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PSSap fund performance for November 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 periods ending November 2008  

* All Earning Rates are after fees and tax

Table 2: Historical fund earning rates (%)

* All Earning Rates are after fees and tax

Commentary

US economic growth, as measured by the growth of real GDP, declined by 0.5% in the third quarter. Unemployment has risen to 6.5%. Economic growth is also declining in other major developed-world regions including Europe, the UK and Japan. Australian growth has slowed, with non-farm output declining in the third quarter.  Chinese growth has also moderated, but remains at a positive pace. 

The weakening global growth profile has been accompanied by lower inflation. Indeed, as commodity prices have fallen significantly, monthly headline inflation has been negative across many regions.

Policymakers have been able to focus on underwriting economic growth and confidence by cutting interest rates, expanding fiscal policy and injecting capital into the financial system. Citigroup has been the latest large financial institution to receive such a capital injection.   

The panic conditions evident in equity markets in October continued for most of November. Market declines in the first three weeks of the month exceeded the massive falls recorded in October. However, the US Government’s rescue of Citigroup helped to underpin a strong equity market rally late in the month. Global equities in hedged terms fell by 6% in November, after declines of 17% in October and 11% in September. The largest declines in November were recorded by the US and India, with both markets down by around 7.5%. Germany and France both fell by 6.5%, while Japan and Hong Kong fell by less than 1% and China rose by 8%. A modest fall in the value of the Australian Dollar in November meant that the return from global equities for Australian investors in unhedged terms was minus 5%.

The Australian equity market performed in line with its global counterparts in November, with the S&P/ASX 300 Index declining by just over 6%. This followed falls of 13% in October and 10% in September. The market is now 45% below the high reached in November 2007. Extreme market volatility was again a feature in November, with only 4 out of 20 trading days experiencing a market move of less than +/-1%. On 12 trading days the market moved by more than +/- 2%, while on 6 trading days the market move was more than +/- 4%. Like its global counterparts, the Australian market also experienced a strong rally in the last week of the month. Small capitalisation stocks again underperformed large capitalization stocks, with the Small Ordinaries Index falling by almost 10%. After two months of underperformance, Resource stocks (down 2%) outperformed their Industrial counterparts (down almost 8%). All sectors again fell in value during November. The worst performing sectors were Information Technology (down 18% due to a large decline in the price of Computershare), Consumer Discretionary (down 14.5%) and Industrials (down 11%).

In November, the level of short-term interest rates fell across most developed regions, including the UK (by 150 bp to 3.0%), Australia (by 75bp to 5.25%), Europe (by 50 bp to 3.25%), Switzerland (by 50 bp to) and Japan (by 20 bp to 0.3%). The reduction in short-term interest rates and a major decline in inflationary expectations led to significant gains in government bond markets. Reflecting this, 10 year government bond yields fell in the US (by 100 bp to 2.9%), the UK (by 75 bp to 3.8%), Europe (by 65 bp to 3.25%), Australia (by 55 bp to 4.6%) and Japan (by 8 bp to 1.4%). Concerns over the length and depth of the looming global recession resulted in a further modest widening in credit spreads on investment grade corporate securities and a large increase in the spread of high yield and structured securities. In November, global government bonds returned 3.4%, while the return from a composite basket of global fixed interest securities which includes government bonds as well as investment grade corporate and structured securities returned 3.1%. At the same time the return from a composite basket of Australian fixed interest securities was 2.9%.  

Commodity prices marked their fourth consecutive monthly decline in November. Oil fell by 19%, bringing the decline from its peak in the middle of the year to over 60%. Nickel and aluminium declined by 14% and copper by 14%. Gold went against this trend, rising by 13%. Since the end of June, gold has declined by only 8%, compared with falls of 40%-50% in most other commodities.

The Australian Dollar fell against most major currencies in November, but unlike October, the declines were of a relatively modest magnitude. The largest decline in November was against the Yen (down 5%). This compared with falls of 2% against the US Dollar and 1.5% against the Euro. Against the Pound, the Australian Dollar managed to increase by 3.5%. Since the end of June, the Australian Dollar has fallen by 39% against the Yen, 32% against the US Dollar, 16% against the Euro and 12% against the Pound.

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Alison Tarditi
Chief Investment Officer
5 December 2008