PSSap Fund Performance for August 2007

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: The PSSap Options Earning Rate for one month as at ending August 2007   

All Earning Rates are after fees and tax

Commentary:

Financial markets have been experiencing extreme levels of volatility as they navigate the tension between tighter availability (and a higher price) for credit and central bank efforts to enable the continued functioning of the financial system and, thereby, quarantine the impact on the real economy. 

August was a particularly volatile month for global equity markets.  Large declines in the first part of the month were associated with a continued souring of investor risk appetite, re-pricing of risk and inability of many institutions to obtain funding from credit markets.  This latter influence led to a sharp widening in the gap between official short-term interest rates and money market interest rates. However, in the second part of August, Central Bank action to provide liquidity to money markets helped narrow this gap and assisted in a strong recovery in equity markets. By the end of August, the return from global equities hedged into Australian dollars had recovered to be flat. Gains in the US (up 1.3%), Germany (up 0.7%) and Hong Kong (up 3.4%) were offset by declines in Japan (down 3.9%) and the UK (down 0.9%). A sharp decline in the value of the Australian dollar in August boosted the return from global equities in unhedged terms to a very strong 5.3%.

The Australian equity market experienced the same roller coaster ride as its global counterparts in August. For the month as a whole, the market was up by just over 2%, with a large level of sector performance dispersion.  Strong gains were achieved by some sectors that had experienced large declines in the previous few months. Notable amongst these were Property Trusts (up 7.8%) and Consumer Staples (up 6.1%). Other sectors that fared well in August were Healthcare (up 5.9%) and Financials (up 3.7%). By way of contrast, meaningful declines were recorded by Consumer Discretionary (down 2.6%) and Telecoms (down 2.1%).  The Materials sector experienced a marginal positive gain.  Domestic small-capitalisation stocks underperformed large-capitalisation stocks by 4% in August, despite outperforming them by 10% in the six months to the end of August.

Like July, the month of August saw a further significant adjustment in the pricing of credit. This reflected concern about the outlook for the US economy, stemming from defaults amongst US sub-prime mortgages, as well as the impact of a lack of liquidity on the pricing of a wide range of fixed interest securities. In this environment, investors continued to seek refuge in the relative safety of government bonds. This resulted in a decline in global government bond yields, with 10 year maturities falling by 0.2% in the US and 0.1% in Australia. Consequently, the return from global bonds was 1.3%, while Australian bonds rose by 0.9%. These easily exceeded the return from cash, which rose by just 0.5%.

Currency movements in August reflected a decline in investor risk appetite, with capital flowing out of high yielding currencies such as the New Zealand and Australian dollars into low yielding currencies such as the Japanese Yen and Swiss Franc. In this environment, the Australian dollar fell by 6% against the Yen and around 3.5% against the US dollar and Euro.

Alison Tarditi
Chief Investment Officer
11 September 2007