Investing in volatile times

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Investing in volatile times
Investing Fundamentals and How MLCs portfolios
are designed to weather market volatility Septembe
r 2008
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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.
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Investment Fundamentals
Why invest in risky assets?
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Why invest in risky assets? To generate
desired returns, investors must be willing to
accept higher volatility.
Expected real return and risk assumptions5 year
expectations
Source MLC Investment Management
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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),
Propertys SP/ASX 300 Property Trusts
Accumulation Index, Aust Shares SP/ASX 300
Accumulation Index (from January 1986 only),
Global Shares MSCI World (ex Australia) in A
Gross Return
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Why invest in risky assets? History shows risky
assets are more likely to generate better
long-term returns
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Equities are investments in real companies
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Investment Fundamentals

• How to invest sensibly

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Invest sensibly and make sure your portfolio is
diversified
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.
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Invest sensibly Focus on the long-term
Short-term noise, long-term clarityJanuary 1985
- September 2008
Short-term noise here is graphically represented
by monthly performance returns
The clarity is the accumulated long-term effect
of this short-term volatility
Source SP/ASX 200 Accumulation Index, SP/ASX
300 Accumulation Index from end Nov 02
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Invest sensibly Understand market volatility
What goes up, must come down, occasionallyJan
1985 - September 2008
Source SP/ASX 300 Accumulation Index
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How to invest sensibly Its time in, not timing,
the market that matters
Missing the 10 Best Days can cost you big
time Value of 10,000 invested in 1980
Data All Ordinaries Price Index (to Dec 2003),
SP/ASX 300 Price Index (to September 2008)
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How to invest sensibly Chasing returns can be a
costly strategy
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How MLCs portfolios are built to weather the
storm?
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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

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Weathering Market VolatilityDiversification at
many levels
Diversified across asset classes sub-asset
classes The current asset asset classes used
across the Horizon Series portfolios
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Weathering Market VolatilityDiversification at
many levels
Diversified across investment managersThe
current manager line-up for Australian shares
exposure within the Horizon Series portfolios
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Weathering Market VolatilityDiversification at
many levels
Diversified across many different industriesThe
current Australian share industry exposure within
the Horizon Series portfolios
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Weathering Market VolatilityDiversification at
many levels
Diversified across companiesThe current
Australian shares company exposure within the
Horizon Series portfolios
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Weathering Market VolatilityDiversification 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

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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 allocation

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

1. Recession
2. Recovery
3. Aus deflation destructive (Japan 1990s)
4. Global depression or stagnation (1930s)
5. Hyperinflation (Germany post war)
6. Financial collapse (eg Asian financial collapse,
   LTCM)
7. Oil price or other commodity price shock
8. Global pandemic
9. Global catastrophe
10. Global catastrophe adverse economic environment
11. Global conflict / war
12. Protectionism
13. Exogenous risk drives investor uncertainty
14. Structural collapse
15. Market bust Rise in Correlations
16. Deregulation
17. Paradigm shift permanently lower vals for
    equities (higher rp)
18. Paradigm shift permanently higher vals for
    equities (lower rp)
19. Speculative bubble

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Weathering Market Volatility Many Excellent
Investment Managers
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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