investing in volatile times investing fundamentals and how mlc’s portfolios are designed to...
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Investing in volatile times
Investing fundamentals and how MLC’s portfolios are designed to weather market volatilityDecember 2008
Slide 2
Disclaimer
This document was prepared by MLC Investments Limited (ABN 30 002 641 661), and MLC Limited (ABN 90 000 000 402), members of the National group of companies, as an information service without assuming a duty of care. Accordingly, reliance should not be placed by anyone on this document as the basis for making any investment, financial or other decision. While the information included is believed to be accurate, no member of the MLC Investments Limited or any member company of the National Group of companies accepts responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis of the material included.
An investment with MLC does not represent a deposit with or a liability of National Australia Bank Limited, MLC Investments Limited, MLC Limited, or other member company of the National Group of companies and is subject to investment risk including possible delays in repayment and loss of income and capital invested.
None of National Australia Bank Limited (ABN 12 004 044 937), MLC Investments Limited, MLC Limited, other member companies in the National Group of companies, the underlying fund managers of the investments, any trustees or their respective officers guarantee the repayment of capital invested, the payment of income, the performance of the specific investments selected by investors or the performance of any MLC products except where specified on the current disclosure document.
Slide 3
Investment Fundamentals
‘Why invest in risky assets?’
Slide 4
Why invest in risky assets? ‘To generate desired returns, investors must be willing to accept higher volatility.’
Expected real return and risk assumptions 5 year expectations
Source: MLC Investment Management
Slide 5
Why invest in risky assets? ‘Riskier assets have a wider spread of returns, but higher potential returns.’
Source data based upon the following: Cash: UBSWA 90 Day Bank Bill Index (from April 1988 only), Global Bonds: Lehman Global Aggregate Hedged (from January 1986 only), Aust Bonds: UBS Composite Bond All Mats (from Nov 1989 only), Property: S&P/ASX 300 Property Trusts Accumulation Index, Aust Shares: S&P/ASX 300 Accumulation Index (from January 1986 only), Global Shares: MSCI World (ex Australia) in $A Gross Return
Slide 6
Why invest in risky assets? History shows risky assets are more likely to generate better long-term returns…
Nominal Market Returns Over Rolling 10 Year Periods (Dec 1900 - Dec 2007)
-10%
0%
10%
20%
30%
1910
1916
1922
1928
1934
1940
1946
1952
1958
1964
1970
1976
1982
1988
1994
2000
2006
Year Period Ended
% p
.a.
AUS Equity Global equity (unhedged) AUS Bond Global bonds (hedged) AUS Cash AUS Listed Property
Source: Calculated by MLC Investment Management using data presented in DMS Data Module offered through the Ibbotson Associates' software program EnCorr. Based on copyrighted books by Dimson, Marsh, and Staunton, Triumph of the Optimists, Princeton University Press, (c) 2002, and Global Investment Returns Yearbook 2003, ABN AMRO/London Business School (c) 2003. All rights reserved. Used with permission.
Slide 7
Equities are investments in real companies
Slide 8
Investment Fundamentals
‘How to invest sensibly’
Slide 9
Why invest in risky assets? ‘Riskier assets have a wider spread of returns, but higher potential returns.’
Source data: Australian Shares: All Ordinaries Accumulation Index. Global Shares: MSCI World Gross Accumulation Index ($A). Property: ASX 200 Property Trust Accumulation Index. Australian Bonds: UBS Composite Bond Index. The Diversified Portfolio is an equally weighted portfolio of all asset classes.
Diversification reduces volatility Rolling 1 yr returns to Dec 08 (assumes income is reinvested)
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Sep
-81
Oct
-82
No
v-83
Dec
-84
Jan
-86
Feb
-87
Mar
-88
Ap
r-89
May
-90
Jun
-91
Jul-
92
Au
g-9
3
Sep
-94
Oct
-95
No
v-96
Dec
-97
Jan
-99
Feb
-00
Mar
-01
Ap
r-02
May
-03
Jun
-04
Jul-
05
Au
g-0
6
Sep
-07
Oct
-08
Australian Shares Global Shares Australian Fixed Interest Property Securities Weighted Portfolio
Slide 10
Invest sensibly… Focus on the long-termShort-term noise, long-term clarityJanuary 1985 - December 2008
Source: S&P/ASX 200 Accumulation Index, S&P/ASX 300 Accumulation Index from end Nov 02
Short-term noise here is graphically represented by monthly performance returns
The clarity is the accumulated long-term effect of this short-term volatility
Slide 11
Invest sensibly… Understand market volatilityWhat goes up, must come down, occasionally
January 1985 - December 2008
Source: S&P/ASX 300 Accumulation Index
$10,000
$100,000
$1,000,000
Jun-
85
Apr
-86
Feb-
87
Dec
-87
Oct
-88
Aug
-89
Jun-
90
Apr
-91
Feb-
92
Dec
-92
Oct
-93
Aug
-94
Jun-
95
Apr
-96
Feb-
97
Dec
-97
Oct
-98
Aug
-99
Jun-
00
Apr
-01
Feb-
02
Dec
-02
Oct
-03
Aug
-04
Jun-
05
Apr
-06
Feb-
07
Dec
-07
Oct
-08
Oct 1987: Share Crash
Sept 2001: World Trade Centre Attack
US Sub-prime crisis
Note: Logarithmic scale has been used to show proportional moves in values over time
Slide 12
How to invest sensibly… It’s time in, not timing, the market that mattersMissing the 10 Best Days can cost you big time
Value of $10,000 invested in 1980
Data: All Ordinaries Price Index (to Dec 2003), S&P/ASX 300 Price Index (to December 2008)
$71,010
$41,930
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Australian Shares Australian shares, missing the 10 best days
Slide 13
How to invest sensibly… Chasing returns can be a costly strategy
Slide 14
How MLC’s portfolios are built to weather the storm?
Slide 15
MLC Horizon Series portfolios are designed to weather market volatility
• Broad Diversification at many levels
– Stocks
– Countries & Currencies
– Managers
• Long-Term Asset Allocation Approach
– Disciplined approach for many states of the world
– Regular rebalancing
• Specialist Investment Managers
– Several excellent managers
– Different, but complementary, manager approaches
Slide 16
Weathering Market Volatility…Diversification at many levels
Diversified across asset classes & sub-asset classes The current asset & asset classes used across the Horizon Series portfolios
Global Property
Global private equity
Australian Nominal Bonds
Australian Inflation Linked
Bonds
Global Nominal Bonds
Global Inflation Linked Bonds
Global shares - hedged
Emerging Markets
Global shares - unhedged
Australian shares
Slide 17
Weathering Market Volatility…Diversification at many levels
Diversified across investment managersThe current manager line-up for Australian shares exposure within the Horizon Series portfolios
Slide 18
Weathering Market Volatility…Diversification at many levels
Diversified across many different industriesThe current Australian share industry exposure within the Horizon Series portfolios
Health care
IndustrialsInformation technology
Listed property trusts
Materials
Telecommunication services
Utilities
EnergyFinancials excluding
property trusts
Consumer staples
Consumer discretionary
Slide 19
Weathering Market Volatility…Diversification at many levels
Diversified across companiesThe current Australian shares company exposure within the Horizon Series portfolios
QBE
MACQUARIE INF
CBA
BRAMBLES
TELSTRA
RIO TINTOWESTPAC
NABANZ
BHP BILLITON
Slide 20
Weathering Market Volatility…Diversification at many levels
Diversify, Diversify, DiversifyThe current manager line-up for the MLC Horizon 4 – Balanced portfolio
• Allocation to many asset classes
• 30 public market managers
• 35 private equity managers
• 40+ countries
• 60+ industries
• 1,000+ shares
• 1,000+ bonds
Oaktree
J F Capital
Lazard
Maple-Brown Abbott
NorthcapeNorthward Capital
Wallara
Fortis
Alliance
Bernstein
La Salle
Resolution
Morgan Stanley
Global Private Equity
Blackrock
Bridgewater
PIMCO
NSIM
LTAR
Wellington
Walter ScottDimensional
Capital
ContangoDimensionalUBS
WR HuffConcord
Balanced Equity
Slide 21
Weathering Market Volatility… Long-Term Asset Allocation Approach
Taking into account many different possibilities Some of the current scenarios considered in determining the Horizon Series asset
allocation19. Recovery
20. Aus deflation – destructive (Japan 1990s)
21. Global depression or stagnation (1930s)
22. Hyperinflation (Germany post war)
23. Financial collapse (eg Asian financial collapse, LTCM)
24. Oil price or other commodity price shock
25. Global pandemic
26. Global catastrophe
27. Global catastrophe adverse economic environment
28. Global conflict / war
29. Protectionism
30. Exogenous risk drives investor uncertainty
31. Structural collapse
32. Market bust – Rise in Correlations
33. Deregulation
34. Paradigm shift – permanently lower vals for equities (higher rp)
35. Paradigm shift – permanently higher vals for equities (lower rp)
36. Speculative bubble
1. Steady State
2. Deflation – constructive / productivity driven boom (1870s)
3. Stagflation (1970s), includes transition to high inflation
4. Rising inflation / inflation shock (reverse of disinflation)
5. Debt driven growth
6. Disinflation
7. Generalised global growth boom – investor optimism
8. Investor pessimism – rise in risk premiums
9. Prolonged global growth & productivity boom BRICs Res Boom
10. Economy & market bust
11. Australia only bust (world econ not weak)
12. Australian economic crisis (reversal of scenario 8) World Weak
13. Profit share mean reversion
14. Credit / monetary expansion
15. Credit / monetary contraction
16. Steady / trend growth with mean reversion
17. Slowdown
18. Recession
Slide 22
Weathering Market Volatility… Many Excellent Investment Managers
Slide 23
SUMMARY
• Recent market volatility has been merely a realisation of low volatility over last few years
• Market volatility is to be expected in any long-term investment approach
• Best approach is generally to diversify and stick to your long-term investment strategy
• MLC Horizon Series portfolios are well diversified and designed to help you reach your long-term goals