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PSSap Fund Performance for January 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: The PSSap Options Earning Rate for one month as at end January 2008 (%)

All Earning Rates are after fees and tax

Commentary:

Risk aversion amongst investors rose further in January.  Economic data, released in January, suggested continued deterioration in the US economy. Ongoing weakness in US housing, manufacturing, retail sales and the labor market, point to an economy that is either in, or close to a recession. This, together with a further tightening of credit standards and concerns over the financial viability of companies (monoline insurers such as AMBAC Financial and MBIA) that provide guarantees on various municipal bonds and mortgage-related structured investments, raised concerns about the stability of the financial system.  As a result, equity markets declined dramatically in the first month of the new calendar year, bond markets performed strongly, and currency movements, by comparison, were relatively modest.

Global equities, hedged into Australian dollars, fell by 8.3%. Due to a small increase in the value of the Australian dollar, the return from unhedged global equities was even worse at -9.1%. The poorest-performing markets were in Asia and Europe, with China down 17%, Hong Kong 16%, Germany 15% and France 13%. Of the major markets, Japan fell by 11%, the UK by 9% and the US by 6%. These declines mask the rebound in equity markets that occurred in the last week of the month, which saw most markets recover around one third of the value lost at their intra-month low point. In the first seven months of the financial year to the end of January, global equities have fallen by 11.5% in hedged terms and 12.5% in unhedged terms.

The Australian equity market also fared poorly in January, despite indications that the economy remains buoyant. The strength of the domestic economy was reflected in the underlying level of inflation rising to 3.6% in the year ending December. This is well above the top end of the Reserve Bank’s inflation target range of 2%-3%.   All sectors of the Australian equity market declined in January, with the weakest results recorded by Information Technology (down 20%) and Listed Property Trusts (down 14%). The best performing sectors were Health Care (down 6%), Materials (down 7%) and Telecoms (down 9%). In the first seven months of the financial year to the end of January, the Australian market fell by 8.5%. 

Bond markets rose strongly in January, with global bonds achieving a return of 2.0%, while the Australian bond market advanced by 1.2%. These returns compared favourably with the 0.6% return from cash.  Bond market returns in January were assisted by fears of weaker global economic growth and two declines in official US short-term interest rates, one of which occurred outside of the normal Federal Reserve meeting cycle. This resulted in the Fed Funds rate being lowered from 4.25% to 3.0%. Amidst this environment, US 10 year government yields fell by 0.4% to a level of 3.6%. European yields fell by the same magnitude to a level of 3.9%, while Australian 10 year government yields declined by 0.2% to a level of 6.1%. These movements further widened the Australia-US 10 year spread to 2.5%, which reflects the expected future economic growth divergence between Australia and the US.  Although government bond yields fell in January, credit spreads widened further due to concerns over the likely future weakness of developed world economic growth and fears that securities guaranteed by monoline insurers will need to be downgraded. Effectively, investors are demanding a higher interest rate to compensate them for this combination of economic and financial risk.  In the first seven months of the financial year to the end of January, global bonds rose by over 8%, Australian bonds advanced by 3% and cash returned 4%.

In January, the Australian dollar rose by around 2% against both the US dollar and British Pound and by 0.5% against the Euro. However, it declined by 2.5% against the Japanese Yen. In the first seven months of the financial year to the end of January, the Australian dollar rose by 5.5% against a weak US dollar, but declined by 9% against the Yen and 4% against the Euro.

Alison Tarditi
Chief Investment Officer
11 February 2008