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 October 2008 (%)
| PSS default fund earning rate for 1 month to end October 2008 | -7.646 |
Table 2: Monthly Allocated Earning Rates (%)
July 2008 % |
Aug |
Sept 2008 % |
Oct |
-0.653 |
1.424 |
-5.090 |
-7.646 |
Table 3: Historical Fund Information (%)
| Year | Fund rates (%) # |
|---|---|
2003-04 |
14.2 |
2004-05 |
13.9 |
2005-06 |
13.1 |
2006-07 * |
14.1 |
2007-08 * |
-1.9 |
# All rates are after fees and tax.
* The 2006-07 rate is the annualised rate of return for the period 1 July 2003 to 30 June 2007, which was allocated to member accounts as of 1 July 2007. Prior year rates are performance rates. Members who exited during the period 1 July 2003 to 30 June 2007 were paid the exit rate applicable on the day of exit being their share of the fund earnings for the relevant period. The 2007-08 rate is the performance of the default option which reflects the monthly allocated earning rates for the 12 months ending 30 June 2008.
The downturn in global economic activity intensified in October. In the US, real GDP declined as a result of the sharpest correction in private consumption since 1980. Within the housing sector, inventories of new homes remain at elevated levels, suggesting prices will continue to decline. In addition, the labour market remains weak with continuing claims for unemployment insurance rising, while the unemployment rate has jumped to 6.5%. Manufacturing data points to a further sign of deceleration, with activity at its lowest level since 1982.
The outlook for the Australian economy has also deteriorated. Housing indicators have trended lower, retail spending has weakened and both consumer and business sentiment has fallen dramatically. Reflecting this, the Reserve Bank cut official short-term interest rates by 1.0% in October. This followed a decline of 0.25% in September and a further reduction of 0.75% in the first week of November. In addition, the Australian Government announced a $10 billion fiscal stimulus package, which will be dominated by one-off payments to pensioners and family benefit recipients. This was accompanied by large fiscal stimulus packages in most developed nations.
The fear and uncertainty surrounding equity markets in September graduated to panic conditions in the month of October. The environment was fuelled by fund redemptions, margin calls, massive market volatility and a string of company profit warnings. Market volatility reached such extreme levels that authorities in Iceland, Russia, Indonesia, Romania and Ukraine closed their equity markets. Global equities fell by 17% in hedged terms in October, after a decline of 11% in September. In October, markets in Asia were the worst hit, led by India (down 26%), China (down 25%), Japan (down 24%) and Hong Kong (down 23%). Other markets also experienced very large declines, with the US falling by 17%, the UK by 11%, Germany by 15% and France by 14%. Notwithstanding these very large equity market declines, an even greater fall in the value of the Australian dollar meant that the return from global equities in unhedged terms for Australian investors actually rose by 1% in October.
The Australian equity market did not escape these major declines, with the market falling by 13% in October, following a 10% decline in September. Extreme market volatility was highlighted by the fact that on 12 out of 23 trading days, the market changed value by more than 3%. In this environment, small capitalisation stocks suffered the most, as evidenced by a 25% decline in the Small Ordinaries Index. Similar to September, resource stocks as a whole (down 19%) again underperformed their industrial counterparts (down 11%). All sectors fell in value during October. The largest decline was recorded by listed property trusts, which fell by 25%. The energy, materials, consumer discretionary and industrial sectors all fell by 19%, while the best performances were achieved by telecoms (down 2.5%), healthcare (down 3%) and utilities (down 4%).
In October, co-ordinated policy action saw central banks in the US, UK, Europe, Canada and Sweden cut official short-term interest rates by 0.5% on 8 October. Rates were also lowered by 0.25% in Switzerland, 0.27% in China and 0.2% in Japan. Later in the month, rates were cut further in the US, Canada and Sweden. In Australia, official short-term interest rates were lowered by 2.0% between September and early November. In this environment, the yield on 10-year Australian government bond yields declined by 0.25% to 5.2%. Government bond yields in other major markets did not decline by as much. 10-year yields declined by 0.1% in Europe, were flat in Japan and Canada and rose by 0.1% in the US and UK. Concerns over the length and depth of the looming global recession resulted in another large widening in the yield spread (over government bonds) on credit and structured securities. As a result, the return from global government bonds was 0.9% in October, while the return from a composite basket of fixed interest securities which includes government bonds as well as corporate and structured securities was -0.8%. At the same time the return from a composite basket of Australian fixed interest securities was 2.0%
Commodity prices experienced massive falls in October, their third consecutive large monthly decline. Copper fell by 38%, oil by 32%, nickel by 28%, aluminium by 18% and gold by 17%. These declines mean that the price of most commodities has dropped by 40%-50% in the three months to the end of October. This movement reflects both the expected impact of lower demand emanating from the global economic recession, as well as the effect of a higher value for the US dollar, which is the currency commodities are denominated in.
Like commodity prices, the Australian dollar also experienced a massive decline in October, falling by 22% against the Japanese yen, 16% against the US dollar and 7% against both the euro and pound. This took the decline in the three months to the end of October to 35% against the yen, 30% against the US dollar and 13% against both the euro and pound. The Australian dollar has been hurt by lower commodity prices and a narrowing of our interest rate differential with other major countries.
Table 4: The PSS cash option earning rate as at end October 2008 (%)
| PSS cash investment option fund earning rate for 1 month to end October 2008 | 0.600 |
Table 5: Monthly Allocated Earning Rates (%)
July 2008 % |
Aug |
Sept 2008 % |
Oct |
0.566 |
0.533 |
0.527 |
0.600 |
Table 6: Historical fund earning rates since inception (%)
| Year | Fund rates (%) # |
|---|---|
2004-05 (7 months to June ) |
2.8 |
2005-06 |
4.8 |
2006-07 |
5.4 |
2007-08 |
6.1 |
# 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
18 November 2008
