PSSap Fund Performance for May 2007

Welcome to the monthly update on your Fund's investment portfolios.

ARIA’s primary responsibility is the management and investment of the Fund in the equitable and best interests of all members. ARIA approaches this task by setting investment objectives for the Fund's investment options that maximise the real investment returns earned subject to tolerable levels of short-term volatility for each option.  

Table 1: Asset allocations for pre-mixed investment options as at end May 2007 (% )

This table below shows the actual asset allocations of the four pre-mixed investment options at the end of May 2007. The other seven options are essentially single strategy options - see our Product Disclosure Statement .

Table 2: Performance in 2006-07 as at end May 2007 (%)  

The figures in the following table are after tax and fees.  The first column shows performance for the 12 months ending June 2006.  The second column shows the return from each option for a member who was invested for the whole eleven months of the current financial year until the end of May 2007.

Commentary:

In May, global equity markets continued to be underpinned by the same factors that have contributed to their gains throughout this financial year. Chief amongst these has been ongoing merger and acquisition activity and strong corporate profit numbers as real economic growth both in the developed and developing regions remains resilient. The Australian equity market rose by 2.6% in May, marking the tenth consecutive month of positive returns. The best performing sectors this month were Materials, Energy and Information Technology.  Domestic small-capitalisation stocks significantly outperformed large-capitalisation stocks.   Over the same period, international equity markets rose 3.4% in both hedged and unhedged terms.  Of the major developed markets, the largest advances were achieved in Germany (up 6.4%), Canada (up 5%) and the US (up 4%). This contributes to strong financial year-to-date returns of 29% from the Australian equity market and 23% from hedged international equity markets (the strong rise in the Australian dollar over this period eroded 11% from unhedged offshore returns, so that unhedged international equity markets rose only 12% financial year to date. Our overseas investments are hedged into Australian dollars).  

The persistent strength and more synchronised nature of global economic growth catalysed a rise in bond yields across all major markets in May. In particular, robust US labour market indicators and signs of a recovery in their manufacturing sector despite housing-sector weakness; stronger economic growth evident in European indicators; and a rise in short-term UK policy rates led market participants to reprice their expectations for a more co-ordinated upswing in the monetary policy cycle in developed economies. Risks are also being re-priced in those markets exposed to US sub-prime loans (that is, housing loans made to borrowers with a past history of poor credit quality and default). These factors contributed to a 0.6% fall in global bond markets in May.  By comparison, the Australian bond market was flat over the period.  As a relatively risk-free asset, cash returns were up 0.5% in May. However, through the financial year to end-May, Australian bonds (up 4.5%) have underperformed both cash (up 5.9%) and global bonds (up 6.1%). 
Option returns in the first 11 months of this financial year remain very strong, with investors rewarded for taking risk. Options with a heavy equity emphasis, particularly in Australia, achieved the highest returns. A rise in the value of the Australian Dollar eroded the returns from unhedged international equities. The Bonds/fixed interest option has suffered from subdued returns in global fixed interest markets.  

Alison Tarditi
CIO
12 July 2007