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CIO's catch-up

Welcome to the third edition of Review - the PSSap quarterly investment report.

Your half yearly statement is on the way
Keep an eye out for your PSSap half yearly statement which is available through Your account. Your statement includes your account summary, investment performance and some steps to help you make the most of your super.

In this issue
This issue updates you on financial markets and the impact on PSSap investment performance. Our feature article outlines the asset classes that make up our pre-mixed investment options and should make the asset allocation easier to understand.

Chief Investment Officer

PSSap option performance – period ending December 2009

With visible recovery underway in the global economy, market focus has shifted to: (i) how and when governments will exit their very stimulative policies and (ii) the structural implications for asset markets from
heavily-indebted governments around the world.

In June 2009, we simplified the asset class names in the four pre-mixed investment options, including the default option – Trustee choice. This doesn’t change the investment options we offer, but simply makes the asset allocation easier to understand.

PSSap investment performance
PSSap investment options performed consistently in the December quarter. The default option, Trustee choice, increased by 2.0% over the past three months to 31 December 2009, while the one-year return was 9.5%.

PSSap investment performance - period ending December 2009*

PSSap December quarter financial market and performance report
With visible recovery underway in the global economy, market focus has shifted to: (i) how and when governments will exit their very stimulative policies and (ii) the structural implications for asset markets from heavily-indebted governments around the world.

There have been a couple of examples of smaller, highly-indebted countries struggling with the risk of sovereign default over the past six months. Examples include the proposed restructuring of Dubai World’s debt in late-November, a material rise in Greek bond rates as the markets price an increasing risk of government debt default, and continued concern about Iceland’s inability to find a solution to the funding of its international banking liabilities.

To date, these issues have been contained to the periphery. Accommodative global policy has successfully generated improvements in asset markets around the world, and notably in the housing markets of many developed economies. Growth in the Asian region, led by China, has been particularly strong, contributing to global recovery and underpinning Australia’s resilient economic performance.

US corporate profit growth has been stronger than expected, as businesses have shed labour to maintain their margins. Global equity markets have responded to this earnings resilience by continuing the rally, initially catalysed by the removal of depression risk through government policy response. Emerging market equities have delivered the strongest performance, rising by 8% in the December quarter, to be up almost 75% from their 2009 lows. Australian and US equity markets, by comparison, have recovered by 55% and 65%, respectively, from their March lows, but remain around 20% below previous peaks.

As economies, earnings, equity and credit markets recover, the defensive government bond sector has reversed some of its crisis-period gains. Small capital losses in this sector were offset by accrued interest.

The next challenge for earnings growth and investment markets will be whether corporate top-line revenue growth can be generated by a recovery in private sector demand, as government stimulus is withdrawn.

Foreign exchange markets were relatively quiet over the December quarter. The Australian dollar consolidated its position against the US dollar. On a trade-weighted basis, the Australian dollar appreciated by 2%, with the largest gain, of over 5%, being made against the Japanese Yen.

Investment classes explained
Have you ever wondered where we invest your money within the investment options we offer?
In June 2009, we simplified the asset class names in the four pre-mixed investment options, including the default option – Trustee choice.

So what does this mean?
This doesn’t change the investment options we offer, but simply makes the asset allocation easier to understand. The new asset class categories are:

PSSap asset allocation as at June 2009

1. Equity assets:

Australian equity
Formerly named Australian shares, the bulk of the Australian equity portfolio is made up of
ASX-listed Australian shares. Australian private equity funds, and their unlisted investments, make up the remainder of the portfolio.

International equity
Formerly named International shares (hedged), the International equity portfolio comprises listed equities across international developed and emerging markets, as well as offshore private equity funds.

Long/short equity funds
Long/short equity funds manage equity portfolios more flexibly than do traditional long-only managers, because they are also able to take short positions in listed equities, which can reduce their overall risk. This gives the managers greater opportunity to capture relative stock performance and to manage the risk of exposure to the broader market. These managers form part of our equity portfolios.

2. Debt assets:

Fixed income
As well as taking equity stakes in corporations, we invest in their debt. Relative to corporate equity ownership, corporate debt ownership is typically lower risk because bond holders are higher up in the capital structure of firms. This means that should a corporation default, bond holders get their capital back before equity shareholders.

We also separately invest in the debt of sovereign governments (both nominal and inflation-linked bonds). These securities form part of the defensive allocation in our portfolio, as they have less risk of capital loss, particularly if held to maturity.

Cash
The cash asset class is made up of investments in highly-rated deposits and money market instruments.

3. Real assets:

We have broadened the scope of the real assets portfolio (previously only unlisted property), to capture potential benefits from diversifying into other physical assets, principally infrastructure assets. At this time the real assets portfolio remains predominately invested in high-grade office and retail real estate.

4. Alternatives:

The alternatives asset class pulls together all other investments that do not lie within the boundaries of traditional equity or fixed income (credit and government bonds) markets or physical asset holdings (unlisted properties and infrastructure). This asset class incorporates market-neutral investment strategies, and includes mandates with diversified-asset managers, hedge funds and other opportunistic investments.

For more information on our pre-mixed investment options or our other individual investment options (including Cash, Government bonds, International shares (unhedged), International shares, Australian shares, Property and Sustainable) see our 2009 Annual Report.