Investment market update (issued: 1 October 2008)

This information explains our position on the in-progress developments across local and global financial markets. 

In summary
The Board continues to monitor developments on the advice of our asset consultant (JANA Investment Advisers Pty Ltd), however, at the current time, it sees no reason to change investment strategy.  

legalsuper’s investment strategy has been consciously structured to be well diversified to accommodate the current risks. Also, it is important to remember that sometimes “trouble is opportunity”, and in the medium term we expect new investment opportunities will present themselves and the Board continues to monitor and receive advice on these opportunities.

Recent developments
Globally:
The US Federal Reserve has supported mortgage providers Fannie Mae and Freddie Mac.  This has been seen by many commentators as a very positive move to maintain financial stability.

Lehman Brothers, a US investment bank, filed for bankruptcy due to losses, and a loss of confidence from customers and lenders. 
This may still have implications for financial markets if their various financial positions unwind.

Bank of America offered to acquire Merrill Lynch - the third of the big Wall Street investment banks loses its independence.

AIG, the big US insurer received funding from the US Federal Reserve to remain solvent. This was critical as if AIG lost its standing, financial deals may have unwound with further adverse implications.

US share markets are now 24% below their peak for the past 12 months.

In Australia:
The Australian dollar has fallen 17% from its peak against the US$ impacting the wealth of Australians whose assets and income are in AUD.

The Australian stock market is 27% below its peak.

What may happen next?
The crisis is unlikely to be fully behind us. Some of the remaining areas of concern include:
- debt reduction by organisations to continue, meaning slower economic growth;
- slower growth in consumer spending;
- slower global growth, particularly in emerging markets;
- lower interest rates;
- further downward pressure on the US$.

Share markets are likely to continue to be volatile. The longer term outlook for earnings is not encouraging given companies’ cost of capital has increased, but eventually markets should reach a price where even lower earnings are attractive.  When markets bottom their rate of recovery is typically sharp.

Hedge funds - The short term outlook for hedge funds is not entirely clear. Over the longer-term there can be great opportunities. Those hedge funds in which legalsuper is invested are well diversified and the managers have focussed on counterparty risk as events have unfolded.

legalsuper’s strategy
Our approach, based on advice, is to make no immediate change to our investment strategy:
- legalsuper’s investments are well diversified and risks are reasonably spread.
- Our exposure to hedge fund strategies is modest in comparison with the risks inherent elsewhere, particularly equity markets. Our hedge funds’ exposure to Lehman reduced over recent months and central authorities appear willing do their utmost to limit the risks of unintended losses.
- We are advised by JANA that there are likely to be some good investment opportunities for over the coming 6 - 18 months.