PSS Fund Performance for July 2007

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 July 2007   

Table 2: Historical Fund Earning Rates over the last five years 

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

Month to date earning rate history

Commentary:

Global equity markets declined in July, with sharp falls towards the end of month occurring from record highs in a number of markets. The declines at the end of July were associated with a significant rise in investor risk aversion. This souring of investor sentiment stemmed from revelations of major losses at some hedge funds due to their exposure to the US sub-prime market (a market where housing loans are made to borrowers with a past history of poor credit quality and default). A re-assessment of risk led to a significant widening of credit spreads and an inability for many institutions to obtain funding from the credit markets, thus further eroding the appetite for perceived risky assets such as equities.

The Australian equity market fell by 2.0% in July, the second monthly fall in a row, following ten consecutive months of positive returns. Materials was the only sector that achieved a positive return, with the largest declines experienced by Information Technology, Property Trusts and Consumer Staples. Domestic small-capitalisation stocks outperformed large-capitalisation stocks and growth stocks outperformed value stocks. Global equity markets in unhedged terms fell by 3.2% in July, comparable to the return to investors who hedged their currency exposure. While most markets declined, strong gains were achieved in parts of Asia, with Korea (up 10.9%), Hong Kong (up 6.4%) and Taiwan (up 4.5%) leading the way. By way of contrast, the US fell by 3.2%, Japan by 4.9% and the UK by 3.7%.

July was characterized by a significant adjustment in the pricing of credit, triggered by growing concern about the outlook for defaults amongst US sub-prime mortgages.  Significant losses were incurred at some hedge funds exposed to this sector.  Rating-agencies downgraded over $10 billion worth of single-name, sub-prime mortgages and the securitized structures (CDO’s) that were backed by that collateral. In this environment, investors sought refuge in the relative safety of government bonds. This reduced the yield on US government bonds by 0.35% for 2 year maturities and around 0.2% for 10 year maturities. Other markets moved in line with the US, with 10 year government bond yields falling by around 0.2% in Europe, the UK and Australia and around 0.1% in Japan. Global bond returns rose by 1.1% in July, compared to 0.7% in Australia. Both market indices outperformed cash. In part this reflects the higher-quality composition of these indices which include investment-grade credit securities rather than the lower-rated securities. Currency movements were relatively insignificant in July, with a rise in the Australian dollar against the US dollar offset by its decline against the Yen.

Table 3: The PSS Default Fund Cash Investment Option Earning Rate as at end July 2007   

Table 4: Historical Fund Earning Rates 

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

Month to date Earning Rate history

The Cash Investment Option continues to deliver returns in line with its objective, once account is taken of fees and taxes.

Alison Tarditi
CIO
24 August 2007