RETHINKING SAFE INVESTMENTS FOR RETIREES

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1 WHITE PAPER JANUARY 216 FOR WHOLESALE CLIENTS ONLY Back in 21, Martin Currie started to look at how the ageing population was changing the retirement environment in Australia, and how people moving into retirement were actually going to fund their retirement. Reece Birtles Portfolio Manager Will Baylis Portfolio Manager The volatile total return experience during the global financial crisis (GFC) had led people to lose faith in traditional equity strategies. At the time, there was a big focus on how fixed annuity products could be the solution, but given the low returns available from such products, we were not convinced. We started to think about the problem from a more fundamental perspective, and went back to first principals to look at product design. For the previous 2 years, the industry had focused on building products for accumulation strategies, where the goal was to maximise the total dollar balance before reaching 65 years of age. There had been no focus on building solutions specifically for retirement income. We believe that if products are designed with the objective to maximise the probability of a stable and sufficient income for life, then income stability is more important than capital stability. The objective of retirees shouldn t be on reaching a particular dollar balance. Key findings n Scaremongering on what retirement balance is needed does not deal with how money could and should be invested for a comfortable retirement n The Age Pension is not a safety net for a comfortable retirement, and unless balances are very large, term deposits no longer provide the required income yield to meet the short fall n Retirees should focus their asset-mix on sustainable and regular income that grows with inflation to meet their lifestyle needs, but most balanced funds focus on total returns only n For retirees, income stability should be more important than capital stability or total returns n Term deposits are not risk free: they have over twice the income volatility of an investment in equities, and capital often has to be eroded to meet income goals n Sticking to a single asset class (such as term deposits) or investing in the wrong combination of asset classes could leave retirees with the burden of running out of money n retirees should seek to match their A$ cost of living/inflation liabilities with A$ assets rather than diversifying, global assets may introduce additional unintended risks n A multi-asset solution, focussing on A$ bonds, shares with solid franked dividends, real assets such A-REITs, utilities and infrastructure can be constructed to meet retiree income needs n At Martin Currie Australia, we offer a unique Multi Asset Retirement Income solution that is managed specifically from a retiree perspective. n This new approach provides retirees with the expected benefits of low volatility (fixed income), inflation protection (real assets) and long-term income growth (equity income), which combined minimises the need to draw down on capital and provides higher yields.

2 Of late, the government has started to look more closely at income objectives. The Financial Systems Inquiry (FSI) recommended in 214 that superannuation fund trustees should be required to pre-select a comprehensive income product for retirement option (CIPR). This would let members receive their superannuation benefits in retirement, with features that include a regular and stable income stream 1. In its response to the enquiry in October 215, the government agreed that such products could lead to improved outcomes, increased private retirement incomes for retirees, increased choice and better protection against longevity and other risks 2. The government has committed to consult with industry by the end of 216 on specific legislation. We are not making a judgement here on whether options such as account-based pensions, annuities or other types of guaranteed investments are the most appropriate default CIPR vehicle, as in our opinion one size does not fit all. Rather, we have been looking at the characteristics of investment products that could be used within an income solution for a superannuation fund, SMSF or individual. In its response to the FSI, the government highlighted that the range of products currently available at retirement is too narrow and does not always meet individuals needs and preferences. We agree that products designed for traditional pension portfolios, such as fixed annuities, are unlikely to be able to provide a comfortable retirement with a stable and sufficient income. We need products that are specifically designed for retirees needs. Quantifying the problem According to the Association of Superannuation Funds of Australia (ASFA), a comfortable retirement lifestyle for a couple aged 65 can be achieved with an income of A$58,784 3, assuming that the retirees own their own home outright and are relatively healthy. Annual income required for a comfortable lifestyle (AFSA) Full Age Pension Shortfall vs. Pension $58,784 $33,982 $24,82 Even at its maximum, the current full Age Pension of $33,982 p.a. 4 is nowhere near sufficient to cover this amount for a comfortable retirement; retirees would need to supplement any pension income with income from their own investments and superannuation. Retirees who look to derive their comfortable income entirely from annuities, or term deposits (which are currently earning around 2.55% 5 ), would need a retirement balance of well over A$1 million to last for 2 years of life expectancy. This sum is out of reach for nearly all people who are approaching retirement, even if they are earning very high incomes. Do you really need A$1 million in super? In 21, the government s Cooper Review into superannuation stated that we needed around $5, in superannuation for a comfortable retirement. Today, Jeremy Cooper, the chair of the review, claims that $1 million is not even enough to reach ASFA s standards 6. Mr Cooper s figures assume that the entire lump sum is invested in low-risk government bonds. He proposes that an annuity stream (such as what Mr Cooper s employer Challenger provides) is the only way to generate income in retirement. What has changed? Have prices in Australia gone up that much? Have life expectancies increased dramatically in five years? No, the reason for the sudden change in his figure is that the yield on government bonds has fallen dramatically since 21 to around 2.6% 7. Such a high retirement balance is out of reach of most ordinary s. In August 215, the Institute of Superannuation Trustees (AIST) estimated that the typical balance of those approaching retirement is just A$1, 8. Public commentary has latched on to this A$1 million figure, but we believe that this is the wrong focus. Such statements send the wrong message to people approaching retirement. We should be looking at actual income delivered rather than just superannuation balances. Additionally, the A$1 million assumptions completely ignore the role of alternative asset classes that produce income. 1 Commonwealth of Australia (December 214). 2 The Government (October 215). 3 ASFA (3 June 215). 4 DHS (2 September 215). 5 RBA (3 September 215). 6 SMH (19 April 215). 7 Factset (3 September 215). 8 AIST (August 215).

3 PAGE 3 An example: achieving a comfortable lifestyle Let s assume a couple has a retirement balance of A$65k 9 available in an accumulation-focused superannuation fund. While this is above the asset threshold for a full pension, the couple is likely to be eligible for a part pension of approximately A$2k a year under the current asset test 1. To achieve a comfortable lifestyle and avoid drawing on their capital, the couple would need to supplement the part pension with a further A$39k 11 of income per year from their investment portfolio. Annual income required for a comfortable lifestyle (AFSA) Part Pension $65k assets Shortfall vs. Pension $58,784 $2,1 $38,784 They also need that income to grow over time, by at least the inflation rate, to maintain its purchasing power. According to the government s Intergeneration Report 12, a 65-year-old has about 2 years of life expectancy, and A$58,784 of expenses today could grow to almost A$94k in 2 years time. The solution needs to provide sufficient income growth over time to offset the loss of purchasing power from inflation. As an added hurdle, inflation for retirees can be effectively higher than the official statistics suggest, because they often have to spend more on healthcare. However, here we will assume 2.5% for illustrative purposes. Income growth required to maintain standard of living through retirement 16, Income from the Age Pension Income required from investment portfolio 14, 12, 1, $93,975 (Income p.a.) 8, 6, $58,784 4, 2, Past performance is not a guide to future returns. Source: Martin Currie Australia, ASFA, ATO, DHS; as of 2 September 215. The objective is to build a portfolio that produces a certain dollar income to match lifestyle needs, and grow that income each year in a stable and reliable fashion. This is quite a different starting point to what the industry as a whole had been doing before. The focus had always been on what s the total balance of the fund? We believe that the focus for post-retirement should really be on sustainable and regular income amount. Using our prior asset/liability assumptions, generating an income of A$39k p.a. from an A$65k balance requires around a 6% p.a. yield. Therefore, we need to design portfolios that will generate in excess of a 6% p.a. yield in order to meet the income needs. 9 Based on ASFA s suggested adequate amount for a couple. Source: Yellow Brick Road (215). 1 DHS (2 September 215). 11 Martin Currie Australia, ASFA, ATO, DHS (2 September 215). 12 Commonwealth of Australia (March 215).

4 How does your risk tolerance change with asset size? It feels intuitive that people with lower assets should have a lower risk tolerance compared to people with higher assets. However, to reach the income requirements of a comfortable lifestyle in retirement through investing, the lower the asset size, the higher the yield/risk required. On the flip side, the higher the assets, the lower the yield/risk required to attain a comfortable retirement. Is this a mismatch? Maybe not Consider this: The lower the value of your retirement savings, the greater reliance you have on the Age Pension. The Age Pension is guaranteed by the government, and so could be considered similar to a riskfree return. The present value of the full Age Pension of A$39k p.a. is around $676k 5 and for low-end asset levels, makes up around 7% of total assets. However, as your assets grow, your access to the Age Pension decreases, and your risk tolerance in fact decreases as the percentage of your assets in risk-free investments fall. Ironically, given the Age Pension safety net, the lower the value of your retirement savings, the more risk you can take to invest your remaining savings in higher yielding strategies. Retirement Savings Present Value of Age Pension 13 Total Full Pension A$291,5 3% A$676,51 7% A$968,1 1% Part Pension A$65K assets A$65, 62% A$398,163 38% A$1,48,163 1% The chart below highlights the required yields for attaining a comfortable income at different asset balances and the interaction of asset size with Age Pension eligibility, ignoring the potential changes to legislation of pension entitlements or superannuation concessions. Required yield and asset sizes for comfortable retirement incomes 7, Income from the Age Pension Income required from investment portfolio Required yield on investment RHS 12. 6, 1. Income p.a. 5, 4, 3, 2, Required yield 1, , 29, 222, 235, 248, 261, 274, 287, 3, 313, 326, 339, 352, 365, 378, 391, 44, 417, 43, 443, 456, 469, 482, 495, 58, 521, 534, 547, 56, 573, 586, 599, 612, 625, 638, 651, 664, 677, 69, 73, 716, Past performance is not a guide to future returns. Source: Martin Currie Australia, ASFA, ATO, DHS; as of 2 September Discounted over 2 years at the government 1 year bond rate of 2.55% (as at 1 December 215), with income growing at inflation rate.

5 PAGE 5 Why have things changed? Prior to the GFC, term deposit rates well in excess of 6% were readily available, and it would have been possible to annuitize a retirement balance and live comfortably off that. However, rates on term deposits have plunged over the last decade. Since the GFC, there has been a general fall in official interest rates, both here and overseas, with the yield on 9-day bank bills falling to just over 2.5% in December 215. To generate the same dollar of income from term deposits today requires an investment of up to four times as much as it did in 28. This lower income generation per dollar also means that that there is a greater chance that the retiree will have to draw down their capital assets in order to meet the cost of living. Where else can we find our required yield of greater than 6% p.a.? Growth assets such as equities offer an alternative, but introduce different risks and questions to the drawdown-on-capital debate. How do you choose when to sell? Which assets should you sell? This uncertainty can make retirees feel uncomfortable about being exposed to the volatility of equity markets, and by extension feel uncomfortable about being invested in growth assets at all. Avoiding drawdowns on capital with an income focus We believe that if we can design portfolios that can provide retirees with their required income, year in and year out, then they can take a longer-term perspective. That means they can rid themselves of the worry about selling their assets at the wrong time. This enables them to hold more growth assets in their portfolio, which in turn enables the portfolio to have growth in the income stream over time to keep up with inflation. Income growth would not be possible in traditional fixed-annuity products, leaving them exposed to income erosion. We need to change the investment focus from valuing total returns to valuing income returns. If we can increase the percentage of the total return in the form of income, this means that we do not need to fund income from capital gains. For retirees, if we account specifically for the franking credits as part of that income focus, there is an additional benefit to invest in equities. Our internal analysis indicates this can increase returns for a retiree in the order of 1.8% per annum gross of fees. Do you know about hidden volatility? Most investors understand the concept of capital volatility; we all know that share prices go up and down. The volatility of share prices (S&P/ASX 2 Accumulation Index) over the last ten years to December 215 has been around 17.4% p.a. 14 Interestingly, the volatility of the dividend stream produced from the same index has been 9.1% p.a.; far more stable than the underlying share prices. For term deposits, or even fixed annuities, capital volatility has been stable over time. But when you look at the income stream produced by those assets, it s actually had volatility of 22.5% p.a. over the same period. 15 That s more than double the volatility of equities! What assets are risky now? Annual income received from A$1 invested 1 years ago A$ 9. stockmarket LHS * Term deposits RHS Oct 5 Oct 7 Oct 9 Oct 11 Oct 13 Dividends: 9.1% vol Term Deposits: 22.5% vol Past performance is not a guide to future returns. Source: MCA, Factset, RBA; as of 31 December 215. *S&P/ASX 2 Accumulation Index. Average special rate (all terms). 14 Source: FactSet (31 December 215). 15 Source: RBA (31 December 215).

6 A new frontier Most investors would be familiar with the upwards sloping efficient frontier chart, which explain that more risk taken results in a greater expected total return. However, when thinking about a retiree s needs, the focus should be on income returns rather that total returns, and income risk rather than total risk. When constructing a profile for income-generating assets and income risk, the efficient frontier has a very different shape to a normal investment frontier. We have compared income return and risk for each of the asset classes typically included in an accumulation portfolio. We also looked at if their current yields meet the minimum 6% income threshold for retirees. Income vs. Income Risk from the perspective of a retiree 1 Expected income MCA MARIS MCA Real Income bonds AREIT MCA Equity Income shares Minimum requirement Global bonds Global shares EM shares Best TD % 5% 1% 15% 2% 25% Income risk (expected SD of income) Past performance is not a guide to future returns. Source: Martin Currie Australia, Factset; as at 31 October 215; Data shown for illustrative purposes only. 14 Source: FactSet (31 December 215). 15 Source: RBA (31 December 215). This analysis has shown us that very few asset classes meet the income threshold. Term deposits have the lowest levels of returns, but sit among those with the highest variability of income over time. A passive investment in equities or listed property also doesn t meet the grade, however, we believe that an portfolio with a specific income focus would.

7 PAGE 7 Global equities: challenging the traditional asset mix Another interesting outcome of our analysis is that global equities might not be appropriate for all retirees, even though they have been traditionally included in the 3/7 mix as a growth component. A typical conservative balanced fund invests in global bonds, global equities, bonds and equities. But in our asset/liabilities match for retirement income, the liabilities (cost of living) are largely, inflation is largely, therefore the risk to the investor is largely in nature. We believe that the assets in which you invest should match your income objectives. For example, a fall in consumer prices in, say, New York or London will not boost your spending power as a retiree in Melbourne or Sydney. For this reason alone, offshore investments may have a disadvantage relative to local investments for retirees. Additionally, typical accumulation stage clients would be happy to take on the diversifying foreign-exchange risk that comes with investing overseas. They don t mind that the dividend yield is only around 2.5%, as the focus is on maximising total returns. But when you look at this from a retirement perspective, if you are only getting a 2.5% yield for foreign equities, you would need to draw down at least a further 3.5% of capital over time to meet the income threshold. Furthermore, foreign-exchange risk, rather than adding diversification, has actually introduced an additional unintended risk in volatility of the income stream. Why Australia is a safer source of income One of the big concerns stemming from the GFC is that countries in the northern hemisphere have taken too much debt on to their government balance sheets. This has clear implications for their fiscal positions, in terms of funding that debt, and what it means for their budget and ability to spend in the future. Thankfully, Australia is in a much stronger position compared to other markets. Government debt to GDP Central bank assets: Percentage of GDP % 75 6 Bank of Japan ECB US Federal Reserve Bank of England RBA % 99% 87% % Australia Japan US Eurozone UK n government is fiscally responsible n Australia not under printing money pressure RBA central bank assets low as a percentage of GDP Past performance is not a guide to future returns. Source: Martin Currie Australia, Factset; as at 31 March 215. RBA continues to run high cash rate and no QE programs

8 But this dynamic in the northern hemisphere has consequences for asset classes everywhere around the world. If you look at essentially the zero-interest rate policies that the US, Europe and Japan have today, you can see that returns from many asset classes have become distorted versus pre-gfc. However, equity yields remain attractive compared to their pre-gfc levels. US Fed funds rate US government 1 yr bond Australia government 1 yr bond Pre GFC level Nov 7 Nov 1 Nov 13 Nov 7 Nov 1 Nov 13 Nov 7 Nov 1 Nov 13 US BAA corporate bond yield US REITs Australia equity yield Nov 7 Nov 1 Nov 13 Nov 7 Nov 1 Nov 13 Nov 7 Nov 1 Nov Past performance is not a guide to future returns. Source: Martin Currie Australia, Factset, as of 3 November 215. Focusing on Australia Even if you believe that the US Federal Reserve will raise rates, be it this year or sometime in the next few years, it s very unlikely that yields will go back to the long-term levels that existed prior to the GFC. Cash rates around the world have been significantly reduced, and there is no way you can achieve a 6% yield out of any cash-type instruments today, and this is also unlikely to rebound to that level in the future. Similarly, that dynamic can also be seen in government bond markets, including Australia, and it s also affected corporate credit yields, and securities such as US and Japanese REITs. These are now much closer to what you see in bond yields. Despite these headwinds, equity yields have remained attractive compared to pre-gfc levels. Australia continues to be a safer source of income; with higher interest rates, a low-risk environment and a tax system that favours dividends. Australia has solid economic prospects, robust population growth (assisted by net migration), a sound fiscal position and low political, legal and corruption risk. The country is also home to many strong companies and a solid banking system, and corporate debt levels are at decade lows. Summary of the retirement challenge We are concerned that sticking to a single asset class or investing in the wrong combination of asset classes could leave retirees with the burden of running out of money, and the Age Pension does not provide a full safety net for a comfortable retirement. As we have discussed above, we believe the solution to meeting retirees income needs lies in prioritising income at the heart of the asset allocation for client portfolios. We believe that if products are designed with the objective to maximise the probability of a stable and sufficient income for life, then income stability is more important than the oft-quoted required balance of A$1 million or even more.

9 PAGE 9 By changing the investment focus from valuing total returns to valuing income returns, we can reduce the need to fund income from capital, and avoid capital drawdowns. Although term deposits provide capital stability, they have the lowest levels of returns but sit amongst those with the highest variability of income over time. Younger retirees who have a long life expectancy can tolerate capital volatility, but they cannot however be short of regular income. Our analysis showed that very few asset classes meet the 6% income threshold; however, yields have remained comparatively attractive vs. their global alternatives. Furthermore, as the liabilities of the cost of living, inflation and risks of retirees are largely in nature, we believe that it makes sense that the assets you invest in match that risk. The solution retirement building blocks We believe that to meet the yield required, a retiree s portfolios should include a multi-asset solution. By redesigning the mix so that it is focused on assets that generate a stable income and grow that income over time, improve capital preservation and inflation protection, we believe that we can increase the likelihood that retirees achieve the income needed for a comfortable retirement. We propose a portfolio built from the following three income-focused building blocks: n An real income strategy: This involves investing in listed A-REITs, utilities and owners of other essential infrastructure with good cash flows from assets and limited business risks. This approach combines superior income yield, inflation protection and low risk. n An equity income strategy: This involves investing in companies listed on the Securities Exchange that have solid franked dividends prospects even in times of market volatility. The strategy is designed to provide a growing and fully franked income yield that is higher than that of the stockmarket as a whole. n An fixed income strategy: dollar cash and bonds should provide the defensive and stable base of the portfolio with low capital volatility. These building blocks, together with an allocation to cash, provide a completely new approach to investing in retirement. From a strategic asset-allocation perspective, we think that a sensible starting point is 3% in equity income, 3% in inflation-protected real assets, 3% in defensive bonds, with the 1% balance in cash. This looks like almost a complete reversal of the traditional conservative 3% growth/7% defensive approach for retirement. MARIS Typical conservative balanced fund Growth Cash/TDs Growth Global equities Equity Income equities Cash/TDs Fixed Income Real Income Real Income Global credit (hedges) Fixed Income Defensive Defensive Source: Martin Currie Australia. However in practice, these so-called growth assets are quite different to what is found in a traditional accumulation portfolio. Many of the equity assets also provide protection against inflation, and the equities held are dominated by low-risk names that offer high dividends and valuable franking credits.

10 Multi-Asset Retirement Income Strategy Martin Currie Australia has developed a Multi-Asset Retirement Income Strategy (MARIS) that brings together our deep understanding of the income needs of retirees, and more than 4 years experience in managing balanced funds. The multi-asset approach invests in a blend of Martin Currie Australia s award-winning Real Income strategy, innovative Equity Income strategy, and the fixed income and cash capabilities of fellow Legg Masonaffiliate Western Asset Management. This combination provides retirees with the expected benefits of low volatility (fixed income), inflation protection (real assets), long-term income growth (equity income), and liquidity (cash) which minimises the need to draw down capital and provides higher yields and better income stability than stand-alone assets such as term deposits. Our strategy has a neutral allocation between three major asset classes; however, using our deep understanding of dynamic asset allocation, we shift the strategic allocations between the three strategies (with a maximum allocation of 5% in each), based on our forward-looking estimates of expected income. Combining a strong mix of fundamental research skills, quantitative analysis experience and market expertise, Martin Currie Australia continually assesses the relative values of equities, bonds and cash. The asset mix will maximise the expected income yield and also assess the IRR (internal rate of return) of each asset class relative to normal valuations. The chart below shows the current asset mix: we favour a higher allocation to equity income and real income for their attractive expected yields. MARIS current asset mix Growth Equity Income Cash/TDs Fixed Income Real Income Defensive The Multi-Asset Retirement Income Strategy follows a more transparent and cost effective approach. It does not use derivatives, and relies simply on the dividends of the companies, and distributions from the trusts and bonds, that it invests in to deliver income and income growth to investors. We believe that the MARIS strategy is the first of its kind in Australia. Its unique combination of fixed income, real assets and equity components are managed specifically from a retiree perspective rather than an accumulator. Source: Martin Currie Australia; as at 3 November 215. Equity Income Real Income Cash + + Fixed Income + Income growth Inflation protection Low risk Liquidity = Best income solution

11 PAGE 11 Protection strategies do they actually protect? In a world of low interest rates, we believe that income-focused funds have become one of the most effective ways to boost a portfolio s income potential. But they re not all built the same way, and this can influence their ability to grow income and provide shock resistance in volatile times. Why do some funds have protection strategies, and what s made some fare better in recent market volatility? Retirement income and low volatility strategies are a new and evolving space. There are lots of theories as to the right way to invest, but unlike accumulation strategies, there has not been enough time to assess whether the theories are correct. There have been a number of capital protected income strategies released in recent years that offer enhanced income exposure and downside capital protection through the use of derivatives. In our Equity Income and Real Income strategies, we don t employ derivatives to protect capital or enhance income as we believe that such capital protection comes at a cost. This cost is hard to quantify, inherently expensive and potentially detrimental to long-run returns. Market portfolio For example, in buy/write strategies, we think the cost of writing call options is just a way to turn capital into income, and so reducing the portfolio s ability to grow its income stream over time. Efficient frontier The Security Market Line provides a simple test as Risk-free asset to whether a strategy is efficient compared with a combination of cash & equities. Everything on or above the line is good; everything below is bad. Risk Expected return Equity strategies are generally efficient So let s look at how various strategies, including equity, multi-asset and some that have employed derivative-based capital protection, fared versus the volatile equity market over the 12-month period through to 31 October A classic risk/return chart with the security market line shows that while multi-asset and equity strategies are generally efficient (i.e. returns around the index), derivative strategies are generally not. And the more derivatives you use to lower the beta, the worse it gets. The implication is that no one should buy an equity derivatives strategy. Instead, just buy an equity portfolio and retain some cash to lower your beta! Upside capture 1 year upside/downside capture 12 Optimal 1 MARIS 8 6 Suboptimal Downside capture MARIS Multi-asset Full equity strategies Cash Buy/write strategies Protected strategies S&P/ASX 3 Past performance is not guide to future returns Source: Martin Currie Australia, Morningstar (31 October 215); depicts a subset of multi asset and equity income funds. Multi Asset performance depicts average for Conservative, Balanced and Growth Multi Asset strategies. 16 Martin Currie Australia, Morningstar (31 October 215); depicts a subset of multi asset and equity income funds. Multi Asset performance depicts average for Conservative, Balanced and Growth Multi Asset strategies.

12 Option strategies are generally sub-optimal 1 year upside/downside capture The upside/downside capture relative to the S&P/ASX 2 accumulation index shows performance against the efficient diagonal line in the last 12 months of volatile equity returns, including a 12.7% fall in the index since February 215. To the left is good; to the right is bad. The conclusion is the same. Derivative strategies are suboptimal because they are an inefficient and costly way to implement investment insights. Return p.a Optimal MARIS Suboptimal MARIS was built on the basis that purposefully designed income strategies bought together in a multi-asset package would offer retirees the best solution. We believe that a multi-asset portfolio will always be more efficient than an equity derivative strategy. The reason being, it invests in more than two asset classes that have correlations of less than one. The proof of our theory is in the results: better returns for the risks taken. This is the case for both MARIS (at a higher return/risk point) but also for the more conservative multi-asset strategies which dominate derivative strategies on the Security Market Line Volatility MARIS Multi-asset Full equity strategies Cash Buy/write strategies Protected strategies S&P/ASX 3 Past performance is not guide to future returns Source: Martin Currie Australia, Morningstar; (31 October 215); depicts a subset of equity income funds. Martin Currie Australia Real Income The benefit of real assets in client portfolios is their ability to provide natural inflation protection, so income is expected to go up, not down. Many real assets by their nature have built-in contracts that allow them to increase revenues in line with (or sometimes above) the inflation rate. By investing in real assets to a significant degree, investors can notionally hedge against future price rises. The Real Income strategy is designed to provide investors with: n returns in the form of an enhanced income stream n an ability for that income stream to rise in line with the cost of living n capital volatility that is much lower than the share market n high liquidity and transparent pricing by investing only in ASX-listed securities The strategy invests in ASX-listed securities that hold real or hard assets physical assets including listed property, utilities and infrastructure. Specific examples include A-REITs, toll roads, ports, airports, electricity and gas grids. Very few investment funds in Australia offer this combination of assets. Real assets generally have a large sunken capital base that drives cash flow future growth does not rely on further investment expenditure. Returns are less likely to be swayed by the ups and downs of the business cycle, resulting in more stable dividends for investors. Many real assets tend to own investments that are highly transparent and structured, with long-duration predictable cash flows. The investment characteristics of the asset tend to match the profile of the income investor. Through active management, the strategy aims to have a bias to the higher quality names in the real asset space, and avoid those with low quality (or high risk) attributes. As it is benchmark-unaware, the strategy offers highly diversified exposure to the real asset space and aims to avoid the concentration issues of the traditional A-REIT Index. The Legg Mason Martin Currie Real Income Fund has been awarded Lonsec s Recommended rating, and is also rated Recommended by Zenith.

13 PAGE 13 Martin Currie Australia Equity Income The role of one equity income strategy is to provide the income growth component of a portfolio. The Equity Income strategy aims to deliver attractive and sustainable income by actively investing in companies that we believe have high-quality business models and a solid prospect of paying dividends through the business cycle. Generally, companies that have solid earnings can sustain dividend pay-outs and are likely to be less volatile than other stocks. The Martin Currie Australia Equity Income strategy is designed to provide investors with: n a high, growing and well diversified long-term income stream n long-term inflation protection by investing in assets that grow with the economy n low stock and sector concentration to avoid income shocks n the opportunity for domestic investors to maximise after tax income through extracting the full benefit of franking credits n a unique distribution each year whereby net realised capital gains are re-invested back into additional units. This is designed to further grow the investor s capital base and provide more stable cash distributions to investors. Genuine growth in income matters because it can help maintain an investor s capital base and overall standard of living through retirement. Without growth, the value of each dollar of income will be eroded due to inflation. The strategy has a natural bias to companies in sectors which we believe match consumer spending patterns, such as consumer spending and property. This may provide a natural inflation hedge as prices increase, consumers will pay more, while investors can expect higher dividends. shares can be a volatile place to invest when seeking capital growth. However, for investors focusing on dividend income, the same asset class may offer comparatively low volatility with attractive yield attributes. That s because company dividends are generally more stable than share prices, and it is the dividend that matters most to an income investor. The strategy aims to deliver lower volatility than the S&P/ASX 2 Index through active stock selection and low concentration of stock and sector exposures. The Legg Mason Martin Currie Equity Income Trust has been awarded Lonsec s highest Highly Recommended rating, and is also rated Recommended by Zenith. Western Asset Management Bond The strategy is designed to maximise the investment opportunities from fixed income as well as promote the defensive attributes that fixed income offers. As a traditional fixed income product, the strategy mainly invests in government and semi-government bonds, corporate bonds and asset-backed securities. Western Asset s investment style emphasises the use of multiple strategies to add value. The approach draws on its range of specialist sector teams, such as sovereign, credit and interest rate risk management. Risk management is a key focus: overall interest rate risk is managed by limiting duration to one year away from benchmark and the average credit quality is generally maintained at AA- or higher. In order to avoid bias to single issuers, we only invest up to a maximum of 5% in any non-government bond issuer. Success in fixed income is as much about risk management as it is about finding investment opportunities. Balancing the two objectives requires a significant research effort by on-the-ground analysts. One way to distinguish fixed income managers is to compare the level of resources dedicated to analysing bond markets, economics and the creditworthiness of bond issuers (credit research). Western Asset has specialised and alternative credit research teams globally that few if any fixed income managers can match. Western Asset is one of a select group of large global companies dedicated to fixed income, with no distractions from managing other asset class. The Legg Mason Western Asset Bond Trust has been awarded Lonsec s highest Highly Recommended rating, and is also rated Recommended by Zenith.

14 FIND OUT MORE For further information on the Martin Currie equities range, please visit our website You can find your local contact at Alternatively please call our global offices, press office or global consultant team on the numbers below: Edinburgh (headquarters) 44 () Asia and Australia (61) New York (1) London 44 () Global consultants 44 () Media 44 ()

15 PAGE 15 Ratings disclaimers The Lonsec Ratings (assigned as follows: Legg Mason Martin Currie Equity Income Trust October 215; Legg Mason Martin Currie Real Income Fund December 215; Legg Mason Western Asset Bond Trust March 215) presented in this document are published by Lonsec Research Pty Ltd ABN AFSL The Ratings are limited to General Advice (as defined in the Corporations Act 21 (Cth)) and based solely on consideration of the investment merits of the financial products. Past performance information is for illustrative purposes only and is not indicative of future performance. They are not a recommendation to purchase, sell or hold [Fund Manager name] products, and you should seek independent financial advice before investing in these products. The Ratings are subject to change without notice and Lonsec assumes no obligation to update the relevant documents following publication. Lonsec receives a fee from the Fund Manager for researching the products using comprehensive and objective criteria. For further information regarding Lonsec s Ratings methodology, please refer to our website at: The Zenith Investment Partners ( Zenith ) Financial Services License No rating (Legg Mason Martin Currie Equity Income Trust assigned June 215; Legg Mason Martin Currie Real Income Fund assigned June 215; Legg Mason Western Asset Bond Trust assigned July 214) referred to in this document is limited to General Advice (s766b Corporations Act 21) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at Important information This information is issued and approved by Martin Currie Investment Management Limited ( MCIM ). It does not constitute investment advice or represent an inducement to invest. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested. The document may not be distributed to third parties and is intended only for the recipient. The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned. Any distribution of this material in Australia is by Martin Currie Australia ( MCA ). Martin Currie Australia is a division of Legg Mason Asset Management Australia (ABN ). Legg Mason Asset Management Australia Limited holds an Financial Services Licence (AFSL No. AFSL24827) issued pursuant to the Corporations Act 21 and acts as responsible entity for the Legg Mason Multi Asset Retirement Income Trust (ARSN ). A Product Disclosure Statement is available for the Legg Mason Multi Asset Retirement Income Trust and can be obtained by contacting Legg Mason Asset Management Australia Limited on Investors should obtain professional advice and read the Product Disclosure Statements before making any investment decisions. This product has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Legg Mason Australia does not guarantee any rate of return or the return of capital invested. Investments are subject to risks, including, but not limited to, possible delays in payments and loss of income or capital invested. Please obtain a copy of the product disclosure statement before making any decision to invest. Any opinions in this document are subject to change without notice and do not constitute investment advice or recommendation. The information contained has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally, and any opinions expressed are subject to change without notice. Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given. Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document. This strategy holds a limited number of investments. If one of these investments falls in value this can have a greater impact on the portfolio s value than if it held a larger number of investments. Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The information should not be considered as comprehensive and additional information and disclosure should be sought ahead of any planned investment. The distribution of specific products is restricted in certain jurisdictions, investors should be aware of these restrictions before requesting further specific information. Martin Currie Investment Management Limited, registered in Scotland (no SC6617). Registered office: Saltire Court, 2 Castle Terrace, Edinburgh EH1 2ES Tel: (44) Fax: (44) Authorised and regulated by the Financial Conduct Authority. Please note that calls to the above number may be recorded.