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August 2016

Grant Mizens, Senior Investment Analyst, MLC

The challenge of matching one’s investment time horizon with the ebbs and flows of the market (ie sequencing risk) has led to the increased uptake of objective-based investment strategies. These funds target specific outcomes irrespective of market (mis)behaviour. The risk of timing your investments is no more evident than in share markets where absolute outcomes can swiftly crush or create wealth over short or even moderate timeframes. This great conundrum of investing is one risk which we go to great lengths to mitigate in the MLC Inflation Plus portfolios. This includes going so far as to build tailored strategies within the portfolios because exactly what was needed to generate the most appropriate outcome didn’t exist.

While share markets have an important function in many multi-asset portfolios, they are also the main culprit when it comes to untimely wealth destruction. However ignoring the contribution shares can play in generating wealth is unwise, therefore investors must manage their exposure to the shares asset class while taking into account this weakness or find a way to mitigate the risks. We have opted for the latter by seeking tailored shares exposures for the MLC Inflation Plus portfolios which are more aligned with the objective of limiting exposure to significant market declines.

The clear and specific real return objectives of the MLC Inflation Plus portfolios allows for the aligning of shares exposures to serve only the portfolio’s objective, as opposed to beating the market. Liberation from traditional share benchmarks does away with the need to carry unattractive risks through fear of underperforming the broader market. For managers aiming to outperform the market, success is measured by an outcome better than the benchmark regardless of the overall absolute wealth experience. Such strategies may not be helpful to achieving the overall MLC Inflation Plus objectives, as simply doing better than the benchmark in an adverse market is unhelpful in the pursuit of a real return outcome.

Although the broad market is highly diversified and this may present certain attractive characteristics, when weighed against the need to contribute towards specific MLC Inflation Plus objectives, not all stocks pass the test. It is worth noting that MLC Inflation Plus objectives are not restricted to returns only. Indeed, the objective of generating an attractive return cannot be divorced from the need to control risk – without risk control, there can be no confidence in return outcomes. The consideration of risk is therefore paramount in ensuring progress towards the return objective is not derailed. There are many stock names that fall short of this hurdle.

The need for a truly absolute risk aware Australian shares exposure has led MLC into developing a tailored Australian shares exposure designed only to serve the MLC Inflation Plus portfolios. In short, it has only one master. This allows for the insights from our Investment Futures Framework to be applied directly to the Australian shares exposures, along with a targeting of stock characteristics to most efficiently contribute towards the overall MLC Inflation Plus objectives. With this approach the benchmark exists only to provide a universe of stocks from which only those most suitable companies will be considered.

In order to achieve consistency with the requirements of MLC Inflation Plus the portfolio construction utilises the Investment Futures Framework, consequently the portfolio provides a tailored exposure to the Australian share market which has greater consistency with the objective of lowering downside risk. Such alignment and efficiency is simply unachievable through a benchmark relative approach.

The tailored Australian shares strategy is in the final stages of more than a three year development period and is expected to be introduced to the MLC Inflation Plus portfolios in the near future. This strategy has performed well, particularly as we have increased alignment with MLC Inflation Plus objectives. This capability enhancement is an important milestone in allowing MLC to achieve real return outcomes for clients.

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This article is issued by nabInvest Capital Partners Pty Limited (ABN 44 106 427 472, AFSL 308953) (“NCP”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (“NAB”) group of companies (“NAB Group”). An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.

This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.

MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”) is the issuer of the MLC Wholesale Inflation Plus – Conservative Portfolio, MLC Wholesale Inflation Plus – Moderate Portfolio and the MLC Wholesale Inflation Plus – Assertive Portfolio (collectively, the “MLC Inflation Plus portfolios”). The MLC Inflation Plus portfolios are also available via the MLC MasterKey Super & Pension Fundamentals and the MLC MasterKey Business Super products issued by NULIS Nominees (Australia) Limited (ABN 80 008 515 633, AFSL 236465) and the MasterKey Investment Service Fundamentals investor directed portfolio service operated by MLC . You should obtain the relevant Product Disclosure Statement (“PDS”) or Financial Services Guide (“FSG”) relating to the MLC Inflation Plus portfolios and consider them before making any decision about whether to acquire or continue to hold the product. A copy of the PDS and FSG is available upon request by contacting our call centre on 1300 738 355 or on our website at

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