Australian Growth Share Fund, Growth Fund, Equity Trust Update

September Quarter 2008

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	Key positive influences
	- Overweight holdings in Cochlear Ltd (+37.8%), IBA Health Group Ltd (+31.0%), QBE Insurance Group (+21.6%), Commonwealth Bank of Australia (+9.9%) and CSL Ltd (+5.09%). - A nil holding in Aquarius Platinum (-64.45%), Fortescue Metal Group Ltd (-60.8%), BlueScope Steel (-33.3%) and Suncorp-Metway Ltd (-25.3%).

	Key negative influences
	- Overweight holdings in Boart Longyear Ltd (-48.8%), Incitec Pivot (-45.2%), Rio Tinto Ltd (-37.2%), OneSteel Ltd (-36.8%), BHP Billiton Ltd (-28.25%) and Leighton Holdings Ltd (-23.93%). - A nil holding in Transurban Group (+31.91%).

• September was an exceptional month for the global financial markets in terms of market events and volatility.
• Some of the best-known Wall Street giants fell into the hands of traditional banks (Merrill Lynch acquired by Bank of America, Goldman Sachs and Morgan Stanley applying for banking licenses) while mortgage providers Fannie Mae, Freddie Mac and the insurance giant AIG were placed under the administration of the US Government.
• Lehman Brothers and Washington Mutual had to file Chapter 11 bankruptcy protection as they both failed to find a white knight to save them from deep financial problems.
• Amid increasing concern that short sellers were driving financial stocks lower, ASIC along with several other stock exchange regulators restricted short selling. This action has had major implications for hedge funds and long/short strategies.
• In the last week of September, the market saw one of the worst one-day falls in history as the US House of Representatives unexpectedly rejected the US$700bn bailout package proposed by the Treasury. However, the markets recouped most of the losses on the following day as the market regained confidence that the package would eventually be passed through.
• The S&P/ASX 300 Accumulation Index declined 9.9% in September, ending down 10.7% over the September quarter.
• Despite the fact that most of the negative news flow over the month concerned the US financial system, domestic banks were able to weather the headwind relatively well and the sector finished the month flat (-0.6%). In addition to Banks, IT (+2.5%), Consumer Staples (-3.2%) and A-REITs (-5.7%) outperformed the market.
• Resources was the weakest sector (-20.8%) following yet another month of falling commodities prices.
• The direction of the Australian market was mainly driven by news flow from the US in the absence of significant company-specific news post reporting season.
• On the domestic front, the RBA cut interest rates by another 25bp early September on the back of weakening global and domestic economic data.
• The dislocation in financial markets will keep the RBA vigilant and ready to act with the next policy move as appropriate. Given the continuing concerns over the state of the Australian economy, the market is now pricing a 50 basis points (bp) cut in October and a further 25bp in December.
• On the currency front, the AUD continued to weaken against the USD and ended the month below AU$0.80/US$ following the expectations of lower interest rates as well as weaker commodity prices.
• Commodity-related sectors have been hard hit in recent months as investors have become concerned about signs of modest slowing in China as well as the deleveraging of previously profitable positions.
• Gold was the only bright spot of the month as most metals continued to fall at a steep rate.
• Given that commodity prices have come down sharply for several months now, we may well see a cycle of downward earnings revisions and project delays in the coming quarters.
• Oil price, while still at a historically high level, has also come down sharply from its peak in June (28.1% over the quarter) and tested the $90 per barrel level for the first time since February.
• We remain upbeat about the long term outlook for commodities and commodity-related equities but we are concerned about the uncertainty in short-term.
• Once positive data starts to flow from the US and China which will restore investors’ confidence and improve the sentiment, we should see the Resources and Energy sectors bounce.
• While Australia is not immune to the current turmoil, particularly if the credit dislocation is protracted, we are confident that the domestic economy will be relatively better off. Nevertheless, we expect that the volatility we have witnessed in the past few months will continue until there is some evidence that reassures the market about a recovery in the US economy.

• Seek an Australian share portfolio that provides exposure to a combination of large mid, and smaller capitalisation stocks.
• Focus on total return.
• Accept the risks of significant price fluctuations.