PSSap fund performance for May 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 May 2009
Option Earning rate *
  1 month (%)
Trustee Choice 0.21
Conservative 0.25
Balanced 0.15
Aggressive 1.11
Cash 0.19
Government Bonds -0.74
Australian Shares 2.39
International Shares (Unhedged) 0.63
International Shares 3.17
Property -0.11
Sustainable 1.56

* 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
Government bonds 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

Fundamentals

With aggressive policy having stabilised consumer spending and, to a lesser-degree, business investment, the focus of markets has turned to the nature of the economic recovery. In particular, the combination of open capital markets, enormous fiscal deficits and monetary easing in the US and UK has undermined confidence in those governments’ long-term sovereign liabilities.

To the extent that inflation remains within or below target ranges, central banks may choose to support the bond market and government spending by buying-back sovereign debt. But if financial markets are not in need of the additional US dollars or British pounds that are created by these purchases, they will risk putting downward pressure on exchange rates.

In comparison, the large budget deficits forecast for Australia come at a time of fiscal strength, with no net public debt outstanding as of June 2008. Similarly, while the RBA has eased monetary policy aggressively, it has done so from an appropriately restrictive stance that was adopted preceding the financial crisis. As such, scope remains for further action on both of these fronts, although the relative performance of the Australian economy may make that unnecessary.

Financial market performance in May

The rally in global equity markets extended further through May, with extraordinary returns in emerging market indices. The Indian Sensex is now up almost 80% from its mid-February levels, and returns across the broad MSCI Emerging Market index have increased by 15% per month for the past 3 months.

Developed equity markets also performed well, with the MSCI World index lifting 5%, driven by a 5% and 8% gain in the S&P500 and Nikkei respectively. The ASX300 rose a more modest 1.1%, weighed down by extensive capital raisings.

Nominal government bonds produced a slight loss over the month, as yields rose. Meanwhile, inflation-linked government bonds made a positive contribution as expected inflation rates also increased. Credit markets continued their solid rally, with investment grade and high yield spreads tightening over the month.

And as highlighted, foreign exchange markets were the main focus through May. The US dollar fell broadly, with the A$/US$ exchange rate lifting by 10% over the month to finish above 80 cents. The trade-weighted Australian dollar is now 24% higher than the low reached in the illiquid conditions of October 2008.


Alison Tarditi
Chief Investment Officer
10 May 2009