Centuria Life presentation Nov 2012

The shift to income investing Alex Clamen – Senior Investment Specialist, Macquarie Fixed Income and Currency November 2012

Important notice This information has been prepared by Macquarie Investment Management Limited ABN 66 002 867 003 AFS Licence 237492 (MIML), the issuer of units in the Macquarie Income Opportunities Fund ARSN 102 261 834 (Fund) and is current as at the date of this presentation. This information is confidential and is provided to licensed financial advisers only. It is not to be distributed to, or disclosed to retail clients. The information may be based on assumptions or market conditions and may change without notice.

The information in this presentation is provided for general information purposes only and does not take into account the investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in the Fund. In deciding whether to acquire or continue to hold an investment in the Fund, an investor should consider the Fund’s product disclosure statement. The product disclosure statement is available from MIML by phoning 1800 814 523.

Past performance information is for illustrative purposes only and is not indicative of future performance. This presentation may include forward-looking statements that represent opinions, estimates and projections, which may not be realised. We believe the information provided herein is reliable, as of the date hereof, but do not warrant its accuracy or completeness. Certain parts of this presentation may have been obtained or are based upon information obtained from third parties which may not have been checked or verified.

Investments in the Fund are not deposits with or other liabilities of Macquarie Bank Limited or of any other Macquarie Group entity and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. None of Macquarie Bank Limited or any other member of the Macquarie Group guarantees any particular rate of return or the performance of the Fund, nor do they guarantee the repayment of capital from the Fund.

Awards In August 2012, the Financial Review awarded the Macquarie Income Opportunities Fund best Diversified credit/multi-strategy income fund at the Financial Review Smart Investor Blue Ribbon Awards 2012.

In October 2012, Professional Planner / Zenith awarded the Macquarie Diversified Fixed Interest Fund best global and diversified fixed interest fund at the Professional Planner / Zenith Fund Awards 2012. The Professional Planner/Zenith Fund Awards are determined using proprietary methodologies. Fund Awards and ratings are solely statements of opinion and do not represent recommendations to purchase, hold, or sell any securities or make any other investment decisions. Ratings are subject to change.

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Economic and market backdrop

Before we begin…. > What do you believe is an achievable long term “target” return?

a) 3% per annum b) 5% per annum c)

7% per annum

d) 10% per annum e) 12% per annum f)

More than 12% per annum

4

Banking crises are followed by protracted periods of deleveraging > Financial and banking crises are protracted and the a3ermath is o3en characterised by*: - Deep and prolonged asset price declines; - Profound declines in GDP growth and unemployment; - A long period of debt reduc@on; and - Debt reduc*on…. lasts six to seven years on average.

10 8

De-­‐leverage “Savings – Investment”

6 4 %

2 0 -2 -4 -6 -8

Private Sector Financial Balance

Re-­‐leverage

US Output Gap

-10 Mar-66 Mar-69 Mar-72 Mar-75 Mar-78 Mar-81 Mar-84 Mar-87 Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08

Mar-11

*Rogoff and Reinhart - The Aftermath of Financial Crises, 19/12/08 and McKinsey and Company - Debt and deleveraging: The global credit bubble and its economic consequences, 01/10

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A low growth environment > The current US recovery is the weakest on record apart from the 1927 episode

> Many countries in Europe are in recession > Emerging market countries are experiencing an economic slowdown > We believe the environment is one of low growth for longer Source: Deutsche Bank, GFD, NBER

6

Let’s take a step back What actually happened?

US household debt (% of GDP) and saving rate 120%

12% US household debt as a % of GDP US personal saving rate (% dispo. income)

100%

10% 8%

80%

Cheap debt fuelled unprecedented asset growth

6% 4%

60% 2% 40% 1982

0% 1987

1992

1997

2002

2007

The great recession

US Federal Reserve Balance Sheet 3.5

The great swap: private to public

Operation Twist

Trillion (USD)

3 2.5 QE2

2

1

0 Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

1300

-­‐57%

900

Emergency Fed Lending

0.5

US S&P500 Index

1500

1100

QE1

1.5

1700

700 Jan 11

Jan 12

500 2005

2006

2007

2008

2009

Macro Markets, Bloomberg, Morgan Stanley, BEA & Macquarie

7

And in Europe…. > Monetary convergence (same interest rate for all Euro countries) was a fallacy > Money was too cheap for many €uro countries > Greece defaulted… but still runs a deficit > It is not just about liquidity… A few Euro countries are insolvent > Austerity aimed at addressing indebtedness is impacting growth

bps

> Many countries are in recession: Greece, Spain, Italy, Ireland… > Addressing the core of the issue monetary union without fiscal integration - will take years Source: Bloomberg, Deutsche Bank

8

Current levels of debt have to be reduced

General Government Fiscal Position for 2011

Gross debt (% of GDP)

250

Japan

> European countries will have to comply with the EU stability and growth pact

200 Greece

> It is NOT just a European phenomena

150 Ireland 100

US

UK

50

Italy Portugal Iceland Belgium OECD France Euro area Germany Spain Switzerland Sweden

Australia -10

-8

-6

-4

> Negative impact on GDP growth and …. potential social unrest

Luxembourg

0 -12

> Difficult to reduce debt in an environment of low growth

-2

0

2

Financial deficit (% of GDP)

“Unprecedented build up of debt – world war size without the world war” - Niall Ferguson

> Employment/growth unlikely to return to pre-crisis levels in the foreseeable future

Source: OECD

9

What is the bond market telling us?

Lower for longer > Inflationary pressures remain low > Similarities with Japan appear evident - bond yields are following a similar pattern to US 1930s and Japan 1990s > Bond yields are likely to surprise to the downside – lower for longer US & Japanese 10 Year Bond Yields

Australian, US and German 10 Year Bond Yields 7%

9% US: 2000 -­‐ Present US: 1925 -­‐ 1941 Japan: 1990 -­‐ Present

8% 7% 6%

6% 5%

5%

4%

4%

3%

3%

2%

2%

1%

1% 0%

2000 1990 1925

Australia US Germany

2005 1995 1930

2011 2000 1935

0% 2005

1941

2010

> The developed world simply cannot afford higher bond yields Source: Bloomberg

10

Questions? > What is the current debt of the US? a) None, it runs a surplus

> Answer - $16,200,000,000,000

b) $ 500 million c) $ 500 billion d) $ 16.2 trillion

> What is the annual tax revenue of the US government? a) $0 - Similar to Dubai, there is no tax in the US

> Answer - $ 2,300 billion

b) $ 1 billion c) $ 950 billion d) $ 2,300 billion

> At a current 2% interest, the yearly interest paid by the US government is around $300 billion > If bond yields moved to 4%, this would increase to over $600bn 11

Beyond unconventional monetary policy Quantitative Easing (or QE): It is an unconventional monetary tool used by central banks to stimulate the economy

> The central bank creates money and buys bonds from financial institutions. > The central bank buying program makes bonds expensive and less attractive

> The financial institutions receive the money and use it for more attractive investments and loans > With an increase in money supply, interest rates should go down boosting the economy > Positive sentiment, confidence and wealth effect perpetuate the cycle 12

A QE World!

Quantitative Easing (or QE): It is an unconventional monetary tool used by central banks to stimulate the economy > Monetary policies are at the zero bound > The big 4 central banks are now implementing some form of QE. - US: QE1, QE2, QE3, Operation Twist - Euro: LTRO (backstopping the banking system) and OMT (bond purchase program) - Japan: From 2001, the BOJ bought government bonds, asset-backed securities and… equities - UK: Bond purchase program

> And… most of these countries are either in recession or are experiencing low growth!

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Is QE working? > So far QE has mostly: - Revived wholesale funding and credit markets post Lehman collapse - Boosted asset prices given low returns from bond > BUT… it has not revived the economy > WHY… - Low demand for loans – individuals are saving and repaying their debt (deleveraging) - High level of unemployment - Low use of productive capacity - Sentiment continues to be negative à Companies have not initiated projects

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Economic and market backdrop - Summary > The recovery continues to be very sluggish > We believe that the environment of low growth is here to stay > Low bond yields reflect that environment > Global deleveraging has to continue > Policy responses are unorthodox, unprecedented and on-going à Beware of the unintended consequences > What does that all mean for the investment environment?

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The shift to income investing

Growth investing vs income investing > The growth investor

Growth investor

- Buys something for $1 on the belief it will rise to say $1.20 - The yield on an asset is therefore unimportant > Income Investing - Buys a stable priced asset for its yield/dividend/rent

Income investor

> The leverage revolution of the 1990-2000s favoured a “growth” stance > The post GFC deleveraging environment shifts favour an “income” stance - Low support for capital gain, however…

- Opportunities still exist: markets are volatile, favouring ‘traders’ 17

Growth investing delivered high returns and with it high expectations, so we embraced growth assets (Risk) Superannua*on Asset Alloca*on Excludes Life Offices and Offshore Assets

60.0%

50.0%

40.0%

30.0%

Equi@es Property Bonds/Loans Deposits

20.0%

10.0%

0.0% Jun 1988

Feb 1991 Nov 1993 Aug 1996 May 1999 Feb 2002 Nov 2004 Aug 2007 Apr 2010

Jan 2013

Source: ABS

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Different structural influences are now in play Looking Back

Looking ahead

High economic growth and returns

Stagnant economies and markets

Increasing benefits

Unfunded pensions “Entitlement”

Secular downtrend in inflation

Low inflation

Banking deregulation

Increasing banking regulation

Post -war baby boom – consumption

Ageing population

Increasing leverage and financial innovation

Deleveraging

Technological revolution

At a rapidly increasing rate

Conventional monetary policy

Zero rates & quantitative easing

Globalisation & China

Increased protectionism ?

> These changes are significant à will they affect the way we approach investing?

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An ageing population has a different impact on the economy than a booming one

> Baby boomers support for asset prices to begin waning > Earnings and spending are highest in the middle of the working age population > Potential negative impact on tax revenues > Rising pension and healthcare costs > Unfunded liabilities arising from ageing are very large

Old-Age Dependency Ratios (population 65+ / working age, %) 0.90

Median age (2030) West Europe: 47 yrs Japan: 52 yrs

0.80

UK France Mexico

0.70

Germany

0.60 0.50

Median age (1980) West Europe: 34 yrs Japan: 33 yrs

Japan Turkey US

0.40

Brazil China

0.30

> Lower growth environment very likely > Population will increasingly seek defensive and income producing assets

India Russia

0.20

Australia

0.10 0.00 1950

Greece Korea

1970

1990

2010

2030

2050

Source: United Nations, OECD

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The shift to income based assets > Global deleveraging has a long way to run > This constrains global growth à producing a lower return environment > The structural themes of “deleveraging” and “ageing population” will provide significant headwinds > There are many periods throughout history where an “income” focussed approach is more prudent and rewarding > An income based approach is at least, a good place to start - Moderate, consistent positive returns

21

Our thoughts on investing in a low yield environment > Achieving a return of CPI + 3% will be a stretch, although is achievable > The chase for yield – a yield grab will be an ongoing theme - Anything with yield will perform and keep performing - Dividends, Rent, Utilities, Corporate Bonds - Bond yields will surprise – remain low for longer than most think > Buying and holding growth assets may be hazardous > If you are going to Buy and Hold – do it with “income” assets > Be more “Balanced”, the shift to income is under way

22

Equities with dividends > Do investors genuinely feel more confident about the outlook for the telecommunications and banking sectors?

Telstra Share Price

$ 4.5 4

60

3.5

50

3 2.5

40

2

30

1.5

20

1

10

0.5 0

Jan 09

CBA Share Price

$ 70

0 Jul 09

Jan 10

Jul 10

Jan 11

Jul 11

Jan 12

Jul 12

Jan 09

Jul 09

Jan 10

Jul 10

Jan 11

Jul 11

Jan 12

Jul 12

> Or is the rally we have seen investors buying brand names with good dividends (in other words “income”)?

Source: Bloomberg and Macquarie as at 01/10/12

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Regimes can and do change!

Sweden, September 3 1967 at 4AM – On the streets loud speakers blare: “Now is the time to change over!”

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Summary > We believe the environment is one of low growth for longer > The Investment Regime is evolving > And so too should return expectations and beliefs > Sometimes change is difficult to recognise > We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize…..I don’t think it’s gonna drive the economy too far from its full employment path, though.“ Ben Bernanke July 2005

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Managing your defensive solutions

Our investment philosophy > When investing in and managing fixed interest:

Private debt

– We are opportunistic, and have a multistrategy and diversified portfolio

CLOs

– We do not invest in things that are too complex

Hybrids

– We do not chase yield at any cost – Liquidity risk is the greatest risk – We don’t invest in overpriced asset classes – we seek to maximise the return from relative value

Complex structured credit CDOs High yield

Preserving the value of your investment should be our first priority

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Attractive opportunities in credit markets

> Corporate bonds currently offer a much higher yield than their long term average > Airac@ve returns from bonds that are posi@oned high in the capital structure

ANZ

AMP

GOODYEAR

Return above cash rate

Return above cash rate

Return above cash rate

Pre crisis: ~0.15% pa Nov 12: +2.21% pa

Jan 07: +0.12% pa Nov 12: +1.50% pa

Jan 07: +1.99% pa Nov 12: +5.80% pa

Sub debt

Source – Bloomberg as at 10/10/2012

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Centuria Life Funds

> We have a defensive and conserva@ve philosophy > First port of call: Capital preserva@on > Both our Macquarie alloca*ons in the Income Accumula*on Fund and Capital Guaranteed Bond invest in high quality assets > The average credit ra@ng is very high in the credit spectrum > High quality credit is more resilient > In this environment we can also protect the funds by increasing our cash levels > Award winning team - Awards for 2012:

Best Global Fixed Income Fund (hedged): Macquarie Enhanced Global Bond Fund (April 2012) 29

Questions?

?

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