CSS Fund Performance for May 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 May 2008 (%)

Table 2: Monthly Allocated Earning Rates (%)

Table 3: Historical Fund Information (%)

# 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.

Commentary

Statistics released during May provided further confirmation of an economic slowdown in the major developed nations. In the US, housing prices continued to fall and are now around 15% below the levels reached a year ago. Reflecting this decline in wealth, US consumers are becoming increasingly less confident and are reducing both their spending and car travel. Economic growth in other countries is also slowing, although as yet, not to the same extent as in the US. In Australia, consumers are reducing both their spending and demand for credit even though employment growth remain robust. Australian business confidence has also slumped dramatically as evidenced by a surprising decline in business investment in the first quarter of this year.

Against a backdrop of slowing economic growth, inflationary pressures continue to grow. In the US, inflation has risen to 3.9%, due largely to sharp increases in food and energy prices. Inflation in other countries is also pushing higher. In China it has risen to 8.5%, while in Europe it has increased to more than 3%, thus preventing any decline in official short-term interest rates. In the UK, the Bank of England has raised its inflation forecasts for the next two years, while in Australia, consumers’ inflation expectations have recently increased to more than 5%, which is well above the Reserve Bank’s inflation target band of 2%-3%. Inflationary pressures across the globe are being fuelled by strong increases in food and energy prices - in the eleven months since the end of June 2007, the world price of oil has risen by around 80%. 

A period of calm continued to prevail over financial markets in the first part of May, due to the lingering comfort derived from the extraordinary measures implemented by the US Federal Reserve in March to prevent a systemic breakdown of the US financial system. The resulting increase in risk appetite enabled equity markets to recoup more of the losses suffered in late 2007/early 2008. However, sentiment turned negative in the second half of May due to growing inflationary pressures, which are thought likely to inhibit the ability of policy makers to continue to ease short-term interest rates in the face of a further contraction in economic growth. Risk appetite amongst investors also declined due to a growing realisation that major global banks are likely to face further credit related losses.

For the month of May as a whole, equity markets eked out modest increases. Global equities (hedged into Australian Dollars) rose by 1.2%, with the strongest gains amongst the major markets achieved by Canada (up 5.6%), Japan (up 3.5%) and Germany (up 2.1%). The US increased by 1.1%, but other markets tended to struggle. The UK fell by 0.6%, while China declined by 7.0%, Hong Kong by 4.8% and Taiwan by 3.4%. A further increase in the value of the Australian Dollar in May eroded all of the equity market gains, with global equities in unhedged terms recording a flat result. In the first eleven months of the financial year to the end of May, global equities declined by 8.3% in hedged terms and 14% in unhedged terms.

The Australian equity market also experienced strength in the first half of May before declining in the last part of the month. For the month as a whole, the market rose by 1.3%, buoyed by a 20% increase in energy stocks. This, in turn, reflected a 12% increase in the price of oil. Information Technology stocks also advanced strongly (up 9.5%), while Materials and Telecommunication stocks rose by around 4%. Other sectors fared less well, with Property Trusts down 9.1%, Industrials down 2.6% and Consumer Discretionary down 1.9%. Small stocks outperformed their large counterparts in May. In the first eleven months of the financial year to the end of May, the Australian market fell by 10.0%, thereby performing in line with its global counterparts. During this period, Materials stocks rose by 19.6% while Industrial stocks fell by 28.5%.

A pick-up in inflationary pressures and a growing acceptance that this may prevent future declines in official short term interest rates resulted in a significant decline in global bond prices in May. This saw 10-year government bond yields rise by around 0.2%-0.3% in all of the major markets.  At the same time, credit spreads declined somewhat further after a more significant fall in April. This resulted in global bonds in hedged terms declining by 0.7% in May, following a similar sized fall in April. Australian bonds managed a 0.1% increase in May following a flat performance in April. Both global and Australian bonds significantly underperformed cash, which rose by 0.6% in May after a 0.7% gain in April. In the first eleven months of the financial year to the end of May, global bonds rose by 8.3%, Australian bonds by 4.1% and cash by 6.7%.

Commodity price performance was mixed in May. Oil prices rose by 12%, while gold advanced by 3%. However, other commodity prices experienced major declines, with lead falling by 27%, nickel by 23%, zinc by 10% and copper by 7%. The decline in metal prices reflected a downward revision to global economic growth prospects. In the first eleven months of the financial year to the end of May, the price of oil rose by 80%, gold by 37% and copper by 3%. However, nickel and zinc both experienced major price declines of 40%.

The Australian Dollar advanced solidly against all major currencies in May, rising by 2.7% against the Japanese Yen, 1.9% against the Pound, 1.6% against the Euro and 1.2% against the US Dollar. The rise was largely attributable to the increase in oil and gold prices.  In the first eleven months of the financial year to the end of May, the Australian dollar experienced mixed fortunes. It rose by 14% against the Pound and 12.5% against the US Dollar. However, it fell by 4% against the Yen and 2% against the Euro.

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

Table 5: Monthly Allocated Earning Rates (%)

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

# All Earning Rates are after fees and tax
*this is an unaudited 30 June value. 

The Cash Investment Option continues to deliver returns in line with its objectives, once account is taken of fees and taxes.
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Alison Tarditi
Chief Investment Officer
5 June 2008