PSSap fund performance for March 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 March 2009
Option Earning rate *
  1 month (%)
Trustee Choice 3.53
Conservative 2.58
Balanced 2.81
Aggressive 4.98
Cash 0.23
Government Bonds 0.93
Australian Shares 9.61
International Shares (Unhedged) -0.78
International Shares (Hedged) 3.03
Property 0.20
Sustainable 6.31

* All Earning Rates are after fees and tax

Table 2: Historical fund earning rates (%)

Option		 2005/06 2006/07 2007/08 Financial year to date (%)
Trustee choice 14.3 16.5 -2.0 -15.63
Conservative 7.7 9.1 0.8 -6.25
Balanced 10.2 12.2 0.6 -10.36
Aggressive 16.1 20.0 -5.2 -20.92
Cash 4.6 5.2 5.9 3.84
Government bonds 2.0 3.0 2.8 -2.01
Australian shares 22.3 25.8 -14.5 -24.86
International shares (unhedged) 17.8 11.4 -13.9 -21.83
International shares 15.5 21.5 -9.7 -36.15
Property 11.7 17.7 13.1 0.68
Sustainable 19.0 24.2 -12.1 -24.79

* All Earning Rates are after fees and tax

Commentary

Fundamentals

After an extraordinarily rapid, deep and synchronised contraction in global demand over the past six months, recent indicators suggest that the rate of decline has eased. Aggressive policy action by central banks (the US Federal Reserve started its easing cycle some 19 months ago) and governments (through fiscal stimulus and widespread provision of guarantees) has contributed to this outcome, although to some extent the sharpness of the downturn simply reduced activity to recessionary levels more quickly than normal.

While the adjustment process was triggered by the US, the steepest declines in activity were actually witnessed in the key manufacturing and export economies of Japan, Korea, Taiwan and Germany. In China, GDP growth was marginally positive in Q4 2008, and business conditions appear to be already improving, as evidenced by manufacturing surveys and improved credit growth. Much of the forecast demand growth in China is linked to the government’s stimulus program, which is focused on infrastructure and low-cost housing.

The Australian economy has been somewhat insulated from the global collapse in demand by the high levels of commodity prices that were sustained through 2008, the adjustment in the exchange rate, the strength of the Australian banking sector and aggressive action from the RBA and the government. Looking ahead, a period of flat demand growth is likely, with a rotation in activity from flagging business investment to the interest-sensitive housing sector.

Financial market performance in March

Equity markets rallied back strongly in March from oversold levels. The ASX300 Accumulation Index and the S&P500 rose by 8.1% and 8.5% respectively, while the Shanghai Composite Index surged almost 14%. In contrast, the UK’s FTSE 100 was subdued, rising just 2.5%.

Financial shares were the largest beneficiaries, with the Obama Administration’s revised Financial Stability Plan well received. Furthermore, the US Financial Accounting Standards Board loosened the application of mark-to-market accounting of distressed assets, which improved the outlook for the upcoming first-quarter earnings releases.

The materials, information technology and consumer discretionary sectors also outperformed during March. In contrast, traditionally defensive stocks in the healthcare and consumer staples industries underperformed in the US and experienced outright declines in Australia.

Despite the sharp lift in equities, credit markets improved only slightly in March, and remain at very depressed price levels.  This reflects continued uncertainty as to the timing and nature of the economic recovery and the implication for asset quality and defaults. Liquidity-risk appears to be playing a part, with only a limited number of investors able to make medium-term commitments of capital in an attempt to capture these attractive yields.

Government bonds again performed well in March, after the US Federal Reserve announced an aggressive expansion of its program to purchase Treasury bonds and mortgage-backed securities. Inflation-linked bonds produced even higher returns, as market expectations of future inflation rose a little from depressed levels.

The Australian dollar made a significant recovery in March, appreciating by 8 and 10% against the US dollar and Japanese yen respectively, and almost 5% on a trade-weighted basis.


Alison Tarditi
Chief Investment Officer
27 March 2009