There are many factors that can cause returns to change. Some factors will have a bigger effect on some investments than others. We have listed some of the main factors in the table below, including ways they can be managed and the MLC funds most likely to be affected.
| What it means | These are factors that affect entire asset classes, including growth and contraction in Australian and overseas economies, investor sentiment, environmental factors, regulatory conditions and political events. |
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| Ways it can be managed (for MLC funds only) | The impact of markets can be reduced by investing in more than one asset class ie diversifying as MLC does with the MLC Horizon Portfolios and MLC Long-Term Absolute Return Portfolio. |
| MLC funds mostly affected | All, although MLC's Horizon Portfolios and MLC Long-Term Absolute Return Portfolio are expected to be less affected as they are diversified across asset classes. |
| What it means | The value of an investment, such as a share in a company, will be affected by events within and outside of the company. These events include changes to management, climate change, ethical and social issues, legal action against the company, competitive pressures, profit and loss announcements and the expectations of investors regarding the company. |
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| Ways it can be managed (for MLC funds only) | MLC selects investment managers who are skilled at researching and valuing companies and will therefore assess the effect of these factors on a company's value. |
| MLC funds mostly affected | All, although the more diversified they are, the less likely they are to be affected. |
| What it means | Investments involving lending to other parties are subject to the risk that the borrower is not able to meet their loan obligations. |
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| Ways it can be managed (for MLC funds only) | MLC's debt portfolios will have some debt securities with low and some with higher credit risk as holding both in a portfolio provides diversification, and a better risk/return tradeoff. Additionally, MLC employs highly skilled investment managers that specialise in assessing the credit worthiness of companies. |
| MLC funds mostly affected | MLC Diversified Debt Fund and to a lesser extent MLC Cash Fund. MLC's higher return seeking MLC Horizon Portfolios will have higher levels of credit risk than the MLC Horizon Portfolios which are focussed on preserving capital. |
| What it means | The value of different asset classes, especially debt securities, can fluctuate with changes in interest rates. For example, when interest rates rise, existing debt securities tend to fall in value. Debt securities with longer maturities tend to fall further than those with shorter maturities. Normally, debt securities with a longer period until they mature are expected to be rewarded with a higher interest rate (or yield) then those with a shorter period until maturity. |
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| Ways it can be managed (for MLC funds only) | MLC's debt portfolios are tailored to meet the objectives of each individual MLC Horizon portfolio. The investment managers MLC has selected conduct in depth research to form a view on interest rates. Based on this view, they will either reduce or increase the exposure of the debt portfolio to interest rate changes in an attempt to improve returns. |
| MLC funds mostly affected | All Funds are affected to some degree but MLC Diversified Debt Fund and MLC Cash Fund are directly affected. MLC's higher return seeking MLC Horizon Portfolios will tend to have a longer term until they mature, and therefore will usually be more affected by changes to interest rates, than the MLC Horizon Portfolios which are focussed on preserving value. |
| What it means | Investments, such as those in private, unlisted or small specialised markets, mortgages, or alternative investments are often difficult to buy or sell quickly. Therefore, they may have to be sold at a discount to their market value in some environments. These types of investments are expected to receive a higher return than similar assets on listed markets due to the higher risk associated with their illiquidity. |
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| Ways it can be managed (for MLC funds only) | MLC includes a relatively small exposure to illiquid assets in its diversified portfolios. Illiquid assets are also pooled across all MLC products which helps with liquidity. MLC Long-Term Absolute Return Portfolio has a higher exposure to illiquid assets than other portfolios as it has a long-term investment objective. |
| MLC funds mostly affected | MLC Long-Term Absolute Return Portfolio. To a lesser extent MLC Horizon Portfolios. |
| What it means | If your portfolio includes assets in other countries, your investment value will change if the exchange rate between the Australian dollar and the foreign currency moves. Investments in Australian assets may also be exposed to changes in the exchange rate if their earnings are derived outside of Australia eg Australian companies that export or import goods and services. |
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| Ways it can be managed (for MLC funds only) | These movements can largely be removed by "hedging" the currency exposure back to Australian dollars. The currency strategy of MLC's funds is outlined in the PDS. |
| MLC funds mostly affected | MLC Global Share Fund, MLC Global Share Value Style Fund and MLC Global Share Growth Style Fund as they are not hedged. The following funds may have some small exposure but should be minimal as they are mostly hedged: MLC Hedged Global Share Fund, MLC Global Property Fund, MLC Diversified Debt Fund. MLC Horizon Portfolios and MLC Long-Term Absolute Return Portfolio have some exposure to currency in their global share portfolios. The other global asset classes are mostly hedged, which may result in some small currency exposure. |
| What it means | Derivatives are financial instruments such as options, futures and swaps. Derivatives are generally used instead of directly owning or selling underlying assets. Generally derivatives are used as a way of implementing a strategy to reduce risk or improve returns. Risks associated with derivatives can include:
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| Ways it can be managed (for MLC funds only) | MLC's funds adhere to MLC's Derivative Risk Statement which outlines how derivatives may be used to
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| MLC funds mostly affected | All MLC Funds and Portfolios. |
| What it means | Gearing is when borrowed money, derivatives and/or other techniques are used to magnify returns. Gearing also magnifies any losses. You should be aware that in extreme market conditions, asset values can fall dramatically in a short period of time. In such conditions, this could cause the value of an investment option to fall to zero. This would be the case, for example, if an investment option had borrowed $100 for every $100 invested by investors, and the underlying assets fell by 50% in a short period of time. |
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| Ways it can be managed (for MLC funds only) | Gearing is used in MLC Horizon 7 – Accelerated Growth Portfolio and MLC Long-Term Absolute Return Portfolio. The gearing strategies are outlined in the PDS. |
| MLC funds mostly affected | MLC Horizon 7 – Accelerated Growth portfolio and MLC Long-Term Absolute Return Portfolio only. |
| What it means | Short selling is selling an asset that is not owned, on the expectation that its price will decrease. If the price of the asset increases, the investment option will lose value. As there is usually no limit to the amount an asset can increase, the potential loss of short selling is not capped. This is known as uncovered short selling. |
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| Ways it can be managed (for MLC funds only) | MLC may use covered short selling in the MLC Long-Term Absolute Return Portfolio which means it holds an asset similar to the asset being short sold, so price movements will largely offset each other. The risk of uncapped losses is therefore largely removed. |
| MLC funds mostly affected | MLC Long-Term Absolute Return Portfolio although is unlikely to have a significant impact as it uses covered short-selling. |
| What it means | All investments, borrowings and transactions (including buying and selling securities) involve a counterparty that is on the other side of the transaction eg when buying a security, the counterparty is the seller. There is a risk that a counterparty may not be able to meet its obligations. |
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| Ways it can be managed (for MLC funds only) | MLC diversifies counterparties across many institutions and any concentrated counterparty risk is limited to highly rated institutions. |
| MLC funds mostly affected | All MLC Funds and Portfolios. |
| What it means | An agency exists where one party contracts with another to perform duties on its behalf. There is a risk that either of the contracting parties do not perform their duties. An investment manager is an example of an agent of MLC. |
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| Ways it can be managed (for MLC funds only) | MLC monitors investment managers regularly to ensure they are performing their duties and managing their portfolios as MLC expects them to. |
| MLC funds mostly affected | All MLC Funds and Portfolios. |
| What it means | A particular investment manager may be affected by an event such as the deterioration in their skill at selecting securities or changes to investment personnel. |
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| Ways it can be managed (for MLC funds only) | MLC reduces the the impact of this risk by doing extensive research on the investment managers and diversifying across a large number of skilled managers. |
| MLC funds mostly affected | All MLC Funds and to a lesser extent Portfolios, as they have exposure to more investment managers. |