Market Update

February / March 2010

Summary

Despite January and February being weak for growth assets, performance for the 12 months has been generally impressive, particularly for the Private Equity and Global Listed Properties sectors. (see table below) Early March 2009 was the low point for the majority of the asset classes.

Asset Class	January 2010	February 2010	28 February 2009 to 28 February 2010
Cash	0.35	0.35	3.6
Australian Fixed Interest	1.3	0.5	3.4
International Fixed Interest (Hedged)	0.9	0.8	6.6
Australian Equities	-6.2	2.0	45.1
International Equities (Unhedged)	-3.0	0.6	10.5
Emerging Markets (Unhedged)	-4.6	-0.4	38.2
Global Listed Property (Hedged)	-5.2	3.4	73.6
Unlisted Australian Direct Property	0.5	0.0*	-8.9*
Listed Private Equity (Hedged)	4.2	3.1	110.1
Hedge Funds (Hedged)	-0.4	0.0*	9.4*
$A/USD	0.87	0.89	0.64**

Cash & Fixed Interest

Australia’s official interest rate is currently 4.0%. Given continued strength in the Australian economy, interest rates are expected to increase to around 4.5% by the middle of 2010. We are investing in term deposits over 6.0% while maintaining a duration of around 80 days to take advantage of higher rates as they become available.

Globally, interest rates in the major economies are expected to remain on hold and interest rates in the US are expected to remain at zero until well into 2010. The current shape of the yield curve (10 year government bond rates less cash rates) is at an extreme level and are therefore not attractive from a valuation perspective. As such we prefer to hold investment grade credit due to increasing concerns over sovereign debt as evidenced by the debt problems of Greece as an example.

Global Equities

Global stock markets initially greeted the New Year with a continuation of late 2009’s rally, before selling pressures took hold. As January progressed, investors became unsettled by the prospect of policy changes that could be harmful to capital markets. Key sources of disquiet were China’s move to gently reel in its previously ultra-accommodative credit policies; President Obama’s proposal to charge banks a special tax to recoup the US Troubled Asset Relief Program (TARP) losses and to limit proprietary trading; and Greece’s towering national debt, which raised fears that the country could default.

Emerging markets underperformed relative to developed markets in January and February. However for most emerging markets the picture is bright, as strong growth will continue to be underpinned by healthy expansion of domestic demand even in the face of sluggish consumption growth in the developed world. China, the largest emerging market, will continue to punch above its weight in terms of its contribution to world economic growth. We expect Chinese growth to clock in at around 8% in 2010, driven again by investment but increasingly also by consumption.

China’s exchange rate policy will also be important to watch as a depegging from the U.S. dollar will become increasingly central to prevent rising protectionist pressures in the west. Corporate earnings growth should play another important role in supporting equity markets in general and emerging markets in particular.

As we move into 2010, the 2011 earnings forecasts will become essential to the formulation of the market’s valuation assessment and it is possible that the current consensus expectations may need to be adjusted down during 2010.

MAP maintains a underweight exposure to international equities and emerging markets.

Australian Equities

The Australian equity market reported a 6.2% decline in January. Increasing concerns around the regula¬tory environment in the USA combined with higher than expected inflation risks emerging in China were the major drivers. Investors were also increasingly focusing on the upcoming domestic reporting season with various companies taking the opportunity to address market expectations. There were positive surprises including upgrades from Commonwealth Bank and Computershare. There were also negative surprises such as a downgrade from Worley Parsons. In addition, Woolworths’ sales figures were seen as disappointing and raised questions over the strength and competitiveness of retail conditions.

In commodities, base metals (CRB Index -3.2%) and spot oil (TWI -8.2%) lost ground due to the potential shift in Chinese macro policy combined with a firmer US dollar. Spot gold (-2.1%) also succumbed to profit taking as the stronger US dollar weighed on sentiment. The same factors also resulted in the Resources sector (-9.4%) underperforming Industrials (-4.8%),

The smaller companies index S&P/ASX Small Ordinaries (-7.4%) also underperformed the large cap S&P/ASX 50 Leaders Index s(-5.9%). At a sector level, Information Technology (-1.1%), AREITs (-3.0%) and Telecommunications (-3.1%), were the best performing sectors with the major stock contributors being Computershare (+1.4%), Westfield Group (+0.8%), CFS Retail Property Trust (-1.6%) and Telstra (-2.6%).

We currently hold a neutral exposure to Australian equities and are overweight large-cap companies relative to small cap companies.

Diversified Property

The majority of MAP Property exposure is through Listed Property Trusts and we can therefore by impacted by movements in the overall equity markets.

The new year saw most of December's strong performance given back across equity markets and listed property was no exception.

Global property stocks fell 5.2% in January with all regions performing poorly. Hong Kong stocks, which significantly outperformed over 2009, were heavily sold off (down 13.5%). UK property stocks were down 7.0%, US REITs (Real Estate Investment Trusts) were down 5.7% and Australian property stocks down 2.8%. The better performing market was Continental Europe posting a flat return for the month. This came despite concerns over levels of government debt in Greece contributing to a fall in Greek listed property stocks of over 10.6%. Japanese property stocks performed relatively well, down only 0.5% during January.

In Hong Kong, whilst monthly property transactions increased by 11% (of which residential homes made up 86%), poor stock performance for the month was largely driven by weak sentiment rather than fundamentals. Given that mainlanders’ purchases account for nearly 10% of overall transactions and nearly 30% of the luxury-end market in Hong Kong, there were concerns that the credit tightening in China may drag down property prices. These concerns appear to be overplayed, as mainlanders cannot use Chinese banks to finance their property purchases in the city.

In U.S. REITs, a regulatory overhang weighed on the financial sector as investors awaited details about the administration’s plan for re-regulating the banking industry. This uncertainty took a toll on the shares of companies that had benefited from renewed economic optimism, which included REITs. The office sector (–5.0%) was pulled down by the performance of companies with a significant presence in New York City, which is closely correlated to the banking and finance industry.

In Australia, there was very little stock specific news ahead of the reporting season in February. As such, property stocks tended to trade down in line with the broader market. The best performers over the month were Westfield Group (up 0.8%), CFS Retail Trust (down 1.6%) and Dexus Property Group (down 2.4%). The worst performers over were Abacus Property Group (down 9.0%), Goodman Group (down 7.9%) and Mirvac Group (down 7.3%).

MAP’s recent investment in unlisted property increased 0.5% in January following a 0.5% fall in December. This sector is at or very close to the bottom of the property cycle with some evidence of an improvement in asset values as continued strong growth in employment and some early signs of transactional activity return to the market. All of the underlying managers have valued their assets within the last year and the majority of revaluations have been the result of an increase in the capitalisation rates reflecting the increased costs of funding. Vacancy rates and rental yields continue to perform well and 2010 is likely to see direct property generate a healthy rental yield with very modest capital gains.

We have a slight overweight exposure to listed property and we continue to favour global listed property trusts. We have a slight underweight to unlisted property.

Alternative Assets

Our infrastructure debt investments continue to perform well with all investments meeting their obligations. The excess return over cash remains around 5.4% meaning a return of at least 10% over the coming year is expected. The 100 percent floating rate nature of the investments will provide protection against a rising interest rate and inflationary environment.

Our hedge fund investments continue to perform well against other asset classes. Sentiment continues to support a long equity allocation, particualry in the Netherlands and the U.K. as both markets offer good relative value.

Partly offsetting these long positions are short positions in Italy and France. Small long positions in Taiwan and Australia exist for momentum reasons. Within bond markets U.S. and U.K. bonds are favoured with a short position in Japan

A large long position in the Japanese yen mostly against the Swiss Franc, continues to represent a good value opportunity. Short positions exist in the Swiss Franc and British Pound. The pound has much worse carry and weaker momentum. In commodity markets momentum and term-structure models support long positions in gasoline and soybeans, and short positions in cattle, corn, natural gas and hogs futures.

Listed private equity returns continue to perform well as equity markets recover. Listed private equity increased 4.2% in January. The key factors driving the performance of listed private equity continues to be an improving exit market. These exits are leading to a re-rating of the larger ‘mega’ buyout funds. This re-rating is also reflected in the prices of leveraged loans with the leveraged loan index bouncing back from a low of 62 to around 92. Anecdotally, pricing in the market for secondary interests in unlisted private equity funds has picked up significantly. We think that this bodes very well for LPEs (Listed Private Equities) which are trading on historically wide average discounts of 30% and which have lagged the recovery in the market for unlisted secondary private equity assets.

MAP maintains a overweight exposure to hedge funds to reduce portfolio volatility in an environment of volatile equity markets. We have a neutral exposure to infrastrucuture and a slight underweight to private equity.

(Published 11 March 2010)