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Portfolio Solutions - Case Study

June 2014

Confidential Advisor Use Only

General advice warning and disclaimer

This information has been provided by Jana Corporat e Investment Services Limited (ABN 38 055 638 474) a member of the National Group , 105–153 Miller Street, North Sydney 2060.

Any opinions expressed in this communication consti tute our judgement at the time of issue and are subject to change. We believe that the information contained in this communication is correct and that any estim ates, opinions, conclusions or recommendations are reasonably held or made as at t he time of compilation. However, no warranty is made as to their accuracy o r reliability (which may change without notice) or other information contained in t his communication.

This communication contains general information and does not constitute financial product advice. It should not be relied upon as a s ubstitute for financial or other specialist advice.

Before making any decisions on the basis of this co mmunication, you should consider the appropriateness of its content having regard to your particular investment objectives, financial situation or indiv idual needs.

2Confidential - Advisor Use Only

Table of Contents

3

Portfolio SolutionsCase Study 1

Investment PhilosophyProposed Portfolios 2

Case Study4 3

Proposed Portfolios3 4

Appendix5 5

Confidential - Advisor Use Only

Portfolio Solutions

A bespoke investment consulting service for High Ne t Worth clients of NAB & MLC Licensed advisors encompassing the fol lowing:

• Risk analysis of current HNW client portfolio

• Bespoke Asset Allocation proposal tailored to meet client’s investment objectives

• Bespoke portfolio implementation advice to meet client’s asset allocation requirements

• Periodic reviews and input by investment consultant as required

4

Key features


Portfolio Solutions

5

Process Steps

Consulting Modelling Proposal Ongoing Service

• Detailed Questionnaire & information gathering

• Initial meeting with Advisor & Client

• Risk modelling & stress test of current portfolio

• Risk modelling & stress test of bespoke portfolio

• PowerPoint presentation for Adviser/client meeting if required

• Implementation solution if required

• Periodic consultation & review as required


Investment Philosophy


Scenarios Framework

7

Future Return and Risk

Strategic Asset Allocations based on comprehensive scenario set• 40 states of the world• Generic scenarios – always applicable

Strategic Overlay – managing risks and seeking oppor tunities over a three to five year horizon• Looks at what’s happening today• Focused set of scenarios, tailored to the current environment and exploring

how it might evolve

Stress testing portfolios not for what has happened or what we think willhappen, but for what could conceivably happen


Long term Scenarios

8

Market leading stress testing – 40 possible scenarios

Source: MLC Investment Management

Equilibrium steadystate

1111

Global catastrophe (adverse economic environme

nt)

4444

0000 Global catastrophe (adverse economic environme

nt)

4444


nt)

4444


nt)


nt)

4444

0000Global catastrophe (adverse economic environme

nt)


nt)


nt)

4444


nt)


nt)

4444


nt)

4444

0000

4444

0000Global

catastrophe (adverse economic environme

nt)


nt)


nt)


nt)

Global catastrophe

(adverse economic

nvironment)

Steady state

2222

Deflation –productivity

driven boom

33334444


nt)

Stagflation

4444

Rising inflation/ shock

(reverse of disinflation)

5555


nt)

4444


nt)

4444

0000

4444


nt)


nt)


nt)

Debt driven growth

6666

Disinflation

77774444


nt)

Generalised global growth

boom –investoroptimism

8888

Investor pessimism –rise in risk premiums

99994444


nt)

10101010

Prolonged global growth & productivityboom. BRICs

resource boom

Australia boom

111111114444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000Australia only bust (world

economy not weak)

12121212

Aust econ crisis (world

weak)

131313134444

0000Profit share

mean reversion

14141414

Credit/monetary expansion

151515154444

0000

4444

0000

4444

0000Global

catastrophe (adverse economic

nvironment)

Credit/monetary

contraction

16161616

Steady/trend growth with

mean reversion

171717174444

0000Slowdown

18181818

Recession

191919194444

0000

20202020

Recovery

Aust deflation –destructive

(Japan 1990s)

212121214444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000Global depression stagnation

(1930s)

22222222

Severe inflation risk

232323234444

0000Financial

collapse risk

24242424

Oil price shock –

geopolitical risk

252525254444

0000

4444

0000

4444

0000Global

pandemic

26262626

Global catastrophe

272727274444

0000Global

catastrophe adverse

economic environment

28282828

Global war/ conflict

292929294444

0000

30303030

Protectionism – adverse growth & inflation

Exogenous risk drives investor

uncertainty

313131314444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000

4444

0000China & EM risk aversion (yield bubble

bursts)

32323232

Monetary stimulus versus

structural deflation

333333334444

0000Market bust

econ not okay (rise in correlations)

34343434Developed

world reform & Asian

leadership (partial US earnings

reversion)

353535354444

0000

4444

0000

4444

0000Global

catastrophe (adverse economic

environment)

Paradigm shift – lower values for equities

(higher risk premium)

36363636

Paradigm shift – higher

values for equities

(lower risk premium)

373737374444

0000Speculative

bubble

38383838

Bubble bursts

393939394444

0000

40404040

Central banks

inflation mistake


Strategic Overlay Scenarios

9

Medium term Scenarios (3 - 5 years)

Three-speed global economy (China soft landing)Mild inflationary resolutionDeveloped market austerity, recession, stagnationEarly re-leveraging Extended quantitative easingSovereign yield re-ratingReformChina hard landingInflation shockTwo-speed recoveryExtended risk aversionOne-speed, slow growth world

Pro

babi

lity H

ighe

rLo

wer

Stagflation


40 Set Scenarios

10





11





Asset Class Views

12Valid @ 30 June 2014


Asset Class Decrease Steady Increase

Australian Shares �

Global Shares (Hedged) �

Global Shares (Unhedged) �

Defensive Global Shares �

Emerging Markets �

Property Securities �

Global Government Bonds �

Domestic Bonds �

Global Non Government Bonds �

Multi-Asset Real Return Strategy �

Australian Dollar �

Case Study


^ amount to be modelled = $10.9m

Current Investment & Financial Position*

* Please note that totals are subject to rounding.

14

Current Portfolio

Asset type Amount

Principle Residence & Lifestyle Assets $15.6m

Investments – Non Super $5.5m ^

Investments – SMSF $5.4m ^

Total Assets $26.5m


Investment Objectives

1. Income requirement - $400k p.a., (today’s dollars, i ndexed, post tax) in retirement.

2. Capital preservation to protect the real value of t he portfolio over time.


Other factors for modelling purposes

1. Investors are currently 68 and 66 years old.

2. Assume 46.5% tax rate for non-super and 0% for SMSF (pension phase).

3. Model using 10 year returns with 40 set scenarios.

4. Advisor indicated that client is comfortable with r isk profile 50% growth / 50% income. Agreed with adviser to provide two scenarios:

Option A – Target 65% Growth / 35% IncomeOption B – Target 50% Growth / 50% Income

5. Assume net employment income is used to fund the li festyle expenses until retirement.

6. Assume the greater of the lifestyle income requirem ent or the legislated age-based pension is withdrawn from the pension portfolio from retire ment. Any excess drawdown to lifestyle expenses is assumed to be invested in the non-super portfolio.

7. Inflation assumed at 2.8% pa.

8. Direct shares to be ring-fenced from sale.


17

Return Objective – income from total wealth

1 Required income (today’s $, inflation indexed, after tax): $400k

2 Inflation factor multiple (1.028 ^ 4 years) 1.1168

3 Required p.a. income at point of retirement in 2018 (future $, inflation indexed)

$446.7k

4 Current total wealth $10.9m

5 Estimated wealth at point of retirement (1.05^4) $13.5m

6 Estimated required return to meet income requirement in retirement ($446.7k / $13.5m)

3.3%

7 Inflation adjustment to maintain real value of wealth + 2.8%

8 Estimated required return to achieve investment objectives = 6.1% #

# This is an estimate of the required return necessary to achieve the investment objectives shown on page 15 assuming the total wealth is used to fund the income requirement


Current Combined Portfolio

18

Asset Allocation

Note: Totals may not sum to 100% due to rounding. The above asset allocations are not meant to represent a fixed target asset allocation, but rather the resulting asset allocation at the present time from a range of proposed building blocks. The actual asset allocation may vary over time due to the inclusion of Absolute Return Strategies.

Asset Allocation Current - Non super Current - SuperCurrent

Combined Portfolio

Australian Equity - Core 70% 49% 60%

Australian Equity - Income 0% 4% 2%

Australian Equity - Absolute Return 2% 4% 3%

Global Equities (unhedged) 7% 15% 11%

Global Equities (hedged) 0% 0% 0%

Emerging Markets (unhedged) 0% 3% 2%

Emerging Markets (hedged) 0% 0% 0%

Global Listed Property 0% 2% 1%

Australian Listed Property 0% 0% 0%

Australian Fixed Income 1% 0% 0%

Global Fixed Income 0% 0% 0%

Diversified Credit 3% 0% 1%

Hybrids 4% 9% 6%

Diversified Fixed Income 0% 0% 0%

Cash / Enhanced Cash 5% 10% 8%

Inflation Linked Bonds 0% 0% 0%

Alternative Assets 8% 3% 6%

Growth Assets 79% 77% 78%

Income Assets 13% 20% 16%

Alternative Assets 8% 3% 6%Total 100% 100% 100%


Current Non Super Portfolio

19

Modelling (10 yrs, Nominal, 46.5% tax, including franking credits)

Estimated required return 6.1% pa post 46.5% tax.

The projections reflect estimated average annualised returns over the forecast time frame under the various scenarios shown. Actual returns in any single year may be materially different to that shown above.


Current SMSF Portfolio

20

Modelling (10 yrs, Nominal, 0% tax, including franking credits)

Estimated required return 6.1% pa post 0% tax.



Current Combined Portfolio

21

Wealth (40 Set Scenarios, Nominal, Post tax, Allowing for cash flows)

Starting portfolio value: $10.9m; Excess to inflation indexed wealth at age 85: $1.4m.

The projections reflect estimated average annualised returns over a 10 year forecast time frame under the various scenarios shown. Actual returns in any single year may be materially different to that shown above.


Proposed Portfolios


Asset class building blocks

23

The investment universe

Australian Equities

Global Shares (hedged)

Global Shares (Unhedged)

Emerging Markets

Global Private Markets

Australian Listed Property

Global Listed Property

Multi Asset Real Return

Hedge Funds

Insurance Related Investments

Australian Bonds

Global Government Bonds

Global Non-Gvmt Bonds

Global Absolute Return Bonds

Global Multi-Sector Bonds

Enhanced Cash

Global High Yield Bonds

Global Bank Loans

Global Mortgages

Australian Inflation-Linked Bonds


Proposed Portfolios

We have modelled two different portfolios:

• Option A: 65% Growth Assets / 35% Income Assets

• Option B: 50% Growth Assets / 50% Income Assets


Proposed Portfolio – Option A

25

Asset Allocation

Note: Totals may not sum to 100% due to rounding.The above asset allocations are not meant to represent a fixed target asset allocation, but rather the resulting asset allocation at the present time from a range of proposed building blocks. The actual asset allocation may vary over time due to the inclusion of Absolute Return Strategies.

Asset AllocationCurrent

Combined Portfolio Option A

Combined Portfolio

Australian Equity - Core 60% 17%

Australian Equity - Income 2% 0%

Australian Equity - Absolute Return 3% 15%

Global Equities (unhedged) 11% 27%

Global Equities (hedged) 0% 0%

Emerging Markets (unhedged) 2% 2%

Emerging Markets (hedged) 0% 0%

Global Listed Property 1% 0%

Australian Listed Property 0% 0%

Australian Fixed Income 0% 2%

Global Fixed Income 0% 1%

Diversified Credit 1% 17%

Hybrids 6% 0%

Diversified Fixed Income 0% 0%

Cash / Enhanced Cash 8% 2%

Inflation Linked Bonds 0% 1%

Alternative Assets 6% 16%

Growth Assets 78% 61%

Income Assets 16% 23%

Alternative Assets 6% 16%Total 100% 100%


Proposed Non Super Portfolio – Option A

26





Proposed SMSF Portfolio – Option A

27





Proposed Option A Combined Portfolio

28


Starting portfolio value: $10.9m; Shortfall to inflation indexed wealth at age 85: $1.8m.



Proposed Portfolio – Option B

29

Asset Allocation

Note: Totals may not sum to 100% due to rounding.The above asset allocations are not meant to represent a fixed target asset allocation, but rather the resulting asset allocation at the present time from a range of proposed building blocks. The actual asset allocation may vary over time due to the inclusion of Absolute Return Strategies.

Asset AllocationCurrent

Combined Portfolio Option B

Combined Portfolio

Australian Equity - Core 60% 11%

Australian Equity - Income 2% 0%

Australian Equity - Absolute Return 3% 13%

Global Equities (unhedged) 11% 17%

Global Equities (hedged) 0% 0%

Emerging Markets (unhedged) 2% 2%

Emerging Markets (hedged) 0% 0%

Global Listed Property 1% 0%

Australian Listed Property 0% 0%

Australian Fixed Income 0% 7%

Global Fixed Income 0% 3%

Diversified Credit 1% 24%

Hybrids 6% 0%

Diversified Fixed Income 0% 0%

Cash / Enhanced Cash 8% 9%

Inflation Linked Bonds 0% 1%

Alternative Assets 6% 13%

Growth Assets 78% 44%

Income Assets 16% 43%

Alternative Assets 6% 13%Total 100% 100%


Proposed Non Super Portfolio – Option B

30





Proposed SMSF Portfolio – Option B

31





Proposed Option B Combined Portfolio

32


Starting portfolio value: $10.9m; Shortfall to inflation indexed wealth at age 85: $3.1m.



Modelling Analytics – Non Super Portfolio

33

10 years (post 46.5% tax, inclusive of franking credits)

The analytics shown above outline our expected outcomes on an annualised basis over the entire modelling period. Over shorter time periods, the volatility of returns may be greater than that shown in our modelling and the risk of a negative return may be materially higher.

Portfolio Statistics Current - Non super Option A - N on-super (65/35)

Option B - Non super (50/50)

Expected Return Probability Weighted 4.7% 4.0% 3.6%Annual Equivalent Volatility Scenarios (per model) 11.9% 7.5% 5.6%Mean in 10% negative tail -1.1% 0.0% 0.6%Mean in 10% positive tail 11.7% 8.3% 6.8%

Prob of Neg Avg Return Scenarios (per model) 9.0% 1.8% 1.0%Prob of Neg Avg Return over 1 year period (normal distribution) 27.1% 15.0% 9.8%Risk Measure (expected # of negative years in a 20 year period) 5.4 3.0 2.0Sharpe Ratio Scenarios 0.6 0.6 0.7Expected Income (pa) Scenarios 3.0% 2.8% 2.9%Expected volatility of annual income (pa) 0.8% 0.6% 0.5%Duration of debt 1.09 1.38 1.42Mean shortfall in 1% tail (40 Current) -5.1% -2.2% -1.3%

Average Tax rate 31.5% 35.8% 38.8%


Modelling Analytics – SMSF Portfolio

34

10 years (post 0% tax, inclusive of franking credits)

The analytics shown above outline our expected outcomes on an annualised basis over the entire modelling period. Over shorter time periods, the volatility of returns may be greater than that shown in our modelling and the risk of a negative return may be materially higher.

Portfolio Statistics Current - Super Option A - Super (65/35)

Option B - Super (50/50)

Expected Return Probability Weighted 7.5% 6.7% 6.4%Annual Equivalent Volatility Scenarios (per model) 14.9% 10.3% 7.8%Mean in 10% negative tail 0.1% 1.2% 2.0%Mean in 10% positive tail 16.1% 12.6% 10.8%

Prob of Neg Avg Return Scenarios (per model) 2.0% 1.0% 1.0%Prob of Neg Avg Return over 1 year period (normal distribution) 24.8% 15.2% 10.1%Risk Measure (expected # of negative years in a 20 year period) 5.0 3.0 2.0Sharpe Ratio Scenarios 0.6 0.7 0.7Expected Income (pa) Scenarios 5.3% 5.2% 5.4%Expected volatility of annual income (pa) 1.2% 0.9% 0.8%Duration of debt 0.06 1.38 1.42Mean shortfall in 1% tail (40 Current) -5.3% -2.0% -1.0%

Average Tax rate -7.8% -4.0% -3.1%


Appendix


A guide to key terms

36

Term Explanation

Expected Return Probability WeightedAverage annualised estimated return of all scenarios (probability weighted) over the indicated modelling period. Returns in any one year can be

materially better or worse than this average.

Annual Equivalent Volatility Scenarios

(per model)Estimated annualised one standard deviation of returns either side of expected return.

Mean in 10% negative tailRepresents average annualised estimated return of worst 10% of scenarios over the indicated modelling period. Returns in any one year can be materially

better or worse than this average.

Mean in 10% positive tailRepresents average annualised estimated return of best 10% of scenarios over the indicated modelling period. Returns in any one year can be materially

better or worse than this average.

Prob of Neg Avg Return Scenarios (per

model)

Probability of achieving negative average return over the indicated modelling period based on the scenario projections. The probability of a negative

return in any single year of the modelling period will be significantly greater.

Prob of Neg Avg Return over 1 year

period (normal distribution)

Probability of achieving negative average return over a 1 year period, based on historic performance, assuming a normalised probability distribution of

returns.

Risk Measure (expected # of negative

years in a 20 year period)

Represents the number years a negative return is expected over a 20 year period, based on historic performance, assuming a normalised probability

distribution of returns. The calculation does not match the industry “Standard Risk Measure” calculation as we allow for tax and do not include manager

fees.

Sharpe Ratio ScenariosA measure of excess return over the cash rate delivered for each unit of excess risk implemented

– the higher the Sharpe Ratio the more efficient the portfolio in its use of risk given the scenarios modelled.

Expected Income (pa) ScenariosEstimated average annual distributions (as a percentage of capital value) from all sources including interest income, dividends and realised capital gains,

over the entire modelling period.

Expected volatility of annual income

(pa)Expected average annual volatility of expected income around the expected mean assuming a one standard deviation

Duration of debtMeasure of sensitivity of bond holdings to movements in interest rates (a 1 percentage point increase in bond yields will deliver an approximate 1

percentage point capital loss for a bond exposure for a 1 year duration).

Mean shortfall in 1% tail (per model) Represents average annualised estimated return of worst 1% of scenarios. Returns in any one year can be materially better or worse than this average.

Average tax rateThe estimated effective tax rate resulting from the investment strategy vs. the headline tax rate of investor. The difference will reflect such factors as the

estimated impact of franking credits


Portfolio Solutions Team


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