Introduction

Welcome to the June 2010 Strategic Investment Review. A summary of this report is available below.

Performance update

Most Man OM-IP funds posted gains for the second quarter of 2010, with an average gain of 1.2%^. This performance was achieved as concerns beset many local and global markets. Read more.

Performance chart of Man OM-IP 220 vs stock indices

This chart shows the performance of the first Man OM-IP fund, Man OM-IP 220, since its inception. The total return, net of fees, is compared to Australian and global stock indices. View chart.

Fund prices for the Man OM-IP funds

The June 2010 fund prices for the Man OM-IP funds are available. View fund prices.

Is a flight to safety the only option for investors at the moment?

The European debt crisis continues to threaten global financial stability. To date the crisis has centred on Greece, but it has also affected other economies such as Portugal, Spain, Ireland, Italy and the UK.

Markets were temporarily calmed when the European Central Bank announced a bailout package worth EUR 750 billion in May. However, this did not resolve the structural problems that affect many European economies – such as high levels of debt, mediocre growth rates, ageing demographics, increasing government expenditures and rising unemployment. Read more.

Man Series 6 OM-IP 220: an exciting opportunity for Shareholders

Shares in Man Series 6 OM-IP 220 are due to mature on 31 December 2010. The Directors have passed a resolution to provide Shareholders with the opportunity to continue their investment in the Company with the same features offered by their current investment. Read more.

^ Past performance is not a reliable indicator of future performance. The average performance figure for the Man OM-IP funds is an average quarterly return figure for all the Man OM-IP funds.

Performance chart of Man OM-IP 220 vs stock indices

The chart below shows the performance of the first Man OM-IP fund, Man OM-IP 220, since its inception. The total return, net of fees, is compared to Australian and global stock indices.

Total return of Man OM-IP 220 vs stock indices

1 August 1997 to 30 June 2010

Source Man Investments Australia Limited.
Note Performance figures are calculated net of all fees as at 30 June 2010. Past performance is not a reliable indicator of future performance.

Is a flight to safety the only option for investors at the moment?

Crisis in Europe

The European debt crisis continues to threaten global financial stability. To date the crisis has centred on Greece, but it has also affected other economies such as Portugal, Spain, Ireland, Italy and the UK.

Markets were temporarily calmed when the European Central Bank announced a bailout package worth EUR 750 billion in May. However, this did not resolve the structural problems that affect many European economies – such as high levels of debt, mediocre growth rates, ageing demographics, increasing government expenditures and rising unemployment.

Volatility returns

Fears of a double dip recession prevented the crisis from being contained to a handful of European countries. As a result, increased volatility returned to global markets. Stock markets, which had been steadily recovering ground since the lows of early 2009, suffered significant reversals. In contrast, perceived safe-haven assets – such as the US dollar, US government bonds and gold – generally performed well, as market participants increasingly demanded safety over excess returns.

In spite of its relative strength, the Australian economy was not immune to this volatility. As the charts below demonstrate, the worsening global outlook had a significant impact on the value of the Australian stock market as well as the Australian dollar.

S&P/ASX 200 Index

1 April 2010 to 30 June 2010

Source Bloomberg.

AUD vs USD

1 April 2010 to 30 June 2010

Source Bloomberg.

Investors remain cautious

One consequence of this volatility is that investors are increasingly reluctant to invest in "risky assets" such as shares and corporate bonds. This is particularly true in countries such as Australia, where interest rates remain high enough to attract investment into cash such as term deposits and cash management trusts.

However, this approach has limits. For example, while other investments may offer tax concessions such as capital gains, franking credits and interest deductibility, investments in cash are likely to be taxed at an investor's full marginal rate.

An alternative to "cash hoarding"

Moreover, "cash hoarding" overlooks the fact that there are investment strategies that can perform in a variety of market conditions, including times of high volatility. Managed futures is one of these strategies:

• Managed futures managers have the ability to trade both long and short, by buying or selling futures contracts respectively. This contrasts with long-only managers, who usually average down during times of falling prices. In other words, a managed futures manager can actually profit from falling asset prices rather than just limiting losses.
• Managed futures managers typically spread their investments over a wide range of markets and sectors. This diversification allows managers to dynamically increase or decrease their allocations to various markets and sectors depending on where opportunities for profit may lie. Other investments can be constrained by strategy and region (for example, "large cap Australian equities"), and as a result may not have the flexibility of managed futures.

Performance potential of managed futures

To illustrate the potential of managed futures, the chart below looks at the performance of AHL during recent market crises. During the periods considered, AHL outperformed Australian, Asian and world stock market indices. The chart highlights the potential benefits that a managed futures fund, such as AHL, can provide to investors – even during periods of high volatility.

Source Man Investments.
^ Past performance is not a reliable indicator of future performance. Performance figures are calculated as at 30 June 2010.