PSS Fund Performance for February 2008

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

ARIA’s primary responsibility is the management and investment of the PSS Fund 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 PSS Default Fund Earning Rate as at end February 2008 (%)  

Table 2: Monthly Allocated Earning Rates (%)  

Table 3: Historical Fund Earning Rates over the last five years (%)

*this is an unaudited 30 June value. 
All Earning Rates are after fees and tax

Commentary:

Financial market volatility remained at elevated levels in February due to fear and uncertainty over the extent of future likely losses from credit related writedowns, and the degree to which the US economy slows and drags down global economic growth.  US economic data released in February – declining employment, weak private consumption, ongoing housing sector weakness and a marked deterioration in the services sector – provided further evidence that the US economy continues to deteriorate. By contrast, the Australian economy appears quite robust, given strong employment growth and a likely further boost to our terms of trade from a large increase in contracted iron ore prices with major Asian steel mills. At the same time, the Reserve Bank forecast that Australian inflation will remain above the top end of its 2%-3% target range until at least 2010.  These events coincided with a further rise in China’s rate of inflation to over 7%.

Against this backdrop, global equities, hedged into Australian dollars, fell by 1.7% in February. Reflecting a solid increase in the value of the Australian dollar, global equities declined by 5.3% in unhedged terms. The best performing markets were in Asia, which suffered the largest declines in January.  In February, Taiwan rose by 12%, Thailand by 8%, Korea by 5% and Hong Kong by just under 4%. Of the developed markets, Japan and the UK were flat, the US fell by 3.5%, while Germany and France both declined by 1.5%. In the first eight months of the financial year to the end of February, global equities declined by 13% in hedged terms and 17% in unhedged terms.

Despite further evidence that the Australian economy remained robust, our equity market also struggled in February, declining by 0.7%. This was due, in part, to concerns that the Reserve Bank would continue to aggressively raise the level of short-term interest rates in an effort to quell inflationary pressures. This fear was justified by the 0.25% increase in official cash rates in early February and again in the first week of March. The Australian equity market was also weighed down by large share price declines in a group of heavily geared financial and property trust stocks. This resulted in a large dispersion in the returns from various sectors. For example, Energy, Telecoms and Materials stocks all rose by more than 10%, while Financial stocks fell by 12.5% and Property Trusts declined by 5.5%. In the first eight months of the financial year to the end of February, the Australian market fell by 9%, thereby comfortably outperforming its global counterparts.

Bond markets also experienced much volatility in February, reflecting uncertainty over the extent to which the US and other developed economies will slow, the size of future likely losses from credit related writedowns and the degree to which inflationary pressures may emerge. Actual, or expected, declines in official short term interest rates in a number of countries resulted in sufficient downward pressure on long bond yields to enable global bonds to return 0.9%. By way of contrast, the Australian bond market declined by 0.6% due to increases in short term interest rates and a realisation that inflationary pressures were larger than previously thought. Cash continued to outperform Australian bonds, rising by 0.5%. 10 year government bond yields fell by 0.1% in the US and Japan, while European and UK yields were unchanged. Amidst higher short term interest rates, Australian 10 year government bond yields rose by 0.1% to a level of 6.2%. Credit spreads continued to widen in February due to concerns over the likely future weakness of developed world economic growth and fears that credit related losses may intensify. In the first eight months of the financial year to the end of February, global bonds rose by 9.4%, Australian bonds advanced by 2.5% and cash returned 4.6%.

In February, the Australian dollar benefited from both very strong commodity price increases and expectations of higher than expected short term interest rates. This resulted in an advance of 4% against US dollar, almost 2% against the Euro and a little over 1% against the Yen. In the first eight months of the financial year to the end of February, the Australian dollar rose by almost 10% against a weak US dollar, but declined by around 8% against the Yen and 2% against the Euro.

Table 4: The PSS Cash Option Earning Rate as at end February 2008 (%)  

Table 5: Monthly Allocated Earning Rates (%)  

Table 6: Historical Fund Earning Rates since Inception (%)

*this is an unaudited 30 June value. 
All Earning Rates are after fees and tax

The Cash Investment Option continues to deliver returns in line with its objectives, once account is taken of fees and taxes.
Alison Tarditi
Chief Investment Officer
20 March 2008