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House of Assembly - Fifty-First Parliament, Third Session (51-3)
2008-09-23 Daily Xml
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STATE GOVERNMENT INVESTMENTS

The Hon. K.O. FOLEY (Port Adelaide—Deputy Premier, Treasurer, Minister for Industry and Trade, Minister for Federal/State Relations) (14:18): I seek leave to make a ministerial statement.

Leave granted.

The Hon. K.O. FOLEY: Since the middle of last year, the collapse of the US subprime mortgage market has reverberated throughout global sharemarkets. I thought it appropriate to advise the house on what impact this may be having on the state's finances. A loss of investor confidence in companies with direct and substantial exposures to subprime securities has spread throughout these markets to drive down prices. Investors have experienced prolonged and sustained negative returns, particularly over the past 10 months.

These negative returns have also impacted South Australian government funds invested in these sharemarkets. Funds SA, the largest investor of funds on behalf of government, has recorded a negative 9.3 per cent return for the balanced fund over the 12 months to 30 June 2008. This is a similar return to that of its industry peers. Although losses experienced by superannuants from this downturn are significant, it is important to view returns in the longer term.

Funds SA's balanced fund has returned 7.9 per cent per annum over three years, 10.8 per cent per annum over five years and 7.2 per cent per annum over seven years. As such, it has exceeded its target of earning inflation plus 4 per cent, equivalent to 7 per cent per annum over seven year rolling periods.

We have also seen major international financial institutions teetering on the brink of collapse over the past few weeks. One company, Lehman Brothers, has collapsed and filed for bankruptcy, while Merrill Lynch and Halifax Bank of Scotland have been taken over by other financial institutions, the Bank of America and Lloyds TSB respectively.

Unprecedented action by the US Federal Reserve has seen vast sums of capital made available to bail out companies that were facing difficulties from this market instability, including for mortgage lenders Fannie Mae and Freddie Mac, and, of course, the giant AIG (the American International Group).

The initial assessment of the government's exposure to subprime securities or other vulnerable instruments, such as collateralised debt obligations (CDOs), and exposure to these companies is as follows:

Funds SA held around $4.4 million in equity in Lehman Brothers and a further $9.4 million in bonds;

in aggregate, the Lehman investments represent only 0.1 per cent of the $14.4 billion in funds under management as at 31 August 2008;

the equity and debt exposures sit within portfolios managed by specialist funds management firms contracted to and monitored by Funds SA;

fourteen firms are engaged to manage the equity investment and eight are engaged to manage the fixed income investments. These firms are actively managing Funds SA's portfolios to ensure all effort is made to achieve recoveries and to maximise returns on all investments within the portfolios;

with respect to CDOs, Funds SA has minimal exposure with one CDO-like structure worth approximately $250,000 held in one particular portfolio. This represents less than 0.002 per cent of total funds under management;

regarding AIG, Funds SA holds $8.4 million in equity and $8.4 million in bonds. The government is advised that, due to the Federal Reserve's assistance package, there is limited risk of loss on bond exposure, although the value of the equity is not yet clear. In aggregate, the investments represent, again, 0.12 per cent of Funds SA's portfolio; and

regarding Fannie Mae and Freddie Mac, Funds SA has $3.4 million of equity exposure and $132.6 million of bond exposure to Fannie Mae. The government has $265,000 of equity exposure to Freddie Mac and $11.2 million of bond exposure. The equity investments comprise approximately 0.02 per cent of Funds SA's portfolio, while the bond investments compromise just under 1 per cent.

Again, due to the Federal Reserve's intervention, there is limited risk of loss on the bond exposures, although the equity value is not yet clear. Funds SA is continuing to monitor developments in the global financial markets and is continuing to review its investment and exposures. I have asked that Funds SA keep me appraised of further developments and impacts if and when they occur.

Regarding other agencies, such as the South Australian Government Financing Authority (SAFA) and the Local Government Financing Authority, I am advised that they have reviewed their exposures and advise that they have no exposure to Lehman Brothers or CDOs. WorkCover and the Public Trustee have advised that they have no direct exposure to Lehman Brothers but may have a very minor exposure through investing in global pooled equity funds. WorkCover and the Public Trustee have no exposure to CDOs. AIG is an insurer of some of the government's insurance programs, including SAFA's Catastrophic Reinsurance Program. Coverage under these insurance policies, I am advised, is not considered at risk.

Clearly, the past year (the last few weeks, as well) has seen great instability in global financial markets. It is important to keep in mind the very minor size of the government exposure to these entities. As I have said, we will continue to monitor closely market developments and any government exposure, and I will keep the house informed.

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