1. Pre Select Diversified Funds Asset allocation and manager changes
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Pre Select Diversified Funds
Asset allocation and manager changes
October 2018

2. Important information
This information is provided by Navigator Australia Limited (ABN , AFSL ) as Responsible Entity of Pre Select diversified funds (listed at the end of this disclaimer) (“MLC” or “we”), a member of the National Australia Bank Limited (ABN AFSL ) group of companies (NAB Group), 105–153 Miller Street, North Sydney An investment in any product offered by a member company of the National Australia Bank group of companies does not represent a deposit with or a liability of the National Australia Bank Limited (ABN ) or its subsidiaries. NAB does not guarantee or otherwise accept any liability in respect of any financial product referred to in this presentation. This presentation has been prepared for licensed financial advisers only. This document must not be distributed to “retail clients” (as defined in the Corporations Act 2001 (Cth)) or any other persons. This information is directed to and prepared for Australian residents only. 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. Investors should obtain a Product Disclosure Statement or other disclosure document relating to any financial product which is issued by MLC, 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 or on our website at mlc.com.au. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. Any opinions expressed in this presentation constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this presentation is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this presentation. Any projection or other forward looking statement (‘Projection’) in this document is provided for information purposes only. No representation is made as to the accuracy or reasonableness of any such Projection or that it will be met. Actual events may vary materially. MLC relies on third parties to provide certain information and are not responsible for its accuracy. MLC is not liable for any loss arising from any person relying on information provided by third parties. While MLC has taken all reasonable care in producing this communication, subsequent changes in circumstances may occur and impact on its accuracy. The investment managers are current as at the date this communication was prepared. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you. The following funds are offered through MLC Wrap platforms and are affected by the changes to the Pre Select diversified funds: Pre Select Conservative Fund Pre Select Balanced Fund Pre Select Growth Fund Pre Select High Growth Fund
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3. Recap on changes we’ve made, since late 2017
In December 2017 we informed clients of changes to the Pre Select Diversified Funds
Change
Reason
Introduced asset allocation ranges
Asset classes can now be managed within ranges of 15% above or below the benchmark asset allocation. The risk level of each asset class is constantly changing so we can better manage clients’ exposure to risk and returns by adjusting the asset allocation.
Added an ‘alternatives’ asset class
Alternatives generate returns not strongly linked to mainstream assets such as equities.
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4. We’ve had to terminate some small funds
March 2018
Pre Select Australian Small Companies Fund and
Pre Select International Equity Fund
September 2018
Pre Select Australian Equity Fund
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5. Changes we’re now making to our asset allocations
We’re frequently adjusting the asset allocation, within defined ranges, because the risk level of each asset class changes constantly. We adjust the asset allocation based on our scenario analysis (the Investment Futures Framework). The risk aware nature of our scenarios approach tends to mean that value is usually added through defensive positioning – we aim to reduce our investors’ exposure to losses by reducing exposure to asset classes when we believe their risks are too high.
Key asset allocation changes we’ve made since 2017 (shown in the graphs on the following slides):
Increased unhedged global shares and decreased hedged global shares – global share prices and the AUD tend to move in the same direction, so increasing foreign currency exposure helps reduce the funds’ risk of negative returns in certain negative scenarios. While foreign currency remains an important source of risk control, its power as a diversifier reduces as the AUD declines.
Increased Australian fixed income and decreased global fixed income – to reduce vulnerability to increases in interest rates.
Increased alternatives – we believe exposure to our real return (alternative) strategies provides the funds with greater potential ability to preserve investors’ capital in volatile markets and provides our investors with potentially better investment returns for the level of risk we take.
Removed Australian listed property securities from most funds – we’re no longer allocating to Australian listed property securities (Real Estate Investment Trusts, REITs) because we believe global REITs provide greater return potential and diversification benefits. An exception is our lowest risk Diversified Fund, the Pre Select Conservative Fund, which has mostly global REITs exposure and a small allocation to Australian REITs.
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6. Changes we’re now making to our investment managers
Within the asset classes we’ve:
Moved the fixed income from passive to active managers.
Expanded the diversity of active managers in our Australian equities, fixed income, and listed property securities (REITs) strategies.
We believe these changes enable us to improve returns and manage risk within the asset classes.
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7. Pre Select Conservative Fund
Asset allocation changes
Asset and manager allocations
Current portfolio positioning
Previous portfolio positioning
Asset allocation ranges for each asset class x
Source: NAB Asset Management Services Limited, as at 31 August Asset allocation changes are from 31 December 2017 to 31 August 2018.
Total 70% defensive and 30% growth assets is unchanged
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8. Pre Select Balanced Fund
Asset allocation changes
Asset and manager allocations
Current portfolio positioning
Previous portfolio positioning
Asset allocation ranges for each asset class x
Source: NAB Asset Management Services Limited, as at 31 August Asset allocation changes are from 31 December 2017 to 31 August 2018.
Total 53% defensive and 47% growth assets, previously 50% defensive and 50% growth
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9. Pre Select Growth Fund x Asset allocation changes
Asset and manager allocations
Current portfolio positioning
Previous portfolio positioning
Asset allocation ranges for each asset class x
Source: NAB Asset Management Services Limited, as at 31 August Asset allocation changes are from 31 December 2017 to 31 August 2018.
Total 33.5% defensive and 66.5% growth assets, previously 30% defensive and 70% growth
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10. Pre Select High Growth Fund
Asset allocation changes
Asset and manager allocations
Current portfolio positioning
Previous portfolio positioning
Asset allocation ranges for each asset class x
Source: NAB Asset Management Services Limited, as at 31 August Asset allocation changes are from 31 December 2017 to 31 August 2018.
Total 21% defensive and 79% growth assets, previously 15% defensive and 85% growth
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11. What’s included in alternatives?
The funds’ alternatives exposure is to the MLC Inflation Plus portfolios, managed by our Capital Markets Research team. The Inflation Plus portfolios focus on providing risk-controlled real returns.
The Pre Select Diversified Funds have different allocations to the three Inflation Plus portfolios.
The MLC Inflation Plus portfolios can invest in a wide range of assets and strategies and we have the flexibility to make large changes to the strategy’s asset allocation to manage risk and capture opportunities for returns as the investment environment evolves.
We expect this diversification, flexibility and ability to tailor risk exposures should help us to generate higher performance for the level of risk we take in the Pre Select Diversified Funds and smooth their returns.
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12. There may be times when the MLC Inflation Plus returns exceed
Why invest in alternatives?
Risk management changes the path of the Inflation Plus portfolios’ returns
Expected return outcomes across different investment scenarios (before deducting fees and tax)
There may be times when the MLC Inflation Plus returns are lower than traditional funds
Strong share markets
Weak share markets
There may be times when the MLC Inflation Plus returns exceed
traditional funds
Real returns (% pa)
What should someone expect from the MLC Inflation Plus portfolios compared to traditional portfolios?
When compared to traditional portfolios the MLC Inflation Plus portfolios are constructed with a COMPLETELY different objective to a more traditionally managed diversified fund. This can lead to completely different performances between the two portfolio suites in varying economic and market conditions.
The MLC Inflation Plus portfolios’ focus on downside protection and risk control, whereas traditional diversified portfolios are market relative and manage risk using active positions.
For example, in weaker share markets, the MLC Inflation Plus portfolios will have periods when its performance exceeds traditional diversified portfolios. However in very strong markets, such as those in recent years, MLC Inflation Plus will tend to lag traditional diversified portfolios. This is expected and occurs by design due to the risk controls and downside protection focus of MLC Inflation Plus.
Inflation Plus portfolios are expected to provide diversification of returns relative to other asset classes in the Pre Select Diversified Funds.
Source: NAB Asset Management Services Limited
Inflation Plus portfolios are expected to provide greater return certainty than a traditionally managed diversified fund.
While they may provide lower volatility, returns should be similar over a full market cycle. The returns are expected to be more efficient because they’re:
less constrained by asset allocation ranges and invest in a broader ranges of asset classes and strategies, and
not grounded by a benchmark asset allocation.
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13. How may clients benefit from these changes?
Through increased active management we've:
improved potential returns, and
reduced risk.
Are fees changing?
As a result of these strategy changes there are no increases in the funds’ management costs. However there’ll be a small increase in underlying investment costs during the 2019 financial year. We estimate the increase will be in the range of 0.01% pa to 0.02% pa of a fund’s net asset value.
Underlying investment costs are incurred when a fund invests in investment funds such as the MLC Inflation Plus portfolios. The costs of these investments are reflected in the unit price of the Pre Select funds and aren’t additional fees retained by MLC.
We believe investors will benefit from these changes after deducting all fees, including underlying investment costs.
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14. How are clients informed?
We continue to keep clients informed of asset allocation and manager changes each quarter in the Pre Select fund commentaries available on:
The fund commentaries tab on mlc.com.au
The Fund Profile Tool for MLC Wrap and Navigator 9vSdMCASihGB%2BG2tPHKMA%3D
THIS MATERIAL IS NOT FOR CIRCULATION TO RETAIL INVESTORS.