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MLC Horizon 3 Conservative Growth PortfolioAbout the Portfolio

The MLC Horizon 3 Conservative Growth Portfolio aims to grow wealth for a low to moderate level of expected volatility. The Portfolio is invested in an approximately equal mix of defensive and growth assets.

The Portfolio is designed to be a complete investment portfolio solution. It’s well diversified within asset classes, across asset classes and across investment managers who invest in many companies and securities around the world.

Source: MLC Investment Management

MLC Horizon 3 Conservative Growth Portfolio performance

Performance to 31 March 20103 month

%1 year

%3 year % p.a.

5 year% p.a.

MLC MasterKey Super / Gold Star / Business Super

(before taking into account fees and tax)

2.5 22.0 1.1 6.1

MLC MasterKey Super Fundamentals

(takes into account fees and tax)

1.8 19.3 -0.2 -

MLC MasterKey Super Gold Star / Business Super*

(takes into account fees and tax)

1.7 18.4 -0.7 3.7

*MLC MasterKey Business Super commenced on 1 July 2001 and issues the same unit price as that reported for MLC MasterKey Superannuation Gold Star. The returns outlined above do not include allowance for fee rebates you may be entitled to should you be part of a large employer plan.


MLC Investments

Target Asset AllocationMLC Horizon 3 Conservative Growth Portfolio

Australian Shares, 21.0%

Global Shares (unhedged), 13.0%

Australian Bonds, 21.6%

Australian Inflation-Linked Bonds, 8.0%

Global Absolute Return Bonds, 2.6%

Global Bank Loans, 1.4%

Global High Yield Bonds, 2.0%

Global Multi-Sector Bonds, 2.4%

Global Non-Government Bonds, 6.6%

Global Government Bonds, 4.8%

Global Private Assets, 6.0%

Global Property Securities, 3.0%

Global Shares (hedged), 6.0%

LTAR, 1.0%

Global Mortgages, 0.6%

Executive summary

All the asset classes the Portfolio invests in provided positive returns for the year to 31 March 2010. Some asset classes were particularly strong which is why the MLC Horizon 3 Conservative Growth Portfolio produced a double-digit return. While the absolute positive returns across all the asset classes contributed significantly to offsetting the falls during the GFC, both such extreme moves are highly unusual for investors in a diversified portfolio. Future return patterns may well be more diverse and be in line with the different asset class characteristics.

Global Property Securities (+85.2%), Hedged Global Shares (+51.8%) and Australian Shares (+45%) were the best performing asset classes for the year. The Bond (diversified debt) sector continued to rally (+9.6%) during the year, as credit markets continued to normalise.

There was a turnaround in the one year performance in Global Private Assets (+11.5%), driven by the continuing upgrades to valuation within this portfolio.

The Long-Term Absolute Return strategy (LTAR) maintained its positive momentum (+32.6%), which was a good outcome considering it has had a defensive positioning since the first half of 2009.

While strong performance has extended to the latest quarter, we are cautiously optimistic about the medium-term return potential. All managers in the strategy performed in line with expectations during the year to provide positive returns, although their market relative returns differed due to their individual investment style. We continue to hold our convictions in the role each manager plays in the overall portfolio.

Absolute returns

The graph shows absolute total returns of this portfolio of investments over 1 year and 5 year periods.

Historical Absolute Performance MLC MasterKey Super Gold Star Horizon 3 Conservative Growth Portfolio

(after taking into account fees and tax)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2003 2004 2005 2006 2007 2008 2009 2010

Ret

urn

% p

.a.

1 Year Ended 31 March 5 Years Ended 31 March


Contributors to the investment portfolio’s absolute returns

During the quarter all asset classes contributed positively, with Australian and global shares the largest drivers of returns.

Australian Shares returned +45% for the year and was the largest contributor to returns, given the Portfolio’s high allocation to this asset class of 21%.

MLC Super review for the year ending 31 March 2010 of 8

Although Hedged Global Shares (+51.8%) and Global Property Securities (+85.2%) provided strong returns, their contribution to returns were smaller given the lower allocation to these asset classes in the Portfolio of 6% and 3% respectively.

Returns from a range of global assets in the portfolio, hedged back to Australian dollars ($A), were very strong. This was due to the rise of the $A by +25% over the year, against a basket of currencies which constitute Australia’s major trading partners (Trade Weighted Index).

The Portfolio hasn’t produced a negative absolute return when measured over compounded five-year periods since inception.

Detractors from the investment portfolio’s absolute returns

The three-year return is still marginally negative after fees, due to the large negative return recorded in 2008 when markets experienced one of the biggest corrections on record.

The three-year return from Global Shares and Global Property remain negative.

The chart shows asset class contributors to the return

Contribution to Total Return by Asset ClassMLC Horizon 3 Conservative Growth Portfolio

(before taking into account fees and tax)

-5

0

5

10

15

20

25

AustralianShares

Global Shares- Hedged

Global Shares- Unhedged

GlobalProperty

Securities

Global PrivateAssets

LTAR DebtSecurities

Total

Re

turn

Co

ntr

ibu

tio

n %

(an

nu

alis

ed f

or

per

iod

s g

reat

er t

han

1 y

ear)

3 months to Mar-2010 1 year to Mar-2010 3 years to Mar-2010 5 years to Mar-2010



Asset class role and performance

Detailed commentaries for each asset class are available online.

Asset Class Role in Portfolio 1 year performance

Australian Shares

(21%)

10 Managers

Australian Shares aims to deliver capital growth by using investment managers who invest and diversify across many companies listed in the Australian sharemarket. Results can be volatile over the short term (under 3 years), but are expected to provide growth over longer terms (in excess of 5 years).

The performance of the strategy was very strong. The +45% one-year return (before fees and tax) was +3% higher than the market’s return. Manager returns were also generally strong with seven of ten managers outperforming the index over the year, some by substantial margins. Dimensional (+55.1%), Maple-Brown Abbott (+49.0%) and Balanced Equity Management (+48.6%) who employ a value-oriented approach to stock selection tended to be the better performers.

Stock strategies that contributed to this outperformance included overweighting Brambles, Fairfax Media, News Corporation, James Hardie and ANZ Bank. Underweighting QBE Insurance and Woolworths also made a positive contribution.

Global Shares – Unhedged (13%)

8 Managers

In addition to what’s discussed above for Australian shares, Global Shares invests in global companies listed in sharemarkets from around the world. The strategy also invests in emerging markets, helping capture key opportunities from these new markets.

The unhedged strategy returned +19.6% for the year, before fees and taxes, beating the market by +1.3%. This number has been driven by strong excess returns from Sands Capital (+25.9% over the benchmark) and Dimensional (+15.7% over the benchmark). The mix of managers with different styles of investing helped the strategy throughout the year. All managers provided positive, double-digit absolute returns for the year.

Capital (-7.9% below the benchmark) and Walter Scott (-6.7% below the benchmark) lagged the market over the year in an environment where companies with higher risk levels rose above the conservatively placed quality companies favoured by these managers.

Global Shares – Hedged (6%)

In addition to those managers above, there are 2 specialist currency managers.

In addition to what’s discussed above, returns are hedged back to the $A, significantly reducing the impact of currency movements on returns.

The hedged Global Shares strategy returned +51.8% for the year. The substantial performance difference when compared to the unhedged strategy was due to the rise in value of the $A against a basket of currencies which represents Australia’s major trading partners by +25% for the year. All countries contributed positively, with manager performance the same as in the unhedged strategy.

Global Property Securities

(3%)

3 Managers

The strategy is designed to provide comprehensive exposure to global listed property securities (including REITs). It aims to deliver growth by using investment managers who invest and diversify across many companies and securities within that asset class. Returns from property are generally expected to be higher than those from bonds, but lower than shares over the medium to long term. All returns from this asset class are fully hedged back to the Australian dollar.

The return from the Global Property strategy over the year of +85.2% was +3.3% above the market’s return. Morgan Stanley (+58.4%) was the prime contributor to the out-performance as Resolution Capital (+41.4%) and LaSalle (+42.7%) underperformed. REIT strategies that contributed to this out-performance included:

overweighting Manhattan office specialist SL Green

overweighting Japanese Real Estate Operating Companies such as Mitsubishi Estate and Mitsui Fudosan

underweighting Japanese REITs which underperformed the global index by a substantial margin.

Global Private Assets

(6%)

35+ Managers

These are investments in assets that aren’t traded on listed exchanges. An example of this is an investment in a privately owned business. Private assets can be volatile and are included in this portfolio for their growth characteristics. All returns from this asset class are fully hedged back to the Australian dollar.

There was a turnaround in the one-year performance in Global Private Assets (+11.5%), driven by the continuing upgrades to valuations within this strategy. The rising value of the $A also helped returns. Several managers have taken the opportunity presented in 2009 to improve balance sheet strength and overall health of companies in the strategy through reducing or restructuring debt, controlling costs and refocusing on core businesses. The strategy is well diversified and


http://www.mlc.com.au/mlc/im_considering_mlc/personal/investments/latest_commentary_and_views/investment_commentary


invests in over 2,000 companies world-wide.

Australian Bonds

(21.6%)

2 Managers

These are investment grade bonds issued by the Australian government, semi-governments, companies etc. They tend to perform well in environments of falling interest rates and inflation. In some scenarios, such as a recession or deflation, these bonds are likely to do well – which means they often provide excellent diversification in negative scenarios.

Australia is one of the first developed countries to start raising interest rates because our economy fared relatively well during the GFC. The market has factored in more increases, with cash rates expected to increase to 5.5% by the end of 2011. When interest rates rise, the value of bonds falls.

The strategy invests in bonds with longer terms to maturity to benefit from the higher interest rates usually paid for longer-dated securities. Yields rose across all maturities and the Portfolio was therefore hit by the increases in Australian government bond yields.

While this environment is not ideal for Australian bonds, the other sectors more than compensated overall returns this year.

On a positive note, the Australian managers, UBS and Antares both still outperformed the market. They positioned their portfolios for an increase in interest rates and adopted a short duration position, which paid-off.

Global Government Bonds

(4.8%)

1 Manager

In addition to the information on Australian bonds, global government bonds are limited to sovereign or treasury issued bonds and they generally provide a good risk-return trade-off because they’re diversified across many countries, each with a different interest rate environment. Government bonds perform well in credit crunches.

Global government bonds are one of our new specialist debt sectors, resulting from the changes announced in February. Previously these bonds were included in global nominal bonds and multi-sector bond strategies.

Although the quarter didn’t see much movement, global government bond yields have been rising (and returns have been weak) over the past year due to concerns about the increase in supply of bonds needed to fund huge budget deficits. Attention at the end of March was on the 10 year swap spreads (difference between AA-rated bank swap rates and US Government Bonds yields) which turned negative. Negative swap spreads reflect markets perceive AA rated banks’ risk of default to be lower than US government credit. While negative swap spreads have occurred in emerging countries in the past, this is a first for the US.

We’ve less than a quarter’s performance for Goldman Sachs as they’re a new manager.

Global non-government bonds

(6.6%)

2 Managers

These are investment grade bonds issued by government agencies, companies etc. In addition to the information on Australian bonds, global non-government bonds generally provide a good risk-return trade-off because they’ve a diversified exposure across many different industries, companies and countries (each with a different interest rate environment).

Global non-government bonds are also one of our new specialist debt sectors. Previously these bonds were included in global nominal bonds and multi-sector bond strategies.

With interest rates in Australia rising quite quickly, being diversified across global non-government bonds boosted returns this year. We saw returns from the falling yields on corporate investment grade (higher credit risk) securities from March 2009 onwards. Within corporate bonds, financials did particularly well.

We’ve less than a quarter’s performance for Wellington Management and Rogge as they’re new managers.

Global multi-sector bonds

(2.4%)

3 Managers

Global multi-sector bond strategies have a longer-term focus and the managers have discretion to invest in the different debt sectors based on their own view - another source of diversification.

The Portfolio has a relatively large exposure to this sector because it has a longer term focus. Prior to the changes, the sector was named Real Return Strategies as the managers had an objective to achieve a return above inflation. The managers now have a market-oriented benchmark. A previous real return manager, PIMCO was re-appointed to a global multi-sector bond mandate but Bridgewater, the other real return manager was removed. Amundi and Franklin Templeton have joined PIMCO as managers in this sector.

PIMCO (+18.6%) provided an excellent return this year due to their credit exposure, particularly to



corporate bonds issued by financials. This sector was the strongest contributor to returns within the debt component of the portfolio this year.

Global Absolute Return Bonds

(2.6%)

1 Manager

These are flexible strategies where managers have discretion to invest across a broad spectrum of bonds to achieve a higher return than cash. They are used as a low risk diversifier to Australian bonds and enhanced cash.

We added an allocation to global absolute return bonds from February, managed by Deutsche. Comments on returns will be possible from the June quarter onwards, as this is a new manager.

Australian Inflation Linked Bonds

(8%)

2 Managers

Inflation-linked bonds are similar to conventional bonds except that repayments are directly linked to inflation. They therefore offer effective medium to long-term protection in periods of high inflation or expected inflation, with some volatility in returns due to their long term nature. Returns can be quite soft during periods where markets anticipate very low levels of future inflation, such as at the start of 2009.

Breakeven inflation is the difference between the yield on nominal government bonds and inflation-linked bonds. It provides an indication of whether inflation-linked bonds represent good value. The breakeven inflation rate has continued to drift higher to 3% which is higher than actual inflation and is the top of the RBA’s target. That’s why Australian inflation-linked bonds underperformed Australian bonds over the year.

Global High Yield Debt

(2%)

2 Managers

These are bonds issued by companies with a credit rating below investment grade. They usually pay higher rates of interest than more credit worthy securities because they have a higher risk of default. Investing in the high yield sector enables us to capture the expected long-term premium paid for investing in securities with higher risk of default. High yield bonds tend to perform well in credit expansionary periods and global booms.

The credit spread (difference between yields on high and low credit risk securities) has now narrowed from their peak at almost 22% in December 2008 to 6% at the end of March 2010. Spreads are now close to long-term averages, reducing the potential for further gains.

Even though exposure to the sector isn’t significant, it was still the best performer this year by a large margin. Our high yield bonds delivered a return just under 50%, so even a 5% allocation gave the Portfolio’s returns a good boost.

WR Huff (+47.1%) and Oaktree (+42.9%) have produced excellent returns, with Oaktree only marginally underperforming the market benchmark.

Global Bank Loans

(1.4%)

2 Managers

Global bank loans are a source of funding through which companies rated as “high yield” can finance their operations and growth aspirations. They tend to perform well in credit expansionary periods and global booms.

Global bank loans rebounded strongly this year (+38.3%) due to rising appetites for higher risk assets. Shenkman Capital has now joined Oaktree as a manager of global bank loans. .

Global mortgages

(0.6%)

1 Manager

Mortgages are bonds which use property as security. They tend to perform well in credit expansionary periods and global booms.

From February there’s a distinct allocation to global mortgages, managed by Stone Tower. Comments on returns will be possible from the June quarter onwards.

Previously exposure to global mortgages was via global nominal bonds, multi-sector bonds and high yield bonds.

LTAR

(1%)

The Long-Term Absolute Return strategy has a unique mandate to provide real returns (after fees, taxes and inflation) +5.5% per annum, over a longer time horizon of 20 years and isn’t constrained in its approach. In addition to investing in traditional assets, the strategy has the ability to invest in unique assets such as Insurance Related Investments (IRI).

LTAR’s return was very strong this year as all the asset classes produced positive returns over the quarter and year.

We’ve taken a relatively defensive asset allocation stance since the first half of 2009 even though market returns have continued to be strong. This stance is consistent with Portfolio’s objective of ensuring that the long-term return is robust regardless of market performance – this implies reducing risk exposure when the risk of a long-term adverse outcome is relatively high. We believe this continues to be the case.


Stock story

Emerging market financials: African Bank (South Africa), Garanti (Turkey), ICICI Bank (India) and Bank Central Asia (Indonesia)

One of the common themes we discovered over the last quarter were new positions initiated by two global share managers in financial firms listed in four different emerging markets. This was interesting given the underweight position within the aggregate Global Shares strategy to financials (15.5% for the strategy vs. 21.5% for the benchmark). Mondrian’s focus on growing dividends within the strategy made them identify two banks with strong potential payout characteristics. Meanwhile, Harding Loevners focus on growth helped identify two institutions in countries with low credit penetration.

Mondrian added two financial services companies in South Africa and Turkey, namely African Bank and Garanti Bank.

African Bank is very well capitalised and operates, with few competitors, in the micro-financing segment of the South African banking market. This creates opportunities for strong dividend growth over the long term through a combination of high levels of profitable loan growth and high payout ratios.

Garanti is a leading private sector bank in Turkey with a robust capital position and disciplined management which combines a healthy dividend yield with attractive long-term growth potential (see Figure 1 below).

Harding Loevner added Bank Central Asia of Indonesia and ICICI Bank in India, which has been owned by them in the past. Both franchises have growth opportunities in low credit penetration countries that Harding Loevner thinks are as increasingly rare and valuable.

ICICI Bank, has impressed Harding Loevner with the actions taken by the former CFO, now CEO, over the past year to improve liquidity, risk management, and profitability. The Bank wants to increase their exposure to the bright long-term growth prospects of financial services in India, which remain dramatically under penetrated relative to the country’s economy. ICICI’s spread of retail and corporate lending, along with its success in building its insurance subsidiary into the largest private sector life insurer in the country, mean that it‘s strongly placed to exploit that growth, yet its shares are more modestly priced than other well managed private sector banks.

Bank Central Asia, meanwhile, has the highest quality and lowest cost deposit franchise in Indonesia. Its urban focus and track record of relatively good management execution and risk control are viewed positively. As with India, there’s a long path towards greater use of financial services by Indonesians as their per capita incomes rise.

Figure 1: Growth history over the last five years of Garanti Bank, Turkey

Source: Garanti Bank Annual Report, 2009.


Important information

This information has been provided by MLC Limited (ABN 90 000 000 402) a member of the National Group, 105-153 Miller Street, North Sydney 2060. This material was prepared for advisers only.

Any advice in this communication has been prepared without taking account of individual objectives, financial situation or needs. Because of this you should, before acting on any information in this communication, consider whether it is appropriate to your objectives, financial situation and needs. You should obtain a Product Disclosure Statement or other disclosure document relating to any financial product issued by MLC Investments Limited (ABN 30 002 641 661) and MLC Nominees Pty Ltd (ABN 93 002 814 959) as trustee of The Universal Super Scheme (ABN 44 928 361 101), and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the Product Disclosure Statement or other disclosure document is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au.

An investment in any product offered by a member company of the National group does not represent a deposit with or a liability of the National Australia Bank Limited ABN 12 004 044 937 or other member company of the National Australia Bank group of companies and is subject to investment risk including possible delays in repayment and loss or income and capital invested. None of the National Australia Bank Limited, MLC Limited, MLC Investments Limited or other member company in the National Australia Bank group of companies guarantees the capital value, payment of income or performance of any financial product referred to in this publication.

Past performance is not indicative of future performance. The value of an investment may rise or fall with the changes in the market. Please note that all return figures reported are before management fees and taxes, and for the period up to 31 March 2010, unless otherwise stated.

The specialist investment management companies are current as at 31 March 2010. Funds under management figures are as at 31 March 2010, unless otherwise stated. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you.


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