Fund investment

Investment Policy | Investment Objectives | Investment Beliefs | Investment Strategy | Strategic Asset Allocations | Investment Management | Investment Managers | Custodian Services | Member Investment Options | Investment Performance| Asset Revaluations | Growth of the Fund |Listed share markets | Looking Ahead | The Road to Recovery | Unitisation

In formulating an investment policy for MilitarySuper, the Board focuses on two primary objectives: to maximise long term Fund return and to manage and control business and investment risks.

Investment policy

The investment of funds must comply with the legislative and regulatory requirements promulgated under the Superannuation Industry (Supervision) Act 1993 and the Corporations Act. These Acts provide general prudential guidelines for superannuation trustees, and specifically address non-arms length transactions, borrowing, loans to Members, ‘in-house’ assets, insider trading and derivative controls.

Investment objectives

The general investment objectives for the Fund are to:

• contribute to the support of Members’ lifestyles in retirement, by enhancing the purchasing power of their investment through prudent and efficient management
• maximise return for the chosen level of risk

The Board sets and routinely monitors and reviews specific investment objectives for the Fund and develops strategies, policies, practices and procedures to pursue these.

As a general principle Fund assets should be invested to maximise the Fund’s likelihood of meeting its overall investment objectives within the risk tolerances set for each investment choice option. Subject to specific risk controls and the other fund investment principles specified below, the Board strives to achieve the optimum investment return for the Scheme’s Members.

The Board has adopted the following principles regarding the expression of its investment objectives.

(i) Return Objective

The return objectives for the Balanced, Growth and High Growth options are expressed as an absolute return target net of fees and taxes, of 8%, 10% and 11% respectively, per annum over the rolling five and seven year periods.

The return objectives for the Cash and Conservative options are expressed as a margin above the UBS Bank Bill Index.

(ii) Risk Budget

The risk budget is an expression of the level of risk that the Board is prepared to accept to achieve its target returns for the Fund. Variation in asset prices are used as the main measure of risk and the risk budget is expressed in these terms. The focus of risk control is for the Fund’s Investment strategy as a whole and not just its individual components. This focus is designed to prevent the distinct mandates from causing the strategy to be either too aggressive (that is, ‘over-spending the risk budget and creating an excessive possibility of loss) or too defensive, given the return objective of the strategy.

Importantly, if the risk budget is exceeded it acts as a trigger for action by the Board to manage the additional risk.

Investment Beliefs

The Board’s investment beliefs are paramount in guiding its fiduciary investment role for Members and in determining investment strategies, policies, guidelines and behaviours that seek to ‘live out’ these core beliefs. Beliefs, by their nature and design, are typically enduring. However, these may be added to, augmented or amplified over time as the Board’s experience and its environment change and evolve.

The Board’s core investment beliefs are:

• all markets are inherently inefficient and the Board seeks to exploit such inefficiency
• active investment management, risk management and risk budgeting are central to the establishment of an effective investment framework and for generating consistent long-term investment returns
• diversity of investments and sustainable long-term investment returns with an acceptable level of risk of negative returns, underpin successful superannuation investment
• optimising internal investment governance processes and fostering and developing appropriately aligned external partnerships that provide access to skill, experience, ideas and opportunities combine to enhance the investment framework and deliver better outcomes for Members.

Investment strategy

Given the volatility of investment returns from traditional listed markets, and acting with the advice of its professional investment advisers, the Board employs an investment strategy that has at its core an absolute return objective for the Growth (Default) option of achieving sustainable long term investment returns of 10% (net) per annum over the long term with an acceptable level of risk of negative return. This will be achieved by seeking to add value from a diverse range of alternative asset classes whose return characteristics are not closely aligned to listed equity markets.

The Fund continues to have a significant exposure to listed markets where it seeks to add value through the engagement of active management strategies capable of identifying and exploiting market inefficiencies with a view to delivering above market returns. Because superior stock selection provides the most consistent and reliable opportunity for generating excess return, the Board’s manager selection process favours managers with demonstrated bottom-up fundamental research capabilities. Therefore recognising the difficulty of outperforming the market on a consistent basis, emphasis on manager selection is on those with high integrity, sound investment philosophies, strong track records, superior organisations and governance frameworks and demonstrated sustainable competitive advantage.

Reserves

Given that the Fund offers Members a range of investment options, including a cash only option, the Board does not maintain a separate or overlay investment reserve across the Fund’s investments and does not seek to smooth declared returns from the Fund in the application of its unit pricing within these options.

Diversification and risk control

The diversification and risk control philosophy of the Board is to manage the risk of the total Fund, not just its separate components. This requires the positions taken by fund managers to be viewed holistically and managed so that the Fund’s strategies optimise the targeted level of risk (or meets its risk budget), in the expectation that this will allow value to be added over the long-term.

This will be achieved by ensuring the appropriate selection, co-ordination and overview or fund managers, so that the Fund does not engage in an active management that effectively nullifies active positions or strategies that taken together combine to produce a higher level of risk for a more passive-like return that would undermine and detract from the Fund’s overall investment strategy.

Business risk can result from poor performance by service providers, suppliers and counterparties. Key service providers to the Fund include its Custodian, the Asset Consultant(s), Fund Managers and the Scheme Administrator. The Board has adopted a due process to control business risk.

Investment risk results from the concentration of a Fund’s investments in fewer than the total universe of available investments. While the Fund ideally seeks to diminish business risk, it does not seek to eliminate investment risk. Investment risk can only be reduced to minor levels by adopting a passive investment strategy and avoided altogether by investing entirely in cash and sovereign bonds (that is, the ‘risk free’ rate of return). Such an approach would be inconsistent with the Board’s mandate and charter to provide a relevant risk adjusted return to the Scheme’s Members over the long-term for their retirement.

The Board’s investment policy allows managers to use derivatives subject to strictly controlled limits. Derivatives are used by the Fund’s managers as part of implementing the Board’s investment strategy. These may include futures contracts, put options, call options, swaps and forward contracts. These derivatives allow the Fund to hedge its positions or to increase its exposure to a particular market. The Fund does not use derivatives to leverage its positions.

Risk Budgeting

Risk budgeting is a framework for allocating funds across asset classes based on absolute returns and volatility. As a first step the Board establishes absolute return and risk or volatility targets from which the Board’s lead investment adviser constructs a Strategic Asset Allocation (SAA) to maximise returns for a specific risk budget. Appropriate investment ranges are set using scenario analysis within the risk budget.

The objective is to set an absolute return target per annum on a rolling five year basis with a focus on preserving capital and maintaining tight risk controls. During times of high volatility the emphasis will be on higher liquidity. Significant changes to the SAA can occur when higher volatility is forecast due, for example, to a significant change in the valuation of listed and unlisted assets. Strategically, the Fund will carry sufficient cash to manage such volatility.

Review of Core Inputs

The Fund’s Risk Budget for its default Growth option is predicated on a 10% net return with an estimated (forecast) volatility level of 15%. The key drivers of the risk budget are the return forecasts for each asset class as well as the volatility forecasts for those asset classes. The higher the risk budget the more it reflects the greater level of current or anticipated volatility in markets relative to the targeted return sought. The Board expects that volatility will remain higher over the next five years compared to the previous five years.

A focus on quality investment performance

The Board is concerned to ensure that its investment strategy is properly considered, executed, monitored, measured and reviewed. The Board subscribes to a portfolio construction that is likely to perform well through the full economic cycle rather than those that are very dependent on specific market conditions that are not likely to last a full cycle or are overly susceptible to investment market shocks.

Adding value through active management

The Board adopts the view, that in some sectors, active investment management can add value to the Fund. To achieve this increase in value requires adherence to well considered strategies throughout different investment circumstances. On average, and in the long-term, this approach is expected to yield better returns than entirely passive investing. Over time these returns should compound to provide substantial increases in the Fund’s value over that which may be achieved through passive investment alone, and thus improve the financial position of the Fund’s Members.

Adding value over a passive investment strategy requires active positions to be taken compared to the benchmark (typically a market index such as the S&P/ASX 300 Accumulation Index for Australian shares). These positions represent a risk to the Fund and are incorporated into the investment strategy’s risk budget.

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Strategic asset allocations

Consistent with its objective of reducing dependence on listed market generated returns the Board has investments in alternative asset classes such as private equity, property, infrastructure and uncorrelated alpha products (such as hedge funds) whose return characteristics are to varying degrees not aligned with the returns of traditional listed markets.

Although it is the Board’s intention to maintain the current five investment options, with their current exposure to assets with growth and defensive characteristics, these asset classes will, from time to time, display characteristics of both a growth and a defensive nature.

The strategic asset allocation to private equity includes capacity for commitments to both international and Australian private equity without imposing ‘hard’ commitment targets. Consequently, the Board is able to allocate its private equity investments on a tactical or dynamic basis as the best opportunities arise. Private equity commitments are drawn down progressively over time, Undrawn commitments are invested in Australian shares and cash.

The following Board approved Strategic Asset Allocation was in place as at 30 June 2009:

As the bulk of the assets of the Fund (over 90%) are invested in the Growth (default) investment option, the remaining four options are re-balanced on a weekly basis to the long-term strategic asset allocation set for each of those options. In the case of the Growth option, the Board has approved ranges around each asset class to cater for market fluctuations and tactical investment decisions.

Investment management

The Board reviews its long term investment strategy and plan on an annual basis and monitors the performance of its fund managers against that plan progressively throughout the year. Assessments of the long term performance of each fund manager are made on an ongoing basis. For this purpose each fund manager meets with the Board and its investment advisers as necessary to discuss strategies, portfolio activity and investment performance.

The Board employs professional advisers to assist with the review of its investment policy and to examine the performance of funds managers, new investment opportunities and the adequacy of the returns achieved by MilitarySuper.

During the year the Board, supported by its specialist advisers, continued the detailed analysis and review of investment managers and investment products consistent with the ongoing implementation of the Fund’s investment strategy. In light of the global financial crisis, particular emphasis was placed on the review of the ongoing appropriateness of valuations on certain alternative Fund assets where valuations are subject to third party events such as distressed sales elsewhere in the market place or where management issues had arisen in respect of an asset in which the Fund held an interest.

Investment managers

The investment managers appointed by the Board manage their portfolios in accordance with specific mandates agreed by the Board. Those mandates include directions as to the types of investments to be held, the maximum and minimum holdings for each type of investment, and the expected rates of return.

The Board does not, however, involve itself in individual stock selection, relying on the demonstrated skills of the manager in the area of the market in which it has been selected to operate on behalf of MilitarySuper.

Custodian services

The Fund’s Custodian safeguards and maintains the assets of the Scheme on behalf of the Board, performing various functions such as settlement of trades, physical custody and safekeeping of securities, collection of dividends and preparation of accounts.

The Board has appointed National Asset Services Limited as Custodian of the Fund’s assets.

Member investment Options

Members have the choice of five investment options for investing their Member and Ancillary benefits. Members can choose one or a combination of the strategies and, if a Member chooses not to make an investment choice, their Member benefit is invested in the Growth (Default) option. Each of the five options consists of investments across a range asset classes with differing investment return objectives and risk characteristics expressed in the form of volatility and the likelihood of a negative return.

Members continue to be able to exercise choice in relation to their individual tolerances for risk and appetites for exposure to ‘Growth Assets’. Growth Assets is a general term for assets such as shares and property, which provide investment returns (comprising both capital growth and income), which are generally expected to outperform inflation.

Within the current investment options offered by the Fund, the allocation to growth assets across these is achieved predominantly by investments in exchange listed domestic and international shares. However, listed share markets are cyclical and volatile and recent history has demonstrated the capacity for market-generated returns to be highly volatile in response to macro-economic events. The Board’s investment research suggests that diversifying into other asset classes with different characteristics and correlations to mainstream listed markets can benefit the portfolio’s risk adjusted outcomes over time.

Although the Fund maintains an overall growth focus, given its membership demographics, it has sought to reduce the reliance on market generated returns in recent years. This has resulted in increasing allocations to other classes and sub-classes of assets, particularly unlisted private market assets with return characteristics which are not directly correlated to movements in listed share markets. These largely comprise:

• property (including direct, unlisted and listed)
• private equity (including venture, buyout and late stage)
• infrastructure (equity and debt, social, utilities, core and opportunistic)
• uncorrelated alpha (including hedge funds and fund of hedge funds)
• alternative debt (mezzanine debt, distressed debt and structured debt).

The Board has adopted specific investment objectives for each of the five investment options of the Fund, as described in the Table below.

Investment performance

The Global Financial Crisis

By any measure 2008–09 was a difficult year for financial markets and investors, given the extreme volatility experienced in global markets as a result of what is now widely labelled the ‘Global Financial Crisis’, or GFC.

However, the second half of 2008, and the first quarter of 2009, saw this situation deteriorate further as the GFC’s grip extended beyond world financial markets to negatively affect wider world economic growth, employment markets and ultimately consumer confidence generally.

During the first nine months of the financial year a number of major economies fell into recession, including the USA, UK, Japan and most major EU countries. Many commentators attribute the immediate cause or trigger of the crisis to the bursting of the United States housing bubble which peaked in approximately 2005–06. High default rates on ‘sub-prime’ and adjustable rate mortgages began to increase quickly in the aftermath of the end of the long term trend of rising housing prices that encouraged borrowers to take on large and questionably unaffordable mortgages in the belief that they would be able to quickly refinance on more favourable terms. However, as interest rates began to rise and housing prices rapidly fell refinancing became more difficult leading to increased defaults and foreclosures.

Arguably in addition to easy credit conditions, both government and competitive pressures contributed to an increase in the amount of sub-prime lending during the years preceding the crisis. Major US investment banks and government sponsored lenders like Fannie May and Freddy Mac played an important role in the expansion of higher-risk lending.

Mounting losses placed increased pressure on a struggling financial system leading to the failure of the iconic Wall Street investment bank, Bear Sterns. The subsequent failure of the 158 year old Lehman Brothers (which as one of the world’s largest investment banks acted as a major counterparty to world financial market transactions) led to further deterioration in confidence within credit and equity markets and led the world to the near collapse of the global financial system in September 2008.

While Australia’s economy arguably fared better during this period, it was far from immune from these tumultuous events. Indeed, the Australian share market, as measured by the ASX200 Index, fell by more than 35% in the nine months to March 2009, but recovered some ground in the last quarter to finish the year some -23% lower than its July 2008 level. During this period, Australia’s commodity prices suffered as well, which affected our export earnings, and the Australian Dollar retreated from being near-parity with the US Dollar at the start of 2008 to around $0.68c.

During the first quarter of 2009 the governments of a number of major world economies, such as the US, Japan and Europe, rolled-out a range of stimulus packages and measures designed to stem the economic carnage. As we start the new financial year it appears that these actions may be having the desired effect. The Australian and other world share markets have clawed back some of the losses experienced over the past 12 months and performed strongly in the first quarter of the new financial year. Daily volatility in these markets has also moderated, banks have resumed lending (albeit cautiously) and the price falls experienced in the commodity markets have stabilised.

Notwithstanding the late rally in 2008–09 the Australian share market recorded its worst year in performance for a quarter of a century.

MilitarySuper’s Investment Performance

MilitarySuper, like all superannuation funds, maintains a diverse spread of investments across both listed and unlisted investments and markets. Just as Australian households and businesses have seen their balance sheets affected by falling asset prices, so too have MilitarySuper and all other superannuation funds.

Listed share markets have fallen some 25% over the past year, directly impacting MilitarySuper’s investment returns, as reflected in the reduction in the value of daily unit prices. However, the Fund has been somewhat cushioned from the full brunt of negative returns as a result of the Board’s strategic investment policy and asset allocation model. MilitarySuper’s strategy includes maintaining a sizeable exposure to unlisted assets, such as infrastructure, direct property and private equity, the performances of which to a degree do not necessarily move in parallel with the movements of listed markets.

This investment strategy, coupled with a decision by the Board in late 2007 to invest net new funds in cash rather than equity and growth-orientated asset classes, held the Fund in good stead during 2008–09.

Despite the difficult investment environment, for the financial year to 30 June 2009, MilitarySuper achieved the following investment returns, (net of taxes and fees) across each of the five investment options:

* Source: SuperRatings Fund Crediting Rate Survey

Asset Revaluations

MilitarySuper regularly reviews all assets in its investment portfolio to ensure the valuations of these investments accurately recognise and reflect current fair market value. While seeking to ensure that appropriate fairness and equity is observed, but without placing excessive costs on Members, the frequency at which unlisted assets are valued tends to be less frequently than for listed assets - which are effectively valued daily by listed markets. Assets such as direct property, private equity and infrastructure by their nature and character are less frequently brought and sold and therefore the valuation of such assets may occur monthly, quarterly or annually.

During the latter part of the financial year MilitarySuper generally experienced a decline in the carrying values and returns of a number of its unlisted assets. These revaluations were largely as a result of the severe impact of the GFC on key economic fundamentals that directly affect such assets. As a result, MilitarySuper’s overall investment performance was negatively affected. Also, the Board’s decision to underweight the Fund’s exposure to the listed share markets during this time, a period when these markets have enjoyed somewhat of a rally, has amplified this short term negative result.

As a responsible asset manager that takes a keen interest in the performance of each and every investment, MilitarySuper’s Board and management have undertaken a series of evaluations and reviews to assess and understand the drivers and causes of the underlying performance of its assets during this difficult time for investors.

As an outcome of that process, the Board has continued to take a cautious approach when considering the probability that the value and return characteristics of its unlisted assets will remain subdued or weakened in the short to mid-term as a result of the current economic circumstances. This includes the Board continuing to re-value assets as necessary to accurately reflect their current economic worth - which in some cases may continue to see some assets fall materially below their previous valuations. Such decisions, while unpalatable are both prudent, equitable and in line with the practice of super funds, banks and other asset owners in this current financial and economic climate.

Growth of the Fund

As a result of the impact of the continuing financial crisis and its flow-on effects on investment performance, the year to 30 June 2009 saw the value of Fund assets decline to $2.811 billion.

However, assuming modest investment performance and continuing strong inwards cash flows by way of new contributions, the Fund is expected to reach $3.1 billion by the end of 2009–10.

The chart below demonstrates the growth of the Fund over the past six years and projected for 2009–10.

Actual and Projected Fund Growth

1. Figures shown are gross of management fees and taxes.
2. Benchmark is the most commonly used index or other market measurement which is used as a yardstick to assess the risk and performance of a portfolio. The benchmark usually represents the minimum performance objective. Absolute return benchmarks established by the Board in the absence of any commonly accepted benchmark.
3. Private Equity is a long term investment and does not generally show a return in the early years of the investment because of set-up and management costs. The investment gains usually come in the later years as the underlying companies mature and increase in value. The effect of this timing is known as the J-curve Effect.
4. All international share exposures are fully hedged back to the Australian dollar.
5. Debt and Debt Instruments make up the ‘Debt Instruments’ classification described in the Fund’s financial statements.

Listed Share markets

Despite a strong last quarter listed share markets had another difficult year. The Australian share market experienced its worst fall in over a quarter of a century with the S&P 300 Accumulation Index falling 20% for the year to 30 June 2009.

International shares also had the same experience although some of the fall in value on the global markets was cushioned by a fall in the value of the Australian Dollar (this has the effect of making the value of overseas investments increase when converted to Australian dollars.

International shares

Investments in international markets carry two distinct forms of risk. One relates to the impact of local market forces on the underlying value of the investment in local currency terms. The second relates to the value of that same investment when viewed in Australian dollars (AUD) terms due to movements (both positive and negative) in international currency exchange rates.

MilitarySuper employs an active currency management strategy around a 50% hedge benchmark over the Fund’s exposure to overseas currencies. The active strategy enables that exposure to be adjusted regularly through use of currency forwards. This is done in order to minimise losses when the overseas currency loses value (against the AUD) while allowing the Fund to participate in growth when the currency increases in value. This strategy served the Fund well during the year as hedges were progressively removed as the value of the AUD against the USD increased during the latter part of the year.

Listed markets were the hardest hit by the global financial crisis and MilitarySuper’s returns for this sector were no different. On a hedged basis this sector returned the Fund -24.98% (gross) in comparison with the benchmark return of -28.39%.

Australian shares

MilitarySuper has appointed a range of investment managers in the domestic equities sector with demonstrated skills in adding value through stock selection and active management over a concentrated portfolio of stocks. The manager configuration comprises a number of smaller (in terms of assets under management) managers.

MilitarySuper’s Australian share managers collectively returned -9.01% (gross) in comparison to the ASX 300 accumulation index which returned -20.34%. The managers in this sector were conservative in their approach with some moving a major portion of funds to cash during times of high market volatility, particularly in the second half of calendar 2008.

The Board believes that the current suite of managers will provide increased opportunity to achieve above benchmark returns as markets improve, reflecting the concentrated and index unaware approach of the individual managers.

Property

Many property investments have fixed income streams attached to them that ensure a minimum level of return on the investment, unaffected by movements in investment markets. Accordingly, many property investments will exhibit characteristics similar to traditional defensive assets.

MilitarySuper’s property investments are comprised mainly of unlisted trusts. Continuing global financial uncertainty and the volatility in credit markets combined to negatively affect domestic and global property markets. During 2008–09 all of MilitarySuper’s property investments fell in value resulting in this sector recording a return of -43.84% (gross).

While commercial property markets will remain under pressure in the short term, the Board believes current market uncertainty will provide good investment opportunities over the medium to longer term which will also assist to restore value and performance to the Funds existing portfolio.

Alternative investments

Alternative investments are investments that fall outside the mainstream asset classes such as listed shares, bonds and listed property. As a general rule these types of assets provide some protection against a fall in the value of traditional listed assets, However, in the climate which existed during 2008–09 many of these assets suffered a fall in value. Notwithstanding their defensive characteristics, given the severity of the GFC, virtually no asset class (with the exception of government bonds and cash) was immune from the impacts of the crisis.

Infrastructure involves investment in the development of facilities and services required by the community and for production, such as government buildings, airports, toll roads, power, telecommunications and water supply.
Investment in infrastructure may take the form of investments in start-up projects or in established facilities.

Investments in the latter provide access to strong cash flows and potential for future capital growth. Therefore, this form of investment displays similar defensive characteristics to more traditional defensive assets.

The Board continues to develop the Fund’s exposure to this asset class as suitable opportunities arise. However, this is being done in a measured way to ensure that the Fund’s exposure is achieved through access to high quality assets. Importantly with infrastructure investment MilitarySuper has access to co-investment opportunities through its established relationships. These co-investment opportunities will enable the Fund to participate in investment partnerships offering access to superior long term capital growth and stable cashflows.
The return characteristics of these types of investment are not closely correlated to those in listed equities.

Consequently they provide a cushioning effect in periods of extreme volatility in public markets. While this portfolio delivered these expected characteristics, the return for infrastructure this year was still negative at -6.83% (gross).

Private Equity is generally described as acquiring an equity interest in an unlisted company or enterprise. This type of investment usually refers to investments in relatively small unlisted companies which have an established track record in their field of business and which require new sources of funding to finance their expansion. This contrasts with venture capital, which tends to refer to investments in start-up companies only.

Private Equity investments offer attractive long term risk-adjusted return characteristics consistent with the absolute return focus of the Fund’s investment strategy. Private Equity is a long term investment and does not generally show a return in the early years of the investment because of initial set-up and management costs. The investment gains usually come in later years as the companies mature and increase in value. This timing is known as the J-curve effect.

MilitarySuper’s investment portfolio has a large proportion of assets in this sector. As a result of our weighting towards international private equity returns have also been negatively affected by market changes experienced during the year. The sector returned -15.39% (gross) which was disappointing given the expected benefits of these assets being to varying degrees uncorrelated to mainstream listed assets.

This asset class involves investment in a range of assets whose performance is not directly correlated to the performance of listed equity markets. This type of investment includes investments in real assets (eg, timberland) or in hedge funds.

2008–09 was a disappointing year for hedge funds which returned -39.17% (gross) to the Fund this year. The Board undertook a strategic review of its investment strategy in May 2009 which in part confirmed that this sector had not delivered the expected uncorrelated benefits to listed markets and as a result the Board is progressively reducing its allocation to this sector in 2009–10.

This sector covers investments in opportunities such as distressed debt, mezzanine debt and some special debt situations. This sector returned 2.02% in 2008–09, which was a positive result despite the dislocation of credit markets and the fluctuation in currency markets during the year.

Cash Investments

This sector includes liquid assets such as cash management accounts, fixed interest and government bonds. During the year the Board increased the Fund’s investment to this sector as a result of its tactical allocation decisions during the GFC. The sector returned 3.90% for the year.

Cash held in this sector comprises of liquid cash assets through which the Board seeks to ensure that Members who selected the Cash option receive a return aligned with the Bank Bill index. The Fund holds bank bills and term deposits designed to achieve this outcome. The sector returned 5.09% (gross) during the year compared to the targeted benchmark of 5.48%.

Looking Ahead

The continuing financial crisis and the current recessionary environment have affected all asset owners including superannuation funds. While MilitarySuper has performed well over an extended period, the current year’s performance has been adversely affected by reductions in the carrying values of both listed and unlisted investments.

The Board and its advisers see the current investment landscape as offering once in a generation opportunities to identify and invest in good quality companies and business enterprises across listed and private markets, at prices that represent good value and that afford MilitarySuper, as a long-term investor, great opportunities to grow the Fund.

The Road to Recovery

There is a growing mood and belief amongst economists that the global economy is slowly recovering. This has been highlighted as share markets have rallied from their low points in March 2009, commodity prices have experienced a bounce and credit markets, which are essential for economic growth, have begun to thaw as market volatility has reduced.

But the road to economic recovery will be prolonged and bumpy. MilitarySuper anticipate a period of slower growth in the next few years as economies rebuild and consumer confidence returns. While listed investment markets have offered better value in recent months as a result of value being realised due to reduced prices this rally may be tested as economic data such as unemployment, housing lending, consumer spending, business profits and the like unfold.

MilitarySuper will closely monitor such data as part of determining the Fund’s investment strategy and asset allocation decisions over the next year.

1. MilitarySuper Net Assets/(Liabilities) represents benefits payable, tax provisions and cash at bank.
2. The value of the Scheme represents the investments of the Scheme. Net assets of the Scheme shows the amount available to Members at 30 June after allowing for tax, cash at bank and benefits payable to former contributors.
3. Debt Instruments consists of Debt and Debt Instruments described in the Fund Investment Manager table.

# An organisation that specialises in the investment of a portfolio of investments which may be by the way of individual portfolio or as a pool of investments.
* Debt and Debt Instruments make up the ‘Debt Instruments’ classification described in the Fund’s financial statements.

Unitisation

Unitisation refers to the conversion of Member interest bearing accounts to unit based accounts within a fund. MilitarySuper was unitised with effect from 1 July 2002. Since then, fund earnings have been reflected as a daily change in the value of a unit. Members’ closing account balances as at 30 June 2002 (after the application of the crediting rate for 2001–02) were converted to units, with each unit having a value of $1.00 at 30 June 2002. This unit holding became the Members’ opening balance with the introduction of unitisation on 1 July 2002.

From 1 July 2002, contributions to MilitarySuper have resulted in the issue of new units at the issue price for the day the money is received by the Fund. Benefit payments result in the withdrawal of existing units at the withdrawal price on the day the completed application for payment is received (but this can be no earlier than the day after the applicant ceases to be a Member of MilitarySuper).

The most current unit prices for the five investment options are provided on MilitarySuper’s website. The unit prices at 30 June 2009 are provided in the table below.

Daily unit prices are struck for each day of the year on the basis of the market value of listed investments on the previous day’s close of trading, and on the basis of the best available valuation data on non-listed investments. Non-listed investments by their nature are illiquid and the true value of these investments is determined on the basis of periodic independent valuations or as a result of a sales event. Provisions are also made for taxes, fees and expenses on the income derived from those investments on a daily basis.

At the end of a financial year fund performance is calculated on the basis of ‘hard close’ data which only becomes available some time after 30 June. Given this timing difference the unit price for each investment option declared for 30 June may vary from the investment performance of that option subsequently determined on the basis of fully audited accounting and taxation information.