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This is a special edition from our Chief Investment Officer to let you know about our 2008/09 performance.

This newsletter covers what's happened in the Australian and global economies, how the CSS performed during this time, and an outline of our investment strategies.

As I am sure you are aware, investment returns have been very poor over this financial year. The impact of the global financial crisis on economies was almost unprecedented. However, in 2009, both the global banking sector and the global economy appear to have stabilised.

World share markets fell by an average of 56% from their peak in October 2007 to their trough in March 2009. In the CSS, diversification into other asset classes (including bonds, property and cash) only partially offset this impact. As a result, the CSS Default Fund fell 14.3% over the year.

The fund had no direct exposure to the sub-prime market (that is the excessive build-up of debt and poor lending practices in the United States housing market), although the collapse of this market had an impact on all economies and share markets. We also had no exposure to fraudulent hedge fund operations.

We remain focused on identifying opportunities to invest in assets where prices have been excessively depressed by the general turmoil in markets, but that offer robust, long-run fundamentals.

Although investment returns have been poor over the 2008/09 financial year, make sure you are aware of how fund investment performance actually affects your final benefit. For more information, see the article below.

How investment performance affects your benefit

As a deferred benefit member, the member and/or productivity components of your benefit are affected by investment earnings, as is the starting value of your Consumer Price Index (CPI)-indexed pension, which is calculated and payable when you claim your entitlement.

2008/09 CSS performance

Over the financial year to 30 June 2009, the CSS Default Fund fell by 14.3%, with the 28% fall in global share markets for 2008/09 being the major contributor.

Actions we're taking

The global financial crisis reinforces our conviction in the benefits of diversification. It has also provided opportunities to implement long-term strategies at attractive prices. As a result we are introducing investments like inflation-linked bonds into the portfolio to help protect the fund against potential inflation.

Market report for 2008/09

The 2008/09 financial year proved extremely difficult for financial markets, as the fault lines revealed by bad loans in the US sub-prime housing market, fractured into a full-blown banking crisis with the failure of the 160-year old investment bank, Lehman Brothers. The
inter-dependence of the global banking sector had been underestimated by authorities and market participants alike.

How investment performance affects your benefit
As a deferred benefit member, the member and/or productivity components of your benefit are affected by investment earnings, as is the starting value of your Consumer Price Index (CPI)-indexed pension, which is calculated and payable when you claim your entitlement.

For more information about your CSS super account, see your annual member statement, which we will send out from October 2009.

2008/09 CSS performance

Default Fund
Over the financial year to 30 June 2009, the CSS Default Fund fell by 14.3%, with the 28% fall in global share markets for 2008/09 being the major contributor.

Diversification into government bonds, cash, high quality properties with long leases and actively diversified global managers, helped offset this major impact to some extent.

We have had no direct exposure to the sub-prime market (that is the excessive build up of debt and poor lending practices in the United States housing market). We also have had no exposure to defaulting counterparties (groups that we've transacted with), or fraudulent hedge fund operations, such as Madoff's fund.

Over the past year, we've taken opportunities to invest into debt markets as the global financial crisis provided attractive entry prices for these assets. These investments hampered performance in 2008 as market pricing was under extreme stress. We expect our investments in these areas to produce positive results over the long term.

Cash Investment Option
The CSS Cash Investment Option returned 4.6% over the 2008/09 financial year. This was in line with the average official cash rate over the period, after taking account of fees and taxes. Cash investment returns are likely to be lower over 2009/10, given the Reserve Bank of Australia (RBA) has maintained the official cash rate at 3% since April 2009, and looks unlikely to lift interest rates in the near-term.

Switching investments
At times like these, it is more important than ever to understand the investment options we offer and the impact switching investment options will have on your final benefit.

We recommend you visit www.css.gov.au and read Market volatility and your super before you decide to switch investment options.

Action we're taking
The global financial crisis reinforces our conviction in the benefits of diversification. It has also provided opportunities to implement long-term strategies at attractive prices.

As a result we are introducing investments like inflation-linked bonds into the portfolio to help protect the fund against potential inflation. The existing market conditions give us the opportunity to do this at very attractive prices due to market concerns about global depression.

Some institutions may be forced into selling assets to raise cash. We expect this will give us further opportunities to acquire solid long-term investments to help produce stronger returns into the future.

Market report for 2008/09
The 2008/09 financial year proved extremely difficult for financial markets, as the fault lines revealed by bad loans in the US sub-prime housing market, fractured into a full-blown banking crisis with the failure of the 160-year old investment bank, Lehman Brothers. The
inter-dependence of the global banking sector had been underestimated by authorities and market participants alike.

The banking sector pressures of the September quarter resulted in a dramatic reduction in credit to households and businesses for consumption and investment. A rapid deterioration into a broad global recession followed. The Australian economy endured this crisis better than most, in particular, due to our strong trade with China and our relatively sound housing sector fundamentals. However, our equity market declined in line with other developed markets, by a little more than 50% from peak to trough.

All corporate debt and equity markets around the world fell because confidence in the financial system had evaporated. Corporate earnings and cash flow were also compromised due to a lack of available credit, and no-one understood whether the policy responses would be sufficient to avert a 'depression'.

Over the first half of 2009, emerging signs indicated policy responses had stabilised the financial system, underpinning a recovery in equity markets. Some recovery has also been visible in corporate credit markets.