PSS Fund Performance for September 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 September 2007 (%)
| PSS Default Fund earning Rate for 1 month to end September 2007 | 2.153% |
Table 2: Historical Fund Earning Rates over the last five years (% p.a.)
| Year | Earning Rate |
2002-03 |
2.9 |
2003-04 |
14.2 |
2004-05 |
13.9 |
2005-06 |
13.1 |
2006-07 |
17.1* |
*this is an unaudited 30 June value.
All Earning Rates are after fees and tax
Month to date Earning Rate history
Commentary:
The volatility and risk aversion evident within financial markets in recent months dissipated in September, due to the calming impact of a 0.5% decline in US official short-term interest rates in mid-September and expectations of further declines in coming months. The mid-September cut in the US Fed Funds rate followed a similar decline in the US Discount Rate in mid-August. The latter action aimed to restore liquidity to money markets and allow the continued functioning of the financial system. The combined effect of these policy actions has been to restore confidence, which resulted in investors moving back into higher yielding and more risky assets in September.
Given this backdrop, it was no surprise that September proved to be a strong month for equity markets. Global equities hedged into Australian dollars advanced by 2.9%, with Hong Kong rising by a massive 13%, the US up by 3.5%, the UK and Germany both advancing by around 3% and Japan increasing by a more modest 1%. These gains mask the fact that equity markets were lower in the first part of the month due to fears that the liquidity crunch was beginning to have a negative impact on economic growth levels. The sharp decline in the value of the Australian dollar in August was more than offset by an even larger gain in September. This meant that the return from global equities in unhedged terms fell by 4% in September, once again underlining the powerful impact currency can have on international asset class returns. For the September quarter, global equities fell by 0.5% in hedged terms and declined by 2% in unhedged terms.
The Australian equity market enjoyed a very strong rise of 5.6% in September, with significant performance dispersion between sectors again a feature. The Materials sector experienced the largest gain, rising by 14.6%. The Energy sector also rose impressively, advancing by 10.6%, while Healthcare was up by 6%. By contrast, Information Technology stocks fell by 5.4% and Telecommunication stocks were flat. At the same time, large capitalisation stocks modestly outperformed their small-capitalisation counterparts. For the September quarter, the Australian equity market rose by an impressive 5.9%
September saw some stability return to credit markets due to the provision of liquidity by policy makers and a realisation that the repricing of risk which occurred earlier in the September quarter had returned credit spreads to more favorable levels. In the US, a reduction in short term interest rates in September did not translate into a decline in long-term bond yields; during this period, two year yields declined by 0.3%, while 10 year yields rose by 0.05%. In Australia, concerns that the Central Bank may need to raise short-term interest rates again this year, led to a 0.2% rise in both two and 10 year yields. The return from global bonds was 0.5% in September and 2.9% in the September quarter. Australian bonds fell by 0.1% in September and rose by 1.5% in the September quarter. This compared with a return from cash of 0.5% in September and 1.6% in the September quarter.
Currency movements in September were again very significant. In August, a decline in investor risk appetite led to capital flowing out of high yielding currencies such as the New Zealand and Australian dollars into low yielding currencies such as the Japanese Yen and Swiss Franc. However, in September, investor risk appetite returned and resulted in a flood of capital returning to high yielding currencies. In September, the Australian dollar rose by 8.5% against the US dollar, 7.5% against the Yen and 3.5% against the Euro. For the September quarter, the Australian dollar rose by 4.5% against the US dollar, but fell by 2.5% against the Yen and 1% against the Euro.Table 3: The PSS Cash Investment Option Earning Rate as at end September 2007 (%)
| PSS Cash Investment Option Fund earning Rate for 1 month to end September 2007 | 0.434% |
Table 4: Historical Fund Earning Rates over the last five years (% p.a.)
| Year | Earning Rate |
2004-05 (7 months to June ) |
2.8 |
2005-06 |
4.8 |
2006-07 |
5.4* |
*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 objectives, once account is taken of fees and taxes.
Alison Tarditi
Chief Investment Officer
10 October 2007
