Pre Select commentaries
Quarter ended 31 March 2017
Contents
Economic and market commentary .............................................................................................................. 1
Fund commentaries ...................................................................................................................................... 2
Pre Select Australian Equity Fund.......................................................................... 2
Pre Select Australian Small Companies Fund ........................................................ 3
Pre Select International Equity Fund ...................................................................... 3
Pre Select Conservative Fund ............................................................................... 3
Pre Select Balanced Fund ..................................................................................... 4
Pre Select Growth Fund ......................................................................................... 4
Pre Select High Growth Fund ................................................................................ 4
Economic and market commentary
Australian shares
Global shares (hedged)
Global shares (unhedged)
Emerging markets (unhedged)
Australian property securities
Global property securities (hedged)
Australian bonds
Global bonds (hedged)
Global high yield bonds (hedged)
Inflation-linked bonds
Cash
CYTD
1 Month to 3 Month to 1 year to 3 years to
Mar 2016
Mar 2016 Mar 2016 Mar 2016 Mar 2016
% p.a.
% p.a.
-2.7%
4.7%
-2.7%
-9.6%
5.4%
-1.3%
5.5%
-1.3%
-3.4%
10.4%
-5.1%
-0.2%
-5.1%
-4.5%
17.4%
0.0%
5.2%
0.0%
-12.3%
6.1%
6.4%
2.5%
6.4%
11.4%
16.3%
3.5%
7.7%
3.5%
1.6%
10.8%
2.1%
-0.2%
2.1%
2.0%
5.4%
3.7%
0.9%
3.7%
4.5%
6.1%
1.9%
2.7%
1.9%
-0.3%
4.3%
1.8%
0.4%
1.8%
-1.2%
4.7%
0.6%
0.2%
0.6%
2.2%
2.6%
5 years to
Mar 2016
% p.a.
5.7%
10.2%
12.2%
2.1%
15.8%
12.7%
6.6%
7.7%
7.9%
7.7%
3.2%
10 years to
Mar 2016
% p.a.
4.4%
S&P ASX 200
6.3%
ACWI $A Hedged
ACWI $A
- Global
Hedged
Shares
- Global
Strategy
Shares Strategy
3.8%
MSCI AC World Index in $A (Gross)
2.6%
MSCI Emerging Markets in $A (Gross)
2.4%
S&P/ASX 300 A-REIT
5.6%
FTSE EPRA/NAREIT Developed Index $A Hedged (Gross)
6.3%
Bloomberg AusBond Composite 0+ yrs
7.8%
Barclays Global Aggregate ($A Hedged) (Gross)
8.6%
Oaktree - Composite
Oaktree - Composite
benchmark benchmark
6.3%
BLOOMBERG AusBond Inflation Govt 0+ yrs
4.4%
BLOOMBERG AusBond Bank Bill
Global
Global growth concerns, falling commodity prices and softer corporate profit expectations weighed on global shares early in the
March quarter. China’s economic slowdown and weakness in emerging nations such as Brazil were a particular worry, weighing
heavily on global shares in January and February. However March witnessed an encouraging relief rally for global shares given
more monetary policy stimulus measures in Europe and Japan and a stabilisation in commodity prices.
Global share markets recorded negative returns for the March quarter. There were sharp negative local currency returns for Europe
(Germany -7.2%, France -5.4%) and Japan (-11.9%) given their sensitivity to export performance and a weaker US dollar (USD)
performance. US shares were more resilient and managed to post a positive return of 0.8%.
Emerging markets were flat for the March quarter after a sharp recovery in March itself (+5.2%) given a rally in commodity prices.
However, China’s shares were still down by 15.1%.
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Pre Select commentaries
Quarter ended 31 March 2017
US economic data was softer in the March quarter. US retail sales were subdued while car sales moderated. However there were
encouraging job gains with the US unemployment rate holding steady at around 5%. Inflationary pressures remain subdued with
wages rising at only a modest 2.2% annual pace. Given this sedate US activity data as well as global growth concerns, the US
Federal Reserve (Fed) signalled at their March meeting a more cautious and patient timeline for raising US interest rates in 2016.
European economic data was subdued during the quarter with softer business surveys and minimal price pressures. In response,
the European Central Bank (ECB) announced further policy stimulus in March by lowering deposit interest rates and increasing
asset purchases by an extra euro 20 billion per month. Britain’s pending vote on whether to withdraw from the European Union
continues to weigh on UK shares.
China’s economic activity is still slowing, although there were some positive signs. China’s manufacturing and service sector
surveys shows that activity continues to moderate. China’s cement and steel production are particularly weak with significant
consolidation and restructuring expected over coming years. However China’s financial conditions are still supportive while the
residential property market has improved over the past year, indicating China could still achieve a solid 6% real economic growth
rate in 2016.
Japan’s economic data proved to be disappointing. A sharp surge in the Japanese yen has dented manufacturing confidence.
Japan’s central bank has accordingly announced negative interest rates in March to stem the yen’s strength and support Japan’s
economic activity.
Emerging markets have been in the spotlight in the wake of China’s economic slowdown and their own domestic problems. Brazil
is still struggling with high inflation, recessionary conditions and a political crisis. Soft demand from other emerging markets also
added to Brazil’s problems. Russia has showed some tentative stabilisation. On a brighter note, India has continued on a positive
path with solid demand and production indicators with moderate inflation.
Australia
The Australian economy has recorded mixed activity data. Australia achieved a solid 3% annual economic growth rate in the final
quarter of 2015 with strong consumer spending and exports outweighing the Mining sector downturn. However the recent monthly
data has been mildly disappointing with subdued retail sales and consumer sentiment. After strong performance in 2015,
Australia’s housing market appears to be cooling this year with modest auction activity and price gains in Sydney and Melbourne.
The Reserve Bank of Australia (RBA) has held the official cash interest rate steady at 2% in the March quarter but still considers
there is “scope” for another possible interest rate cut given low inflation.
Australian shares had a volatile quarterly performance in line with their global counterparts. Weaker commodity prices and profit
downgrades weighed on Australian shares in the opening months of 2016. However there was an encouraging revival in iron ore
and oil prices late in the March quarter which allowed Australian shares to partially recover. However Australian shares still posted
a disappointing -2.7% negative return for the March quarter. Yet Australian real estate investment trusts (REITS) continued their
strong performance in the March quarter (+6.4%) benefiting from lower government bond yields and the relative attractiveness of
REIT yields.
Australian bonds recorded a strong quarterly return performance of 2.1% with global growth concerns and a slide in Australian
shares driving bond yields lower. Commonwealth 10 year bond yields declined from 2.9% at the start of the quarter to finish near
2.5%.
The Australian dollar (AUD) rose strongly (+5.0%) against the USD given the stabilisation in commodity prices and the Fed
signalling more gradual interest rate rises are likely this year. However there were only marginal moves for the AUD against other
major currencies (euro, yen, sterling) as the weaker USD performance was the key mover during the quarter.
Fund commentaries
Pre Select Australian Equity Fund
The fund returned 4.5% (before fees and tax) in the quarter to 31 March 2017. This was slightly lower than the fund’s market
benchmark (the S&P/ASX300 Accumulation Index) return of 4.7%.
This is the market’s fourth consecutive positive quarter. Market volatility continued to fall and is overall very low, a trend that has
been evident for a number of months since the ‘Brexit’ vote mid-2016 and more recently President Trump’s election. The positive
tone in our market reflects growing confidence globally in the outlook for the world’s major economies, although economic
conditions in Australia remain mixed.
The profit reporting period was generally well received and had a bearing on sector and stock specific returns in the quarter.
Sectors with defensive characteristics tended to perform better with Health Care (14.9%) leading the way due to the performance
strength of CSL (24.8%). Utilities’ 10.7% return was due largely to AGL Energy rising 19.4% while a better than expected profit
result from Woolworths (10%) contributed to Consumer Staples’ 10.8% rise. Negative sector performers were Telecommunications
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Pre Select commentaries
Quarter ended 31 March 2017
(-4.6%), which reflected the market’s disappointment with Telstra’s (-8.6%) profit result, and Real Estate Investment Trusts (-0.3%).
Stocks such as JB Hi-Fi (-11.9%) and Harvey Norman (-11.9%) who are dependent on discretionary retail spending also lost
ground.
A blend of managers with diverse styles is responsible for the fund’s stock selection. Outperformance by Antares, BlackRock and
small companies manager Adam Smith, offset underperformance by Perpetual and our other small caps manager Antares.
Pre Select Australian Small Companies Fund
The fund returned 2.7% (before fees and tax) in the quarter to 31 March 2017. This was 1.3% above the return of the S&P/ASX
Small Ordinaries Accumulation Index.
Our manager Adam Smith strongly outperformed the market this quarter and Antares underperformed.
The Australian share market continues to trade well, supported by very low interest rates and the improved earnings outlook evident
in the February reporting season, although industrials look quite fully valued, as do the major banks. Genuine valuation anomalies
are getting harder to find as the market rises. In such an environment, quality and balance sheet strength are more important than
ever.
Through our managers’ extensive company visitation program and in-depth knowledge of small companies, the fund seeks to
identify and exploit inefficiencies in the pricing of small companies to deliver consistent investment outperformance.
Pre Select International Equity Fund
The fund returned 2.8% (before fees and tax) over the quarter to 31 March 2017. This result was 1.2% above the benchmark MSCI
All Country World Index (ACWI).
Although the world has remained fixated on political manoeuvres in Washington DC, European and emerging market shares
provided strong returns during the quarter for investors. Not that US shares disappointed – they continued their extraordinary rally
that began after the presidential election on 9 November 2016.
There was a reversal for manager performance with growth oriented managers performing strongly during the quarter. Five of the
fund’s eight managers outperformed the broader market over the quarter. Performance of individual managers in the strategy was
down to individual stock picking as much as their broad investment style.
Holdings in Information Technology and Consumer Discretionary sectors helped performance the most over the quarter. Over the
year, selections from Industrial and Real Estate contributed the most to performance.
Investing in Indian financial firm HDFC Bank and overweight positions in HDFC and Facebook contributed the most to performance
over the quarter. On the other hand, being overweight Tesco and Shell, and not holding Apple, hurt performance.
Most economic indicators point to reasonable economic growth prospects continuing in most regions around the world. However,
most of the good news may already be priced in to share markets, especially in the US. Valuations are relatively more compelling in
Europe than in the US, both in absolute terms and after adjusting for longer term cyclical effects. While earnings growth may also
be higher in the euro common currency area, this is starting off a lower base than in the US. Meanwhile, emerging markets present
a conundrum as higher commodity prices offer support for some countries, while a higher US dollar and geopolitical risks are a
significant drag across many.
The current bull market is the second longest in the last hundred years – behind only the longest which occurred from 1991 through
to 1999. Whether we are at the late stages of this bull market will only be known in hindsight. In an extremely uncertain political,
economic and policy environment, we remain confident in the investment processes of our underlying managers to deliver the risk
adjusted investment outcomes in the strategy.
Pre Select Conservative Fund
The portfolio produced a return of 1.8% in the quarter and 6.1% for the year to 31 March 2017 (before fees and tax).
Contributors to performance
Key contributors to performance for the quarter are (returns are before fees and tax):


Australian shares produced very strong returns of 4.5% this quarter, its fourth consecutive positive quarter. Market volatility
continued to fall and is overall very low, a trend that has been evident for a number of months since the ‘Brexit’ vote mid-2016
and more recently President Trump’s election. The positive tone in our market reflects growing confidence globally in the
outlook for the world’s major economies, although economic conditions in Australia remain mixed.
Global shares (unhedged) delivered a strong return of 2.8% this quarter. Although the world has remained fixated on political
manoeuvres in Washington DC, European and emerging market shares provided strong returns during the quarter for
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Pre Select commentaries
Quarter ended 31 March 2017

investors. Not that US shares disappointed – they continued their extraordinary rally that began after the presidential election
on 9 November 2016. Five of our eight global shares managers outperformed the broader market over the quarter.
Australian fixed income produced a positive return of 1.3%. Australia’s government bond yields have been steady given mild
inflation and mixed economic data.
Pre Select Balanced Fund
The portfolio produced a return of 2.6% in the quarter and 9.6% for the year to 31 March 2017 (before fees and tax).
Contributors to performance
Key contributors to performance for the quarter are (returns are before fees and tax):



Australian shares produced very strong returns of 4.5% this quarter, its fourth consecutive positive quarter. Market volatility
continued to fall and is overall very low, a trend that has been evident for a number of months since the ‘Brexit’ vote mid-2016
and more recently President Trump’s election. The positive tone in our market reflects growing confidence globally in the
outlook for the world’s major economies, although economic conditions in Australia remain mixed.
Global shares (unhedged) delivered a strong return of 2.8% this quarter. Although the world has remained fixated on political
manoeuvres in Washington DC, European and emerging market shares provided strong returns during the quarter for
investors. Not that US shares disappointed – they continued their extraordinary rally that began after the presidential election
on 9 November 2016. Five of our eight global shares managers outperformed the broader market over the quarter.
Australian fixed income produced a positive return of 1.3%. Australia’s government bond yields have been steady given mild
inflation and mixed economic data.
Pre Select Growth Fund
The portfolio produced a return of 3.5% in the quarter and 13.1% for the year to 31 March 2017 (before fees and tax).
Contributors to performance
Key contributors to performance for the quarter are (returns are before fees and tax):



Australian shares produced very strong returns of 4.5% this quarter, its fourth consecutive positive quarter. Market volatility
continued to fall and is overall very low, a trend that has been evident for a number of months since the ‘Brexit’ vote mid-2016
and more recently President Trump’s election. The positive tone in our market reflects growing confidence globally in the
outlook for the world’s major economies, although economic conditions in Australia remain mixed.
Global shares (hedged) delivered a very strong return of 7.6% this quarter. Although the world has remained fixated on
political manoeuvres in Washington DC, European and emerging market shares provided strong returns during the quarter
for investors. Not that US shares disappointed – they continued their extraordinary rally that began after the presidential
election on 9 November 2016. Five of our eight global shares managers outperformed the broader market over the quarter.
Global shares (unhedged) delivered a strong return of 2.8% this quarter. Returns were lower than hedged global shares
because the Australian dollar rose in value over the quarter.
Pre Select High Growth Fund
The portfolio produced a return of 4.0% in the quarter and 15.5% for the year to 31 March 2017 (before fees and tax).
Contributors to performance
Key contributors to performance for the quarter are (returns are before fees and tax):



Australian shares produced very strong returns of 4.5% this quarter, its fourth consecutive positive quarter. Market volatility
continued to fall and is overall very low, a trend that has been evident for a number of months since the ‘Brexit’ vote mid-2016
and more recently President Trump’s election. The positive tone in our market reflects growing confidence globally in the
outlook for the world’s major economies, although economic conditions in Australia remain mixed.
Global shares (hedged) delivered a very strong return of 7.6% this quarter. Although the world has remained fixated on
political manoeuvres in Washington DC, European and emerging market shares provided strong returns during the quarter
for investors. Not that US shares disappointed – they continued their extraordinary rally that began after the presidential
election on 9 November 2016. Five of our eight global shares managers outperformed the broader market over the quarter.
Global shares (unhedged) delivered a strong return of 2.8% this quarter. Returns were lower than hedged global shares
because the Australian dollar rose in value over the quarter.
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Pre Select commentaries
Quarter ended 31 March 2017
Important information
This information is provided by Navigator Australia Limited (ABN 45 006 302 987, AFSL 236466), a member of the National Australia Bank Limited
(ABN 12 004 044 4397 AFSL 230686) group of companies (NAB Group), 105–153 Miller Street, North Sydney 2060.
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.
You should obtain a Product Disclosure Statement (PDS) relating to the financial products mentioned in this communication issued by Navigator
Australia Limited, and consider it before making any decision about the product. A copy of the PDS 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 financial product referred to in this communication is not a deposit with or liability of, and is not guaranteed by NAB or any of
its subsidiaries.
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. The
performance returns in this communication are reported before deducting management fees and taxes unless otherwise stated.
This information is directed to and prepared for Australian residents only.
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.
Navigator Australia Limited ABN 45 006 302 987 AFSL 236466. Part of
the National Australia Bank Group of Companies. An investment with
MLC is not a deposit or liability of, and is not guaranteed by, NAB.
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