PSSap Fund Performance for June 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 June 2008  

Option

Earning Rate * (%)

Trustee Choice

-3.4

Conservative

-1.9

Balanced

-2.2

Aggressive

-4.9

Cash

0.5

Bonds / Fixed Interest

-0.6

Australian Shares

-7.6

International Shares (Unhedged)

-6.9

International Shares

-6.5

Property

1.0

Sustainable

-7.0

* All Earning Rates are after fees and tax

Table 2: Historical Fund Earning Rates (%)

Option

2005/06

2006/07

2007/08

Trustee Choice

14.3

16.5

-2.0

Conservative

7.7

9.1

0.8

Balanced

10.2

12.2

0.6

Aggressive

16.1

20.0

-5.2

Cash

4.6

5.2

5.9

Bonds / Fixed Interest

2.0

3.0

2.8

Australian Shares

22.3

25.8

-14.5

International Shares (Unhedged)

17.8

11.4

-13.9

International Shares

15.5

21.5

-9.7

Property

11.7

17.7

13.1

Sustainable

19.0

24.2

-12.1

* All Earning Rates are after fees and tax

Commentary

The month of June saw continued evidence of a slowdown in global economic growth, an increase in global inflationary pressures, a further worsening of credit conditions and expectations of on-going financial institution losses. The combination of slower economic growth and higher inflation has led to fears that policy makers may be constrained in their ability to inject sufficient liquidity to ensure that future global economic growth remains at reasonable levels. These concerns were fuelled by expectations that the next move in short-term interest rates in the US and Europe will be up.

A mixture of higher food and petrol prices, lower housing prices and heightened job insecurity has resulted in a large decline in consumer confidence in the major developed economies. This does not auger well for future economic growth. In Australia, the economy is showing further evidence of slowing, with consumer confidence at its lowest level since the recession of the early 1990s. Despite this, inflationary pressures continue to rise, due to a combination of higher food and energy prices. Policy makers are keen to ensure that rising inflationary expectations do not become entrenched into higher inflation via larger wage increases.

The negative economic backdrop in June translated into major equity market declines. Global equities (hedged into Australian dollars) fell by 8.3%, with widespread declines across all major markets. The largest falls were recorded by China (down 20%), India (down 18%) and Sweden (down 15%).  Amongst the major markets, the US fell by 9%, Europe by 11%, Japan by 6%, the UK by 7% and Hong Kong by 10%. One of the strongest performances was achieved by Canada, which fell by only 2%. A small rise in the value of the Australian dollar in June meant that global equities in unhedged terms fell by 8.6%, which was slightly larger than the decline recorded by hedged global equities. In the full 2007/08 financial year, global equities declined by 15.7% in hedged terms and 21.3% in unhedged terms.

The Australian equity market also experienced a very negative month in June, recording a decline of 7.5%. Falls were widespread, with only the Energy sector managing a small rise of around 1.5%. Materials declined by 1.5% and Information Technology by 5%, but all other sectors experienced double digit declines, with the greatest pain felt by Consumer Discretionary (down 15%). Small stocks underperformed their large counterparts in June, a trend that was repeated in the last 12 months. For the full 2007/08 financial year, the Australian market fell by 13.7% in price terms (excluding dividends), thereby modestly outperforming its global counterparts. This outperformance was made possible by a 40% rise in the Energy sector and 20% gain in the Materials sector. This contrasted starkly with a 40% decline in the Consumer Discretionary sector and 38% fall in the Property Trust sector.

A pick-up in inflationary pressures and a growing fear that this may prevent future declines in official short term interest rates, led to only modest global bond price increases in June.  This coincided with a
re-widening of credit spreads due to the worsening economic backdrop. In the month of June, 10-year government bond yields fell by around 0.15% in Japan and 0.10% in the US and Australia, but rose by 0.20% in Europe and 0.15% in the UK. Consequently, both Australian bonds and global bonds in hedged terms rose by 0.3% in June. This was below the return of 0.6% from cash. For the full 2007/08 financial year, global bonds rose by 8.7%, Australian bonds by 4.4% and cash by 7.4%.

Commodity prices rose very strongly in June despite the deteriorating global economic outlook. Oil advanced by 10%, while copper increased by 8%, aluminium by around 7% and gold by over 4%. For the full 2007/08 financial year, oil prices doubled, gold rose by over 40%, while aluminium and copper both advanced by around 15%. By way of contrast, nickel prices fell by 40%.

Amidst the turbulence in equity markets in June, currency markets shone like a beacon of stability. During this period, the Australian dollar advanced modestly against the US dollar and Yen, but recorded similar sized declines against the Euro and Pound. For the full 2007/08 financial year, the major currency story was the weakness of the US dollar and Pound versus the strength of the Euro, Yen and Australian dollar. This resulted in the Australian dollar rising by around 13% against both the US dollar and Pound, and declining by around 3% against both the Euro and Yen.

Alison Tarditi
Chief Investment Officer
9 July 2008