PSSap fund performance for July 2009

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 July 2009
Option Earning rate *
  1 month (%)
Trustee choice 2.89
Conservative 1.90
Balanced 2.00
Aggressive 4.08
Cash 0.21
Government bonds 0.78
Australian shares 7.90
International shares (unhedged) 4.86
International shares 5.63
Property -3.25
Sustainable 7.41

* All earning rates are after fees and tax

Table 2: Historical fund earning rates (%)
Option 2005/06 2006/07 2007/08 2008/09 Financial
year to date (%)
Trustee choice 14.3 16.5 -2.0 -13.8 2.89
Conservative 7.7 9.1 0.8 -4.2 1.90
Balanced 10.2 12.2 0.6 -8.6 2.00
Aggressive 16.1 20.0 -5.2 -16.8 4.08
Cash 4.6 5.2 5.9 4.5 0.21
Government bonds 2.0 3.0 2.8 -2.2 0.78
Australian shares 22.3 25.8 -14.5 -14.6 7.90
International shares (unhedged) 17.8 11.4 -13.9 -19.5 4.86
International shares 15.5 21.5 -9.7 -30.5 5.63
Property 11.7 17.7 13.1 -1.8 -3.25
Sustainable 19.0 24.2 -12.1 -17.4 7.41

* All earning rates are after fees and tax

Commentary

Fundamentals

Signs of improvement in the global economy continued to emerge through July. Notably, industrial production has begun to lift sharply in Asia, as inventory levels have been run down and manufacturing output lifted back towards levels of final demand. Although industrial activity has been slower to recover in the US and Europe, signs of stabilisation in the housing markets of those regions have bolstered investor confidence. Consumer confidence, however, remains depressed, and the path of economic recovery is likely to be slow given still-elevated household debt burdens and a fragile US banking sector.

Australia’s relative resilience has been further demonstrated, with business surveys strengthening through June and July. Consumer sentiment has rebounded, and is currently well above long-run average levels. Reflecting stronger than expected consumer and business spending and a desire to retain staff, the labour market has held up relatively well. Although the unemployment rate has risen by almost 2% points to 5.8%, the Australian economy has still generated an increase in the total number of jobs over the past year, and household expectations of unemployment are now back in line with long-run average levels.

With the monetary and fiscal policy stimulus that was delivered through the 2009 financial year proving successful in stabilising growth, attention has focused on the process of policy normalisation. The majority of government initiatives were temporary measures or one-off payments, and as such the budget position will naturally improve as they are not repeated or extended. In addition, the stronger than forecast economic outcomes will significantly improve revenues from sources such as corporate and income tax, as well as stamp duty. Private final demand, in the form of household and business spending, appears well placed in Australia to take over from these temporary fiscal measures.

This leaves the RBA with the task of assessing the most appropriate path of interest rate normalisation. The futures market currently expects the RBA to begin lifting rates before Christmas, and for the official cash rate to reach 5% (from 3% currently) by the end of 2010. Such an outcome will likely require a smooth recovery path for the global economy – the prospects for which are still uncertain.

Financial market performance in July

Equity markets extended their recovery rally through July, with the MSCI World index rising by a little more than 7% over the month. The US and Australian share markets performed in line with the global average, and emerging markets again outperformed. The four Asian Tiger markets of Hong Kong, Korea, Singapore and Taiwan all rose by more than 10%, while the Shanghai-A share market extended its sweeping rally by another 15%.

Despite the vigorous rally in global equities, government bond yields were essentially unchanged in the US, and declined slightly in Germany. Australian bond yields rose, particularly at the short-end, where the market moved to price tighter monetary policy expectations going forward. Credit markets also continued to improve, with corporate bonds earning a relatively high yield, whilst also benefiting from capital gains as spreads tighten.

The Australian dollar recovered further through July, rising by 1.9% against the US dollar, and 1.5% on a trade-weighted basis.

Alison Tarditi
Chief Investment Officer
20 July 2009