CSS Fund Performance for March 2008

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

ARIA’s primary responsibility is the management and investment of the CSS 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 CSS Default Fund Earning Rate as at end March 2008 (%)

CSS Default Fund earning Rate for 1 month to end March 2008

-0.904

Table 2: Monthly Allocated Earning Rates (%)

July 2007 %	Aug 2007 %	Sept 2007 %	Oct 2007 %	Nov 2007 %	Dec 2007 %	Jan 2008 %	Feb 2008 %	March 2008 %	April 2008 %	May 2008 %	June 2008 %
-0.173	1.162	2.166	1.928	-1.465	0.029	-4.685	0.109	-0.904	-	-	-

 

Table 3: Historical Fund Information (%)

Year	Fund rates (%)
2003-04	13.9
2004-05	13.9
2005-06	13.1
2006-07*	13.7

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.
* All rates are after fees and tax.

Commentary

Financial markets continued to exhibit extreme volatility in March, with the global liquidity crisis forcing the US Federal Reserve to adapt extraordinary measures to prevent a systemic breakdown of the US financial system. The first of the measures came mid-month, when a number of leading Central Banks joined forces to increase liquidity in the US and other major economies. This was followed shortly after by the US Federal Reserve’s effective bail-out of Bear Sterns, a large non-deposit taking US bank. This involved the Fed Reserve providing the financial backing to allow JP Morgan to purchase Bear Sterns and honor its commitments to other financial institutions. This action was followed two days later by a 0.75% cut in the Fed Funds rate to 2.25% - the largest such cut since 1984.

The economic environment in March was characterised by a growing realisation that the US economy is now in recession – as evidenced by a large drop in employment and weakness in both consumer and construction spending. In Australia, early evidence emerged that the recent tightening of monetary policy is beginning to have an effect – reflecting a drop in both consumer and business confidence and an easing in credit growth. The slowdown in global economic growth is being accompanied by heightened inflationary pressures, with higher than expected inflation numbers in China, Europe and Japan in March. These heightened pressures are stemming from significant increases in food and energy costs.     

Against this backdrop, global equity markets fell sharply in the first part of March before partially recouping some losses in the last part of the month, in line with the aggressive policy action by the US Federal Reserve.  For the month as a whole, global equities hedged into Australian dollars fell by 2.1%.  However, a decline in the value of the Australian dollar meant that global equities in unhedged terms rose by 1.6%.  In March, the best performing markets included Mexico (up 7%), Spain (up 1%), Sri Lanka (up 1%) and the US (flat).  The markets that fared worst included China (down 20%), Japan (down 8%), Hong Kong (down 6%) and Italy (down 6%). In the first nine months of the financial year to the end of March, global equities declined by around 15% in hedged terms and 16% in unhedged terms.

The Australian equity market also struggled in March, declining by 4.0%. Industrial shares outperformed resource shares by 7%, while small stocks fared slightly worse than their large counterparts. Materials stocks (down 8%) were hurt by the decline in commodity prices, while Telecoms (down 8%) and Industrials (down 4%) also lagged. The best performing sectors were Consumer Staples (up 1%), Financials (up 0.5%) and LPTs (flat). In the first nine months of the financial year to the end of March, the Australian market fell by 12%, thereby modestly outperforming its global counterparts.

Bond markets also experienced much volatility in March, with government bond prices strengthening in the first part of the month in response to equity markets falling, before weakening in the last part of the month as equity markets advanced. This reflects the extent to which movement in government bond yields are currently dominated by their perceived safe haven characteristics, rather than economic fundamentals such as changes in inflation, economic growth and the level of short-term interest rates. Credit spreads increased further in the first part of March before contracting somewhat towards the end of the month. In March, long-term government bond yields declined by around 0.1% in the US, Japan and UK, but were flat in Europe. This resulted in a return from global bonds in hedged terms of 0.4%. This compared with a return of 0.7% from cash and 1.6% from Australian bonds, which the latter benefiting from a more significant decline in government bond yields as the market began to anticipate an end to the cycle of short-term interest rate increases. In the first nine months of the financial year to the end of March, global bonds rose by 9.9%, Australian bonds by 4.0% and cash by 5.3%

In March, the Australian Dollar exhibited significant weakness, falling by 2% against the US Dollar, 5% against the Yen and almost 6% against the Euro. This decline was due to both a modest pullback in commodity prices and an increasing belief that the cycle of domestic short-term interest rate increases is near an end. The first nine months of the financial year to the end of March has been a story of US Dollar weakness. During this period, the Australian dollar rose by 7.5% against the US dollar, but declined by 13% against the Yen and almost 8% against the Euro.

Table 4: The CSS Cash Option Earning Rate as at end March 2008(%)

CSS Cash Investment Option Fund earning Rate for 1 month to end March 2008

0.575

Table 5: Monthly Allocated Earning Rates (%)

July 2007 %	Aug 2007 %	Sept 2007 %	Oct 2007 %	Nov 2007 %	Dec 2007 %	Jan 2008 %	Feb 2008 %	March 2008 %	April 2008 %	May 2008 %	June 2008 %
0.466	0.448	0.435	0.505	0.462	0.545	0.495	0.435	0.575	-	-	-

 

Table 6: Historical Fund Earning Rates since Inception (%)

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

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 April 2008