run high conviction portfolios, each individual manager’sreturns are likely to be extremely volatile. Diversifying across a number of managers creates a morerobust investment strategy, with the following benefits:• Greater diversification of insights – if one manager underperforms, there is less drag on the
aggregate portfolio.• Improved opportunities to transfer assets between managers when transitioning managers in or out
of a portfolio, reducing transaction and other costs.• Greater flexibility when a manager is terminated – less reliance on individual managers may mean
that finding an immediate replacement is not necessary.• Less of the portfolio is impacted if a manager is replaced.
As long as MLC is successful in hiring excellent managers, combining several managers does not dilutelong-term performance. Each manager is still expected to generate a high level of outperformance,although they will peak at different times.
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Active money for excess returns
To have the capacity to deliver excess returns, a portfolio must be made up of a combination ofmanagers different enough to ensure the resulting portfolio is different to the index.
This chart shows ‘active money’ for MLC’s Australian share managers’ portfolios. The higher theactive money percentage, the higher the bets the manager is making against the index. Theaggregate MLC portfolio (light blue column) has 32% active money – putting it at a level verydifferent to the index (shown as 0% on the right) and comparable to many standard single-manager portfolios.
Individual manager’s active money as at 30 June 2005
Source: MLC Investments
Combining different investmentmanagers continued
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Determining the allocation to each manager
Each asset class strategy built by MLC has a desired risk and return profile, which is used as the basisfor determining the appropriate combination of managers to achieve that profile.
Determining the allocation to each manager starts with a qualitative judgement based on MLC’sintimate knowledge of each manager’s investment approach. Quantitative analysis is then used to testthe proposed combinations historically using MLC’s in-house software – the DataWarehouse.
The DataWarehouse enables MLC to map the characteristics of different managers’ portfolios, and theaggregate MLC strategy, across many different measures including (where applicable):• Active money• Number of stocks• Maximum country, stock, sector and industry bet• Deviation from the market index at a country, stock, sector and industry level• Market capitalisation using a number of measures• Sales to price• Cash earnings to price• Earnings to price• Earnings projections for the next one and two year periods• Dividend yield• Book to price• NTA to price• Return on assets• Return on equity• Beta• Interest cover
MLC does not rely on any one measure. Where two managers may look similar using one measure,they are often very different on another measure (see over page).
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Benefits of MLC’s approach to combining managersInvestors• Lower risk through combining several complementary managers, reducing portfolio
volatility.• Lower risk of one manager dragging down the performance of the overall portfolio.• Broader diversification of manager insight than is available through other investment
solutions.
Advisers• Ability to give clients access to a broad number of managers without the complexities
involved in blending multiple managers.• Clients are not overly exposed to risks of a particular style of investing.• Ability to give clients access to portfolios, and a number of managers, normally only
available to multi-million dollar clients.• Efficiency in using fully-implemented portfolios.• Ability to focus on the highest value-add component of a client’s financial plan – technical
advice and strategy.
WallaraBalancedHighbridge CapitalConcordContangoLazard AEJardineDimensionalMBAMLC aggregateJu
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A composite of some of these measures is graphed below for MLC’s Australian share manager line-up.Managers with scores above 1 would generally be classified as having a value style, and below 1,growth.
Style measures vs ASX300
Analysing these measures helps MLC consider and monitor the structural and style biases of theaggregate strategy through time. Without this depth of insight it would be difficult to confirm if themanager mix is consistent with the objectives of the strategy.
Typically, the manager configuration is adjusted and re-run through the DataWarehouse many times asthe manager weightings are refined. The quantitative analysis helps support the qualitative judgementon the combination of managers that best meets the objectives of the asset class. The specific aim isto attain broad diversification in a portfolio of exceptional managers with complementary investmentapproaches.
Source: MLC Investments
Implementing portfoliosefficiently
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Implementation is a critical part of any investment solution. Even if the best investment strategy andinvestment managers are selected, there are potentially substantial losses if a portfolio is notimplemented efficiently.
To counter this, MLC has a team of investment professionals dedicated to implementation. Theirprimary functions are:• managing daily cash flows to ensure asset allocations and manager weights are kept in balance
without any unnecessary buying and selling of the underlying assets.• managing transitions that result from strategy changes, or from significant client activity.• ensuring managers’ activities are consistent with their mandates.• structuring investment vehicles to facilitate efficient outcomes.• ensuring the portfolio is implemented in a tax-efficient manner.• reviewing managers’ back-office arrangements and other aspects that may represent an
operational risk.
Rebalancing and managing cash flows
MLC applies a disciplined rebalancing approach to keep each portfolio within 2% of its targetallocations. This ensures the portfolio remains ‘true to label’ – giving you and your clients comfort theirportfolio maintains the characteristics they originally chose it for.
One of the benefits of a disciplined rebalancing approach is it essentially forces the portfolio to reducethe money allocated to asset classes or investment managers that have performed well, and increasethe allocated money to asset classes or investment managers that have not done as well. Although this‘buy low / sell high’ approach is essentially a risk control, it can actually result in improved returnswhen compared to letting a portfolio ‘drift’ in a changing market.
The MLC difference
The way rebalancing is implemented can have a significant impact on clients’ returns.For example, a rebalancing approach which involves the actual selling and buying of assets(eg. due to insufficient cash flows within a client's portfolio) can result in significant capitalgains tax implications and transaction costs.
MLC’s specialist implementation team ensures rebalancing is undertaken as efficiently andcost-effectively as possible. This generally involves allocating MLC's considerable daily cashflows to the most underweight asset classes and managers (as opposed to buying/sellingassets). This helps reduce any implementation leakages (such as transaction costs and capitalgains tax), and means MLC only buys and sells assets for rebalancing purposes in the mostextreme circumstances.
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Managing transitions
The art of ‘transition management’ (the process of planning, coordinating and implementing a changein a portfolio) is complex, and often overlooked. However, the efficient and cost-effective managementof any change to your clients’ portfolios is critical to ensure they do not ‘leak’ valuable returns.
The MLC difference
MLC's experience in facilitating transitions assists in minimising potential risks. In addition, thecosts associated with transitions are managed carefully by:
• using scale to attract low brokerage rates.• maintaining excellent relationships with many local and global brokerage organisations that
offer a transition service at attractive rates.• avoiding unnecessary sales and purchases on the market.• maximising the transfer of securities between managers and portfolios.• minimising cash flow and market timing mismatches.• ensuring that portfolios remain fully invested while moving to the new target portfolio.
Managing transitions makes a difference
In November 2004, MLC announced changes to its Australian share strategy, including:• the appointment of Balanced Equity Management and Wallara Asset Management,• the termination of Credit Suisse Asset Management, and• the introduction of ‘emulation’ (see page 28) to improve ongoing implementation
efficiencies of MLC’s multi-manager Australian share strategy.
The potential costs involved in such a transition, in order of magnitude, are as follows:1) Market impact – Placing large ‘buy’ or 'sell' orders for a particular stock can have an
impact on that stock’s market price, meaning the manager may pay more (or receiveless) for the stock than they otherwise would have.
2) Opportunity costs – To avoid market impact costs, trading of stock may be delayedduring a transition. Any price movement during this time is an opportunity cost toinvestors as they may have to pay more (or receive less) for a stock.
3) Brokerage – The fees incurred when trading stocks in the market, or in any off-market transfers with transition managers.
4) Capital gains tax – The tax payable on assets sold as a result of a manager change.
MLC managed these costs by transferring (or ‘crossing’) as much stock as possiblebetween managers (around 74% of stock in this case) – minimising the amount of stocktraded on the market or sold as a result of the transition. The remaining stock (26%) wastraded on the market. The fact MLC used a specialist transition manager for theseremaining trades, and did not notify the market of the transition until it was completed(unlike some other multi-managers and asset consultants), meant the market impact wasminimised.
In this case, MLC’s transition cost investors only 0.05%, compared to the estimated 2.7%*typically associated with a non-managed transition. This highlights the benefits of MLC'scommitment to managing transitions efficiently.* Citigroup Global Markets Australia Limited
Why use a custodian?• Safety. Your clients’ money is kept in a separate, independent account – and is not vulnerable
to the financial wellbeing of any one organisation.• Efficiency. Your clients’ money is held in a single holding. This not only reduces administration
costs, but it prevents the need for unnecessary trading of ‘common securities’* when MLCreplaces a manager – helping reduce transaction costs.
• Accuracy. Because they hold all securities, the custodian can prepare daily transactionrecords – helping ensure all trades have been conducted correctly and in a timely fashion.
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Implementing portfoliosefficiently continued
* Common securities are securities (such as shares or bonds) contained in the portfolios of both the outgoing manager and theincoming manager. MLC’s manager of managers investment process avoids the unnecessary sale and repurchase of suchsecurities during a manager transition.
Investors’ funds are received by MLC and then deposited in accounts withthe independent custodian, State Street. The custodian then monitors andmaintains the accounts on behalf of MLC. MLC sets the strategic assetallocation of the relevant portfolios and is responsible for the investmentmanager selection.
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The specialist investment managers (selected by MLCand given specific mandates) instruct the custodian tosettle trades in accordance with the investment decisionsthey make under their mandates.
The independent custodian is responsible for settling trades asadvised by the managers. They are responsible for the processingof all transactions and hold all assets on behalf of the beneficiaries(the investor).
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Specialist investment managersas at 30 November 2005
• ABN AMRO Asset Management• Alliance Capital Management LP• Balanced Equity Management • Bernstein Investment Research &
Management• BlackRock• Bridgewater Associates • Capital International• Challenger Funds Management Limited• Citigroup Global Markets Australia• Concord Capital• Contango Asset Management
• Dimensional Australia• Goldman Sachs JB Were Investment
Management• Highbridge Capital• JF Capital Partners• LaSalle Investment Management
Securities• Lazard Asset Management• Maple-Brown Abbott• Morgan Stanley• National Specialist Investment
Management
• Oaktree Capital Management• PIMCO• Resolution Capital• State Street Associates• UBS Global Asset Management• Vanguard Investments Australia• W.R. Huff Asset Management • Wallara Asset Management• Walter Scott & Partners Limited• Wellington Management Company
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Implementing portfoliosefficiently continued
Reducing taxation and transaction costs of manager trading
Running any portfolio using multiple managers gives rise to the possibility that, because investmentmanagers have different philosophies and views on stocks, one investment manager will buy a securityaround the time another manager in the portfolio may be selling that same security. This results inunnecessary turnover of stock, leading to:• unnecessary transaction costs,• exposure to market spreads, and • the early realisation of any capital gains.
The end result is lower returns for investors.
MLC has taken an innovative approach to reduce these implementation leakages and improveinvestors’ returns. MLC have named this approach ‘emulation’ – a process that involves consolidatingall the portfolios of MLC’s managers into a single portfolio, which is then replicated by animplementation manager (Vanguard). As the aggregate portfolio changes, Vanguard only trades the netchanges (see diagram).
Under a traditional approach, if two managers were both undertaking the above transactions on thesame stock, there would be two transactions – one manager buying 3,000 shares and the other selling2,000 shares (ie. a total of 5,000 shares traded). Any capital gains tax (CGT) would then be realised onthe 2,000 shares sold.
Using emulation, Vanguard only trades the net amount of 1,000 shares, substantially decreasing theamount of shares traded on the market.
The reduction in costs arises because Vanguard only trades any differences in the overall portfolio,rather than both the larger buy and sell transactions. This process results in lower transaction andother costs for MLC’s portfolios which means higher returns for investors.
Traditional Emulation
Buy (+3,000)
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Total shares traded 5,000 1,000CGT exposure 2,000 0
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The MLC difference
MLC's dedicatedimplementation team isfocused on reducingimplementation leakages –finding innovative solutions toproblems others may not evenbe aware of.
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Benefits of MLC’s efficient portfolio implementation
Investors• Superior returns through lower implementation leakages when managing the portfolio.• Less risk due to portfolio consistently being efficiently rebalanced to its target allocations.• Confidence that their money is held separately by a custodian, and is not included within the
assets of any single organisation.• Confidence that managers are investing their money in accordance with the goals and
objectives of the fund.
Advisers• Compliance benefits in knowing investors’ portfolios remain true to label with the preferred
investment strategy and manager line-up.• Speed and ease of manager changes, which occur without needing to see clients, prepare
Supplementary Statements of Advice, or liaise with your platform to implement the change.• Efficiency in using fully-implemented portfolios.• Able to focus on the highest value-add component of a client’s financial plan – technical
advice and strategy.
Why use a multi-manager solution?
Many investors expect their financial adviser to not only provide technical advice, but to offer detailedinvestment advice as well. This is generally based on the misconception that advisers are in a positionto know what the best individual investments are for their particular circumstances.
As the diagram below illustrates, there are potentially millions of securities to invest in, and no-one canreasonably expect an adviser to identify the best of these. Instead, the best advisers spend the majorityof their time looking after the technical aspects of their clients’ financial affairs.
Using a multi-manager provides you with the flexibility to position yourself as your clients' financialadviser rather than just an investment adviser. You can then focus on providing the highest value-addelements of a client's financial plan – technical advice and strategy, including insurance, estateplanning, superannuation and retirement planning.
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Choosing a multi-managersolution for clients
Choosing investment managers is also a complicated and involved process,and it is next to impossible for any individual to replicate the depth ofresources available to most multi-managers.
Millions of individual securities(shares and bonds)
Thousands of investmentmanagers around the world
Accessed by around 40multi-managers in Australia
Selecting which of the millions of securities around the world are mostlikely to meet your clients' goals is almost impossible. Specialist investmentmanagers are able to focus on researching and selecting the mostappropriate securities.
A more practical approach is for advisers to research and employ the bestmulti-manager for their clients.
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Key feature The MLC difference
Sound, disciplined approach ✓ A proven asset allocation process with multiple scenario analysis to ensure clientshave a robust portfolio across many market conditions & economic environments.
Ongoing review ✓ A dedicated Capital Markets team continually reviewing assumptions and assetclasses to ensure clients have an investment strategy that reflects current research.
Access to wide range of asset classes ✓ MLC’s scale gives access to a depth of asset classes other managers can’t provide.
Access to new asset classes ✓ MLC’s culture of innovation means it is often one of the first to provide clients accessto new asset classes.
Sound, disciplined approach ✓ MLC has been selecting managers for over 20 years using the same process toidentify managers with a competitive edge, and unlike others, does not rely on pastperformance.
Dedicated research team ✓ Specialist team focused solely on researching and selecting managers.
No conflicts of interest ✓ MLC does not sell its manager or asset class research to others, and is therefore notsubject to potential conflicts of interest other researchers may have.
Regular manager reviews ✓ MLC’s close relationship with managers provides the background for MLC to regularlyreview managers and act before other researchers.
Extract the best from managers ✓ MLC uses its scale to encourage managers to run high conviction portfolios, seekinghigher returns for clients.
Enough managers to reduce risk ✓ Sufficient scale to diversify across many managers without the higher costs andcomplexity that reduce clients returns.
Managers blended appropriately ✓ Proprietary software (the DataWarehouse) to analyse every portfolio across at least 26different style measures, ensuring an appropriate blend of managers to meetobjectives and desired risk and return characteristics.
Rebalancing and cash management ✓ Dedicated implementation team rebalances portfolios to within 2% of the target asset allocation and manager line-up using MLC’s considerable cash flows, reducingthe impact of transaction costs and taxes.
Efficient transition management ✓ Carefully manages all transitions to reduce the impact of any implementation leakageon clients’ returns.
Manager monitoring ✓ Continually monitoring managers’ activities to ensure their portfolios are in line withtheir mandates.
Efficient investment structures ✓ Efficient investment structures and arrangements to minimise transaction costs andtaxes incurred by clients in the running of their portfolios.
What should you look for
Once you’ve decided to use a multi-manager solution for your clients, there are several features youneed to look for when selecting a multi-manager.
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A sophisticated solution for all types of clients
MLC’s manager of managers investment process is used by some of Australia’s largest companies, alllooking for a sophisticated way of investing money. These companies, often investing hundreds ofmillions of dollars, choose the same solution that your clients can access through MLC.
With that kind of backing and experience, wouldn’t you like to have MLC working for your clients?
Some of MLC Implemented Consulting’s clients (as at September 2005)
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Choosing a multi-managersolution for clients continued
NSW• Boral• Kimberly Clark• Lend Lease• Leighton• Qantas
ACT• Medibank Private
NZ• Bank of New Zealand
Victoria• Cadbury• Foster’s Group• Isuzu• Monash University• Pilkington• Toyota
South Australia• SACILSLB• Meals on Wheels• Mitsubishi
Northern Territory• NT Government• NT Legislative Assembly
Queensland• Parmalat• QLD Teachers’ Union• UNiTAB
Western Australia• ASGARD• Chevron Texaco• Iluka• Silver Chain
Tasmania• Tasbuild• Tasplan
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MLC has been providing multi-manager investment portfolios for 20 years – consistently deliveringsuperior returns with lower risk, as shown in the graph below.
MLC balanced portfolioAnnualised risk and return for 20 years ended June 2005 (after tax after fees).
Source: Mercers Investment Consulting
This superb long-term result has been achieved by regularly generating returns in the first and secondquartile. The graph below shows the 5-year history of MasterKey Horizon 4 – balanced portfolioagainst its peers.
MLC Horizon 4 - balanced portfolioSuperannuation multi-sector balanced growth universe from July 2001 to September 2005.Excess return versus median (after tax after fees) over rolling 5-year periods.
Source: Mercers Investment Consulting
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Annualised Standard Deviation (% p.a.) calculated monthly
MLC balancedportfolio
32 like funds started this racein May 1985. These linesshow the median risk andreturn result of the 11managers who survived the20-year period.
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The MLC difference
Rather than just delivering goodreturns over a single period ortimeframe, MLC has consistentlydelivered strong peer relativereturns on an after-tax and after-fees basis – a great result forclients.
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Providing advice with MLC’sinvestment processA good financial plan is based on more than just investment advice. It’s also about determining the bestrange of technical strategies (such as superannuation, debt management, tax planning and estateplanning) to reach your client’s goals, and implementing these strategies effectively.
An important part of the implementation stage is determining the most appropriate investment strategyto balance your client’s investment objectives, time horizons, savings ability and tolerance for volatility.The next step is investment selection, and choosing the actual investment managers to build a portfoliothat, when combined with the overall strategy, will lead to the highest probability of realising yourclients’ goals.
The diagram below illustrates the components of a financial plan, and indicates the value MLC believeseach component adds to your clients’ wealth.
Unnecessary risk is exactly that
Good advice should minimise risks that don’t get rewarded in the long run. Your clients shouldunderstand the importance of patience and discipline when investing, helping them avoid commonpitfalls like swapping asset classes and/or managers based on short-term performance.
This section outlines some of the information MLC provides to help you deliver quality financial advice,and how MLC’s manager of managers investment process helps you implement it.
How to order
For hard copy brochures – go to the adviser site at mlc.com.au, click on 'Order brochures and forms'in the Business Functions area and follow the steps.
For all other tools – go to the adviser site at mlc.com.au
Or contact your MLC representative.
Wealth accumulation
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technical strategy
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Accessing MLC’s investment process
MLC’s manager of managers investment process can be accessed through the MasterKey HorizonSeries, the MLC Long-Term Absolute Return Portfolio, and MLC’s single sector and style funds.
The MasterKey Horizon Series
The MasterKey Horizon Series portfolios have been designed to suit a range of investors with differentgoals and attitudes to investment market volatility. The seven portfolios are multi-manager and multi-sector – each containing a selection of asset classes (eg. shares, property, bonds, cash), and a range ofspecialist investment managers within those asset classes.
The MLC Long-Term Absolute Return Portfolio
The MLC Long-Term Absolute Return Portfolio uses unconventional investment strategies (includinggearing, short selling and derivatives) in a portfolio focused on generating real after-tax returns over 20or more years. The distinctively long investment time frame enables MLC to use investment strategieswhich may take many years to reward investors.
MLC multi-manager sector and style funds
MLC also uses its manager of managers investment process to create a range of single-sector andstyle-biased investment options. Available on the MasterKey investment menu and many other majorplatforms, these options allow you to put a strategic tilt on your client’s portfolio by investing in a singleasset class (including Australian or global shares, Australian property securities, or cash) or in a ‘style-biased’ portfolio (typically using managers with ‘value’ or ‘growth’ investment styles).
Horizon 4 is diversified across...• 5 asset classes• 28 investment managers• over 40 countries• over 3,000 securities
The accelerated growth portfolio Horizon 7
The share portfolio Horizon 6
The growth portfolio Horizon 5
The balanced portfolio Horizon 4
The conservative growth portfolio Horizon 3
The income/capital stable portfolio Horizon 2
The bond portfolio Horizon 1
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Providing advice with MLC’sinvestment process continued
MLC’s adviser-to-client tools
MLC has produced a range of brochures and tools to help you explain the benefits of MLC’s manager ofmanagers investment process to clients. Here is a sample of some of them.
Explaining investment concepts
Often clients need guidance and education on general investment concepts, including why and howthey should think about investing. MLC provides a number of tools on mlc.com.au to help you explaininvestment concepts to clients.
The chaser
A graph showing how a strategic approach to asset allocationhas delivered better returns than chasing last year’s topperforming asset class – highlighting the benefit of a strategicasset allocation approach.
Asset return charts
Historical charts of asset class returns, showing volatility andlong-term returns for the major asset classes over the past 20 years.
Short-term noise, long-term clarity
A graph highlighting that while there may be volatility in short-term (monthly) returns, there has been a considerableincrease in investors’ capital over the long term.
Why market timing doesn’t work
An illustration of why you shouldn’t try to time markets –missing only 10 good or bad days can have a significantimpact on your portfolio over a 25-year period, so the risksoutweigh the rewards.
Annual returns
A graph showing the single-year returns for major assetclasses over various periods.
Own or loan
A case study showing that, over the long term, investors wouldhave been better owning shares in National Australia Bank thanputting their money in a term deposit with the bank.
$187,316
$149,694
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Strategic Balanced PortfolioThe Chaser
The Chaser vs a strategic balanced portfolio
Asset Class ComparisonHow the Asset Classes performed June 1985 - June 2005
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
Mar 90
Mar 91
Mar 92
Mar 93
Mar 94
Mar 85
Mar 86
Mar 87
Mar 88
Mar 89
Mar 95
Mar 96
Mar 97
Mar 98
Mar 99
Mar 00
Mar 01
Mar 02
Mar 03
Mar 04
Mar 05
Australian SharesAustralian PropertyAustralian Fixed InterestGlobal SharesCash
-15%
-10%
-5%
0%
5%
10%
15%
20%
Dec 80Dec 81Dec 82Dec 83Dec 84Dec 85Dec 86Dec 87Dec 88Dec 89Dec 90Dec 91Dec 92Dec 93Dec 94Dec 95Dec 96Dec 97Dec 98Dec 99Dec 00Dec 01Dec 02Dec 03Dec 04
Mon
thly
retu
rn
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000Monthly returnAccumulated value of $10,000
Short term noise, long term clarity?Global share returns
Missing the 10 best and Worst daysValue of $1.00 since 1979
$22.75
$13.63
$56.87
$-
$10
$20
$30
$40
$50
$60
Dec-79Dec-80Dec-81Dec-82Dec-83Dec-84Dec-85Dec-86Dec-87Dec-88Dec-89Dec-90Dec-91Dec-92Dec-93Dec-94Dec-95Dec-96Dec-97Dec-98Dec-99Dec-00Dec-01Dec-02Dec-03Dec-04
Australian sharesAustralian shares missing the 10 Best DaysAustralian shares missing the 10 Worst Days
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1989199019911992199319941995199619971998199920002001200220032004
Inte
rest
/div
iden
ds
0
10,000
20,000
30,000
40,000
50,000
60,000
NAB - Dividends Term Deposits - InterestNAB - Capital value Term Deposits - Capital Value
Own or loan??$10,000 invested in NAB and term deposits? 31 Dec 1989 - 31 Dec 2004
Global share returns (in local currency)
-60%
-40%
-20%
0%
20%
40%
60%
80%
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
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Explaining MLC and its products
MLC investment process pamphlet
A client-facing booklet that accompanies this one, helping youto explain the benefits of MLC’s managers of managersinvestment process to clients.
Order No: 54148
Horizon Series Toolkit
A series of 7 flyers (one for each Horizon Series portfolio) todemonstrate to clients the many layers of diversification andfeatures available within the Horizon Series portfolios, includingasset and manager allocations.
Order No:52007 Toolkit52002 Horizon 152011 Horizon 252012 Horizon 352013 Horizon 450964 Horizon 552014 Horizon 652654 Horizon 7
MLC Long-Term Absolute Return Portfolio Toolkit
A client-facing flyer demonstrating MLC's latest portfolio,including some of its unconventional strategies.
Order No: 54140
Investment manager allocation tool
A website or stand-alone Excel tool which shows the targetamount invested with each manager when you access any ofthe MLC manager of managers investment options, and showsclients the amount of diversification across asset classes andinvestment managers they receive within each MLC managerof managers investment option.
Demystifying multi-manager articles
A number of articles, available on mlc.com.au, explainingsome of the key features of multi-managers, and what to lookfor to get the best results for your clients.
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Providing advice with MLC’sinvestment process continued
Website interactive
A web tool showing clients how the MLC manager of managersinvestment process works for their portfolio.
Investment manager profiles
Descriptions of all MLC’s specialist investment managers,available on mlc.com.au
MLC investment option profiles
A tool on mlc.com.au providing 1-page descriptions of theindividual MLC investment options available within eachMasterKey tax structure.
Other investment information
Regularly updated performance, asset allocation and stockholdings for all MLC investment options, available onmlc.com.au
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Commentaries
Quarterly updates on how each portfolio has responded tomarket conditions, including impacts at an asset allocation andinvestment manager level. Available in word format onmlc.com.au and on the annual Horizon CD, so you candownload and provide to your clients.
Horizon update presentations
A quarterly presentation for you to deliver to your clients,available on mlc.com.au and the annual Horizon CD, whichreviews annual market conditions, performance of eachinvestment option and investment manager, and enhancementswithin each Horizon Series portfolio.
Annual Horizon CD-ROM
A multimedia review tool, containing video footage of some ofMLC’s investment managers, fully scripted Horizon updatepresentations and commentaries for each of the MLC HorizonSeries portfolios. The CD will help you provide comprehensive,customised annual portfolio reviews to your Horizon Seriesclients each year.
Order No: 53845
Announcing MLC’s strategy enhancements
Strategy changes
If there are any changes made to the strategy of a MLCmanager of managers investment option, you can access fulldetails of the reasoning behind the change, and impacts of thechange on your clients’ portfolios, via e-mail and mlc.com.au
Template client letters
To help you inform your clients of changes to their MLCportfolios as a result of strategy changes, templates letters areavailable on mlc.com.au
Reviewing MLC’s portfolios
To ensure you and your clients are up to date with what’s happening within the MLC investmentoptions, there are a number of tools available.
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For the latest asset and manager allocations for the MasterKeyHorizon Series and MLC multi-manager sector and style funds,order the Strategic asset allocations flyer on mlc.com.au
Order No: 54115
5280
6 M
LC 1
1/05
MLC LimitedPO Box 200
North Sydney, NSW 2059
For more information on MasterKeyplease contact your MLC representative
or call the Adviser hotline on 133 652.
mlc.com.au
To help explain MLC’s manager of managersinvestment process to clients, order copies ofMLC’s client-facing brochure on mlc.com.au
