Wholesale International Bond Fund Update

September Quarter 2008

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Market review US data released over the quarter were uniformly weak, indicating that the downturn in economic activity has intensified. Economic growth in the second quarter was slower than previously estimated, expanding at a 2.8% annual pace. The housing market shows few signs of stability. Although the inventory of unsold homes declined over the quarter, it remains at an unsustainably high level. New home sales continue to tumble to record-low levels.

Composition may not total 100% due to rounding.

• The manufacturing sector showed further signs of slowing. Industrial production contracted in the third quarter, reflecting the market decline in auto production.
• The labour market contraction is worsening. Non-farm payrolls fell by 299,000 jobs in the third quarter, and unemployment rose to 6.1%, the highest rate since August 2003.
• Consumer spending shows signs of weakening. Personal consumption expenditures were flat in August on a real basis and negative in both June and July.
• Some of the slowdown in expenditures reflects the fading of fiscal stimulus. However, the driving forces are fundamental and include declines in equity and real estate wealth, a weakening labour market, tighter financial conditions and battered consumer confidence.
• Inflation developments have been mixed. Headline inflation appears to have already peaked due to the major correction in commodity prices that began in July. Core inflation, however, has shown signs of acceleration over the past three months.
• In the Eurozone, negative GDP growth in the second quarter will likely be followed by further contraction in the third, as economic data weakened rapidly during the months.
• The European Central Bank, which bucked the trend by raising its main refinancing rate to 4.25% in early July, has now recognized the downside risk to growth.
• Business and consumer confidence have been hit by the troubles of larger financial institutions – such as Fortis and Hypo Real Estate – which has led to wholesale government guarantees on banking deposits in Ireland, Germany and Greece.
• On 8 October, the Fed, the ECB, and the Central Banks of England, Canada, Sweden and Switzerland enacted a coordinated 50bp interest cut.
• In the UK housing market has weakened further from the second quarter, with mortgage approvals and lending down sharply and mortgage rate still climbing.
• Soaring funding cost forced lender HBOS to merge with Lloyds TSB and led to the nationalisation of Bradford & Bingley.
• Stretched household budgets have seen savings rates dip and have caused numerous disappointing earning results from retailers.
• The Bank of England kept its policy rate unchanged over the quarter as inflation continue to tick higher, but the BoE’s August inflation report forecasts inflation to return to target over the medium term.
• In Japan, macroeconomic data released during the quarter came out generally weaker confirming an economic downturn. At the Monetary Policy meeting held in September, the Bank of Japan decided to maintain the target policy rate of approximately 0.50%.

• On September 16th, the Federal Open Market Committee (FOMC) voted to leave the target rate at 2%, indicating that the downside risks to growth and the upside risks to inflation are both of significant concern.
• The Fed noted that strains in the financial markets and a weakening labour market have contributed to a slowdown in economic growth. The Committee stated that it is monitoring economic and financial developments carefully, signalling a willingness to take action if necessary.
• The central bank maintained its view that it expects inflation will moderate “later this year and next year, but the inflation outlook remains highly uncertain”.
• We continue to be defensive in our positioning and are close to neutral duration versus the benchmark. Remain overweight in CMBS and favour higher-rated securities. We continue to be overweight MBS as we believe the spread tightening from Treasury and GSE purchases will be beneficial to the sector in the long run.

	Positive influences
	- Long duration in the Euro Bloc; - Overweight exposures to Australia, New Zealand, Mexico, Germany, Denmark and the UK; and - Underweight European corporates, European spread product and Pfandbrief.

	Negative influences
	- Position in JGBi’s and JGB floaters; - Underweight exposure to Japan; and - Positions in ARMs, CMOs.

• The Fund aims to outperform the benchmark Lehman Global Aggregate 500 Index (AUD hedged) Index by 150 basis points p.a. (before fees) over rolling 3 year periods.
• The Fund seeks to achieve its performance objective through the taking of active risk versus its benchmark index in strategies based on areas including, but not limited to, the following:

– duration – yield curve selection – sector (eg. credit) selection – issuer; and – country, security and currency selection.

• The Fund benchmark is hedged back to Australian dollars. We may, however, take active currency positions relative to its fully hedged benchmark subject to certain restrictions.

• Seek a fund which aims to provide capital growth and some tax effective income.
• Accept the risk of significant price fluctuations.