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This is a special edition from our Chief Investment Officer to let you know about our 2008/09 performance.

This newsletter covers what's happened in the Australian and global economies, how the PSSap performed during this time and an outline of our investment strategies.

As I am sure you are aware, investment returns have been very poor over this financial year. The impact of the global financial crisis on economies was almost unprecedented, however in 2009, both the global banking sector and the global economy appear to have stabilised.

World share markets fell an average of 56% from their peak in October 2007 to their trough in March 2009. In the PSSap, diversification into other asset classes, including bonds, property and cash offered only a partial offset to this impact. As a result, the PSSap's default option (Trustee choice) fell 13.8% over the year. However, its returns remain well above those of the median Australian super fund over a three-year period and since its inception in 2005.

The fund had no direct exposure to the sub-prime market (that is the excessive build up of debt and poor lending practices in the United States housing market) although the collapse of this market had an impact on all economies and share markets. We also had no exposure to fraudulent hedge fund operations.

We remain focused on identifying opportunities to invest in assets where prices have been excessively depressed by the general turmoil in markets, but that offer robust, long-run fundamentals.

2008/09 PSSap performance

PSSap's Trustee choice performed better than the median super fund (based on SuperRatings performance data) on a three-year rolling period and since its inception in 2005. Despite the poor investment returns in 2008/09, average annual returns since inception remain positive.

The financial crisis reinforces our conviction in the benefits of diversification. It has also provided opportunities to implement long-term strategies at attractive prices. As a result we are introducing investments like inflation-linked bonds into the portfolio to help protect the fund against potential inflation.

The 2008/09 financial year proved extremely difficult for financial markets, as the fault lines revealed by bad loans in the US sub-prime housing market fractured into a full-blown banking crisis with the failure of the 160-year old investment bank, Lehman Brothers. The inter-dependence of the global banking sector had been underestimated by authorities and market participants alike.

Diversification into government bonds, cash, high quality properties with long leases and actively diversified global managers, helped offset this major impact to some extent.

We have had no direct exposure to the sub-prime market (that is the excessive build up of debt and poor lending practices in the United States housing market). We also have had no exposure to defaulting counterparties (groups that we've transacted with), or fraudulent hedge fund operations, such as Madoff's fund.

Over the past year, we've taken opportunities to invest into debt markets as the financial crisis provided attractive entry prices for these assets. These investments hampered performance in 2008 as market pricing was under extreme stress. We expect our investments in these areas to produce positive results over the long term, as these markets begin to recover.

Figures rounded to one decimal place. All returns are after fees and taxes.

PSSap investment options performance 2008/09

How we stack up
PSSap's Trustee choice performed better than the median super fund (based on SuperRatings performance data) on a three-year rolling period and since its inception in 2005. Despite the poor investment returns in 2008/09, average annual returns since inception remain positive.

PSSap's comparison to SuperRatings all-fund median

Action we're taking
The financial crisis reinforces our conviction in the benefits of diversification. It has also provided opportunities to implement long-term strategies at attractive prices.

As a result we are introducing investments like inflation-linked bonds into the portfolio to help protect the fund against potential inflation. The existing market conditions give us the opportunity to do this at very attractive prices due to market concerns about global depression.

Some institutions may be forced into selling assets to raise cash. We expect this will give us further opportunities to acquire solid long-term investments to help produce stronger returns into the future.

Market report for 2008/09
The 2008/09 financial year proved extremely difficult for financial markets, as the fault lines revealed by bad loans in the US sub-prime housing market fractured into a full-blown banking crisis with the failure of the 160-year old investment bank, Lehman Brothers. The inter-dependence of the global banking sector had been underestimated by authorities and market participants alike.

The banking sector pressures of the September quarter resulted in a dramatic reduction in credit to households and businesses for consumption and investment. A rapid deterioration into a broad global recession followed. The Australian economy endured this crisis better than most, in particular, due to our strong trade with China and our relatively sound housing sector fundamentals. However, our equity market declined in line with other developed markets, by a little over 50%.

All corporate debt and equity markets around the world fell because confidence in the financial system had evaporated. Corporate earnings and cash flow were also compromised due to a lack of available credit, and no-one understood whether the policy responses would be sufficient to avert a ‘depression'.

Over the first half of 2009, emerging signs indicated policy responses had stabilised the financial system, underpinning a recovery in equity markets. Some recovery has also been visible in corporate credit markets.

As a result of the global recession and subsequent policy responses, developed-world governments dramatically increased their projected debt levels.