PSSap Fund Performance for August 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 periods ending August 2008  

* All Earning Rates are after fees and tax

Table 2: Historical Fund Earning Rates (%)

* All Earning Rates are after fees and tax

Commentary

The US economy remained weak in August, although the magnitude of the economic slowdown has yet to reach the proportions seen in the downturn in the early part of this decade. This is perhaps best explained by the positive impact of a lower US dollar, which has helped to buoy the level of net exports. US employment growth has fallen in every month this year, but the extent of the decline has been only half the rate experienced in 2001/02. Furthermore, although the housing market remains weak, the pace of deterioration appears to have slowed somewhat, as evidenced by a stabilisation in the rate of decline of house prices and a recent increase in existing home sales.

The picture in other developed countries appears somewhat gloomier. The most recent data for real GDP revealed a contraction in activity in Europe and Japan and flatness in the UK. The weakness in activity has been confirmed by a decline in manufacturing activity and retail sales in Europe and a drop in consumer confidence and industrial production in the UK. In Australia, recent figures point to ongoing weakness in the housing sector, although employment levels remain robust and consumer confidence rose in the last month in response to lower petrol prices and an easing of interest rate pressures.

After two consecutive months of declines, equity markets rebounded somewhat in August. This continued the trend, established since the middle of July, where a sharp drop in commodity prices, particularly in oil, reduced both inflationary expectations and the expected path for short-term interest rates. This eased investor concerns and paved the way for an increase in equity prices, with global equities rising by 1.1% in hedged terms in August. The major feature of the month was the relatively small level of performance dispersion between markets, with the exception of Asia where markets generally declined. The largest increases were achieved by the UK (up 4%), France (up 2%), Italy (up 2%) and the US (up 1%). The largest declines were in Asia, with China (down almost 14%) leading the way.  Hong Kong, Singapore and Malaysia all fell by around 6% and Japan by 2%. A large decline in the value of the Australian dollar meant that the return from global equities in unhedged terms rose by 7.8%.

The Australian equity market rose by 4% in August, recapturing the vast majority of the July decline. The largest increases were achieved by industrial stocks, which outperformed resources by over 3%. Small stocks again underperformed their large counterparts, maintaining the trend evident over the last year. In terms of sectors, Healthcare rose by 18%, Property Trusts and Consumer Discretionary by 10% and Energy by 9%. The worst performing sectors were Telecoms (down 1%), and Materials and Utilities (both flat).

In August, another large fall in the price of oil and further economic weakness reduced earlier fears that inflationary pressures may prevent future declines in official short-term interest rates in the major economies. This created an environment in which the major bond markets advanced strongly. Nowhere was this more evident than in Australia, where the level of real short-term interest rates is higher than most other nations and the onset of the slowdown in economic activity more recent. Reflecting this trend, Australian bonds rose by 2.1% in August, outpacing the gains from global bonds which advanced by 1.6%. These rises were again well in excess of the 0.6% return from cash.  The gains in bond markets coincided with a meaningful decline in 10-year government bond yields. These fell by 0.4% in Australia, 0.2% in the US, UK and Europe and 0.1% in Japan and Canada. Credit spreads continued to widen during the month in response to the weakness in economic activity.

After a sharp fall in July, commodity prices again experienced significant declines in August. The largest losses were recorded by gold and copper which fell by 9%, while aluminium declined by 8% and oil by 7%. The latest decline in the price of oil means that it has fallen by 20% from its mid-July peak. Nickel bucked the trend by advancing 9% in August. However, this masks earlier large falls which have seen it drop by 35% in the six months to the end of August.

The Australian dollar fell sharply in August as investors fled high yielding currencies and moved back into the Yen and US dollar. The move into the Yen reflected an unwinding of carry trade positions, which are notable for capital flows into high yielding currencies such as the Australian dollar and out of low yielding currencies such as the Yen. The strength of the US dollar was due, in part, to an increasing expectation that the short-term interest rate gap between the US and other developed countries in the period ahead is likely to narrow in favour of the US. In August, the Australian dollar fell by 9% against the US dollar, 8% against the Yen, 3% against the Euro and 1% against the Pound.

Alison Tarditi
Chief Investment Officer
9 September 2008