PSSap Fund Performance for October 2007

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: The PSSap Options Earning Rate for one month as at ending October 2007   

All Earning Rates are after fees and tax

Commentary:

The themes that dominated financial market performance in September continued to influence asset class returns in October. During October, markets remained confident that the US Federal Reserve would take policy action to prevent a recession.  This belief was validated by a further 0.25% reduction in the US Fed Funds and Discount Rate at the end of October.  Together with the absence of any further high profile casualties from the liquidity crisis of July/August, this policy action helped to restore investor appetite for some risk taking.

As a result, October proved to be another strong month for most equity markets. Global equities hedged into Australian dollars advanced by 2.1%.  Note that because of further Australian dollar appreciation over the month, the unhedged return from global equities was a negative 1.7%.  The outlier was the Hang Seng, which posted a 15% appreciation in October, following a 13% increase in September.  These increases were largely the result of regulatory changes. The Chinese government relaxed restrictions prohibiting Chinese nationals from investing in Hong Kong shares. Of the other major markets, the UK rose by 4%, Germany by 2% and the US by 1.5%, while Japan recorded a marginal decline.  Over the financial year to the end of October, global equities rose by 1.7% in hedged terms but declined by 3.8% in unhedged terms, as the Australian dollar appreciated throughout this period.

The Australian equity market again rose a further 2.9% in October, buoyed by strong gains in the Telecoms (up 7.1%), Consumer Staples (up 6.2%) and Financials (up 4.1%) sectors. This more than offset a decline in the Utilities and Information Technology sectors. The Materials and Energy sectors recorded moderate gains. Small capitalisation stocks (up 5.4%) easily outperformed their large capitalisation counterparts. Over the financial year to the end of October, the Australian equity market rose by a material 9.0%.

October saw a general easing in global interest rate expectations. The major influence was the US, where official short-term interest rates were reduced by 0.25% at the end of the month. Although official short-term rates were unchanged in other major countries, short-term market rates eased slightly, reflecting expectations of somewhat easier future policy stances as global economies adjust to the contractionary impact of the liquidity squeeze. As a result, government bond yields generally declined in October. 10 year yields fell by 0.12% in the US, 0.10% in Europe and 0.08% in both the UK and Japan. Australia went against the global trend, due to continuing evidence that our rate of economic growth is sufficiently strong to fuel inflationary pressures. This raised expectations of a further increase in domestic official short-term interest rates, which in turn resulted in no change in 10 year government bond yields despite a decline in yields in other countries. The return from global bonds was 1.0% in October and 4.0% in the four months ending October.  The return from Australian bonds was flat in October and 1.5% in the four months ending October. Australian bonds continue to underperform cash, which rose by 0.6% in October and 2.2% in the four months ending October.

Healthy investor risk appetite for high yielding currencies resulted in the Australian dollar experiencing another strong rise in October. This led to a gain of 5.1% against the US dollar, 5.8% against the Japanese Yen and 3.5% against the Euro. In the financial year to the end of October, the Australian dollar rose by 9.9% against a weak US dollar, 3.0% against the Yen and 2.7% against the Euro.
 
Alison Tarditi
Chief Investment Officer
6 November 2007