CSS Fund Performance for November 2007

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 November 2007 (%)

Table 2: Monthly Allocated Earning Rates (%)

Table 3: Historical Fund Earning Rates over the last five years (%)

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

Commentary

November saw risk aversion return with a vengeance, replacing the relative calm of September and October. The catalyst for the change in sentiment in November was twofold. First, speculation intensified that the magnitude of losses experienced by a number of high profile US banks due to credit-related securities would be much larger than previously thought. Second, statements by various US policy makers suggested that increasing inflationary pressures may limit the scope for further declines in US short-term interest rates. The net effect of these two factors was to increase investor fears that the US economy may experience a significant slowdown in economic activity.

Against this backdrop, November was a weak month for equity markets. Global equities hedged into Australian dollars fell by over 4%. However, due to an even larger decline in the Australian dollar, the unhedged return from global equities actually rose by 0.5%. In November, the US, UK and France all fell by a little over 4%, Japan declined by 6% and Germany by 2%. Asian markets fared the worst, with the Chinese market down by 18%, Taiwan by 12% and Hong Kong by 8.5%. In the financial year to the end of November, global equities fell by almost 3% in hedged terms and declined by a little more than 3% in unhedged terms.

The Australian equity market fell by just under 3% in November, with the modest outperformance of its global counterparts due in part to the relative strength of resource stocks, which fell by only 1.5%. The strongest sectors were Information Technology (up 8%), Consumer Staples (up 3%) and Health Care (up 1%). All other sectors fell, with the largest declines recorded by Property Trusts (down 6.5%), Industrials (down 5%) and Financials (down 4%). The Materials sector experienced a decline of 1.5%, while Energy fell by 2%. Small capitalisation stocks (down almost 4%) modestly underperformed their large capitalisation counterparts. In the financial year to the end of November, the Australian equity market rose by just under 6%.

November was a strong month for government bond markets, with fears of a significant slowdown in US economic growth and an increase in risk aversion leading to a surge of funds into the relative safe haven of government bonds. This was most pronounced in the US, where 10 year yields fell by around 0.5%, to a level of just under 4%. Canada and the UK experienced declines of around 0.3%, while 10 year yields fell by 0.2% in New Zealand, 0.15% in Australia and Japan, and 0.1% in Europe. The decline in Australia occurred despite a further increase in official short-term interest rates by 0.25% to a level of 6.75%. The decline in government bond yields in November masked further turmoil in credit markets. This was reflected by spreads on non-government securities increasing and a renewed hesitancy on behalf of banks to lend to each other. The latter influence resulted in a widening in the gap between inter-bank rates and official short-term interest rates. The return from global bonds was a strong 1.3% in November and 5.2% in the five months ending November.  The comparable return from Australian bonds was 0.5% and 1.5%, respectively. Australian bonds continue to underperform cash, which rose by 0.6% in November and 3.3% in the five months ending November.

Heightened risk aversion led to a sharp decline in the Australian dollar in November. The largest fall was against the Yen (down 9%), although declines against the Euro (down 6.5%) and US dollar (down 5%) were also significant. In the financial year to the end of November, the Australian dollar rose by 4% against a weak US dollar, but declined by 6% against the Yen and 4% against the Euro. This resulted in an unchanged Trade Weighted Index (TWI).

Table 4: The CSS Cash Investment Option Fund Earning Rate as at end November 2007(%)

Table 5: Monthly Allocated Earning Rates (%)

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

*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
6 December 2007