PSS Fund Performance for May 2007

• PSS Default Fund
• PSS Cash Investment Option

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

The impact of investment performance on your final benefit varies from minimal (if you are a contributing member) to significant (if you are a preserved benefit member) or if you have transferred amounts from other funds. However, all members may find it useful to understand how your fund performs.

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.

PSS Default Fund

Table 1: Asset Allocation as at end May 2007 (%)

Table 2: The PSS in 2006-07 as at end May 2007 (%)

The Fund return numbers for each asset class in the table below are after fees and before tax. Two total fund return numbers are shown; the first is after fees and after tax (the return investors receive), while the second is after fees and before tax (the return that should be used when comparing the total fund return to the total fund benchmark return). Benchmark return numbers are before fees and before tax.

The asset class benchmark return numbers show the market performance of the sector, while the asset class fund return numbers show what your Fund's performance was in that asset class sector.

* after fees and after tax;  * * after fees and before tax

Table 3: Historical Fund returns over the last five years (% p.a.)

Commentary:

In May, global equity markets continued to be underpinned by the same factors that have contributed to their gains throughout this financial year. Chief amongst these has been ongoing merger and acquisition activity and strong corporate profit numbers as real economic growth both in the developed and developing regions remains resilient. The Australian equity market rose by 2.6% in May, marking the tenth consecutive month of positive returns. The best performing sectors this month were Materials, Energy and Information Technology.  Domestic small-capitalisation stocks significantly outperformed large-capitalisation stocks.  Over the same period, international equity markets rose 3.4% in both hedged and unhedged terms.  Of the major developed markets, the largest advances were achieved in Germany (up 6.4%), Canada (up 5%) and the US (up 4%). This contributes to strong financial year-to-date returns of 29% from the Australian equity market and 23% from hedged international equity markets (the strong rise in the Australian dollar over this period eroded 11% from unhedged offshore returns, so that unhedged international equity markets rose only 12% financial year to date.  Our overseas investments are hedged into Australian dollars).  

The persistent strength and more synchronised nature of global economic growth catalysed a rise in bond yields across all major markets in May. In particular, robust US labour market indicators and signs of a recovery in their manufacturing sector despite housing-sector weakness; stronger economic growth evident in European indicators; and a rise in short-term UK policy rates led market participants to reprice their expectations for a more co-ordinated upswing in the monetary policy cycle in developed economies. Risks are also being re-priced in those markets exposed to US sub-prime loans (that is, housing loans made to borrowers with a past history of poor credit quality and default). These factors contributed to a 0.6% fall in global bond markets in May.  By comparison, the Australian bond market was flat over the period.  As a relatively risk-free asset, cash returns were up 0.5% in May. However, through the financial year to end-May, Australian bonds (up 4.5%) have underperformed both cash (up 5.9%) and global bonds (up 6.1%). 
The Fund’s after tax and fees return for the 11 months ending May was 16.9%.  On an after fee but before tax basis, the return of 18.4% was in line with the benchmark return of 18.5%.  

PSS Cash Investment Option  

Table 4: The PSS Cash Investment Option in 2006/2007 as at end May 2007 (%)  

The fund return in the table below is after fees and tax, whereas the Benchmark return is before fees and tax.

 Table 5: Historical Fund returns (%)  

Commentary:

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

Alison Tarditi
CIO
12 July 2007