PSSap Fund Performance for April 2008

Welcome to the monthly update on your Fund's investment performance.

ARIA’s primary responsibility is the management and investment of the PSSap Funds in the equitable and best interests of all members. ARIA approaches this task by setting an investment objective to maximise the real returns earned on investments subject to a tolerable level of short-term volatility.

Table 1:  PSSap Option Earning Rates for the month of April 2008  

* All Earning Rates are after fees and tax

Commentary

In April, further evidence emerged of a slowdown in global economic activity. In the US, first quarter economic growth remained positive, but only because of an unintended build-up in inventory levels, which is likely to restrict future growth.  A more accurate indication of the state of the US economy was provided by a drop in consumer confidence to levels not reached since the recession of 1982, weakness in the labor market and a further decline in housing prices. In Australia, the tightening of monetary policy over the last year is beginning to have a dampening impact on economic activity. This was reflected by evidence of weaker household spending, lower business and consumer confidence figures and a reduction in the demand for credit by both households and business.

Despite slower global economic activity, the rate of inflationary pressures continues to accelerate in most nations, thereby heralding a potentially difficult period for policy makers if economic growth rates continue to decline. The challenge of attempting to fine tune economic policy so that it boosts economic growth while at the same time reduces inflationary pressures, has not been faced by policy makers in the last two decades. In April, any concern over a build-up in inflationary pressures did not prevent policy makers further reducing the level of official short-term interest rates in the US (by 0.25% to 2%), UK (by 0.25% to 5%) and Canada (by 0.5% to 3%).

A period of calm prevailed over financial markets in April due to the extraordinary measures implemented by the US Federal Reserve in March to prevent a systemic breakdown of the US financial system.  This resulted in an increase in risk appetite which enabled equity markets to rise strongly, with global equities hedged into Australian dollars rising by over 6%.  A strong rise in the value of the Australian dollar meant that the return achieved by unhedged investors in global equities was reduced to 2%.  In April, some of the best performing markets were in Asia, with Hong Kong (up around 13%), India (up around 12%) and Japan (up around 11%) leading the way. Of the other major markets, the UK rose by 7%, France and Germany by 6% and the US by 5%. Despite impressive gains in April, for the first ten months of the financial year to the end of April, global equities declined by around 9% in hedged terms and 14% in unhedged terms.

The Australian equity market also experienced an impressive rebound in April, with a rise of 4.5% more than offsetting the 4.0% decline recorded in March. Industrial stocks which had outperformed Resource stocks by 7% in March, underperformed them by over 8% in April. Small stocks continued to fare worse than their large counterparts during a period in which sector performance dispersion was again significant. Energy stocks rose by 10%, thanks to a 12% increase in the oil price. Materials stocks gained 9%, reversing their large decline in March, while Utilities stocks advanced by around 8% and Healthcare stocks by around 6%. The worst performing sector was Consumer Discretionary with a decline of around 6%. Negative returns were also recorded by Industrials (down by around 2%) and Consumer Staples (down by 1%). In the first ten months of the financial year to the end of April, the Australian market fell by 8%, thereby marginally outperforming its global counterparts. During this period, Resource stocks rose by 19% while Industrial stocks fell by 17%.

An increase in investor risk appetite in April resulted in capital flowing out of safe-haven Government bonds and into corporate securities (and equities). This led to a reduction in price and increase in yield on Government bonds and a reduction in credit spreads. In April, long-term government bond yields increased by 0.2%-0.3% in all major markets, including Australia. This resulted in a return from global bonds in hedged terms of -0.7%. This compared with a return of 0.7% from cash and 0.0% from Australian bonds. In the first ten months of the financial year to the end of April, global bonds rose by around 9%, Australian bonds by 4% and cash by 6%

In April, the Australian Dollar reversed the weakness evident in March, rising by around 8% against the Yen, 4% against the Euro and 3% against the US Dollar. This strength was due to both increased investor risk appetite for high yielding currencies such as the Australian Dollar and a rise in commodity prices, particularly oil. The first ten months of the financial year to the end of April has been a story of US Dollar weakness. During this period, the Australian dollar rose by 11% against the US Dollar, but declined by 6% against the Yen and almost 4% against the Euro.

Alison Tarditi
Chief Investment Officer
7 May 2008