November 2006 Investment Report

Markets Reach Annual Highs on Moderating Inflation

Markets reached new highs in November on moderating inflation. Consumer prices dropped for a second straight month helped by another meaningful decline in gasoline pump prices. It was the first back-to-back monthly decline in prices since late last year and provided more evidence that inflation pressures are beginning to ease. This gave investors confidence that the Federal Reserve has ended its inflation-fighting campaign and will discontinue raising interest rates. The Fed is attempting to control inflation through interest rates without slowing the economy so much it slides into a recession. While overall inflation has slowed, core inflation, which excludes food and energy, is up by 2.7%. The Federal Reserve carefully watches core inflation and is more comfortable with core inflation in the 1% to 2% range.

Although positive for the month, world stock markets retreated at month's end over concerns of consumer spending during the holiday season after Wal-Mart, the nation's largest retailer announced a sales decline. The holiday season is an important time for many retailers who only become profitable during the Christmas season.

The U.S. dollar continued its decline …

… versus most major currencies based on perceptions that the Federal Reserve is less likely to raise interest rates as a result of weaker U.S. economic data and positive inflation news. The currency markets believe that foreign central banks will continue to raise rates making foreign currency more desirable compared to U.S. currency. Additionally, a report from China indicated that it is considering diversifying its currency reserves (predominantly U.S. dollar based) to other currencies.

Housing construction plunged to the lowest level in more than six years …

… as the nation's once-booming housing market further slowed. The level of building activity in October was 27.4% below activity in October 2005, the biggest year-over-year decline since March 1991. The sharp slowdown in housing this year stands in stark contrast to the past five years, when the lowest mortgage rates in four decades powered a housing boom that pushed sales of both new and existing homes to five consecutive records.

Oil prices climbed to $63.13 a barrel in November …

… amid concerns about winter weather, a December OPEC meeting and violence in Iraq. Prices were volatile as they initially declined to $55.81 in mid-November, but then rose afterward.

The October trade deficit fell by the largest amount in more than
five Years …

… as a result of declining energy prices. The overall deficit declined 6.8% to $64.3 billion in September after hitting an all-time high of $69.0 billion in August. The drop of $4.7 billion was the biggest one-month decline since February 2001. However, the politically sensitive deficit with China rose to a new record of $23 billion, pushed higher by a flood of Chinese-made televisions, cell phones and toys being imported to stock American store shelves for Christmas. The concern is that China unfairly depresses the value of its currency to make Chinese goods cheaper in U.S. markets while making American products more expensive in China.

US Airways makes an $8 billion bid for Delta Air Lines …

… once Delta emerges from bankruptcy. The deal would create one of the world's largest airlines. Delta's common shares are likely to end up worthless when it exits bankruptcy, so the offer could give these stockholders collectively $4 billion in cash and 78.5 million shares of US Airways stock.

Democrats take control of congress…

… during midterm elections. Republicans lost control of the Senate in an election where candidates split on the direction of the Iraq war. Immediately after the election, Secretary of Defense Donald Rumsfeld resigned.

Fund Performance

In November, for the second month in a row, all six of the General Board's funds produced positive investment returns. Additionally all six funds outperformed their respective performance benchmarks. For the year, all funds continue to produce positive returns with four funds outperforming benchmarks and two underperforming (net of all fund management and administration fees).

The Inflation Protection Fund (IPF) advanced 1.4% and surpassed its benchmark return of 1.2%. The excess performance resulted from the fund's exposure to commodities, which generally rose in price during the month. For the year, the fund has gained 3.1% compared to the benchmark return of 2.9%. The fund's active inflation-linked bond manager has added value compared to its benchmark, and the fund's commodities exposure also added to returns. The gains from these two strategies, however, have been partially offset by the fund's management and administration fees.

Once again, the Domestic Bond Fund (DBF) recorded another excellent month and advanced 1.8% significantly surpassing the performance benchmark return of 1.2%. As in October, the fund benefited from its holdings in bonds denominated in currencies other than the U.S. dollar as the dollar continued to weaken against most world currencies. For the second month in a row, the portion of the portfolio invested in government bonds of lesser developed countries increased more than 3%. For the year, the DBF has gained 7.1% and has substantially outperformed the benchmark return of 5.2%. Should this benchmark performance differential continue through the end of December, the fund's performance will likely rank among the very best compared to similar bond mutual funds. The main reason for the outstanding performance of the fund is its exposure to government bonds of lesser developed countries including bonds denominated in currencies of these countries. The fund's emerging market debt strategy has produced an investment return of 15.7% through the end of November. Additionally, the fund's global bond strategy has returned 9.4% through the end of November. Neither of these strategies is widely used by traditional bond mutual fund managers. Participants in the Domestic Bond Fund should understand that these strategies add a higher element of risk to the fund. The General Board believes, however, that these strategies are an important element of a broadly diversified investment strategy and enhances the opportunities for superior returns for long periods. It is important that investors in the fund recognize that one day that market conditions will likely result in unfavorable comparisons for the Domestic Bond Fund relative to other bond mutual funds. If and when this occurs, the General Board will continue to manage the Domestic Bond fund, as all of its funds, with a long term focus.

The Domestic Stock Fund gained 2.3% in October and marginally exceeded the performance of its benchmark. Stocks continue to be supported by a belief that interest rates are unlikely to rise over the near term, constructive views on corporate profitability, and a positive outlook for continued aggressive merger and acquisition activity. The stocks of small companies continued to perform better than the stocks of larger companies. This had a positive impact on fund performance in November. Once again, the fund's exposure to stocks of real estate investment trusts (REITs) also helped performance as the largest publicly traded REIT received a buyout offer significantly boosting the price of its stock as well as other REITs. For the year, the fund has gained 14.7% net of all fund expenses, which is 0.4% better than the performance of its benchmark. The fund's exposure to real estate has positively influenced performance, offset by the impact of fund management and administration expenses.

As in October, the International Stock Fund was the best performing fund on an absolute return basis and advanced 3.9%, which was 0.3% better compared to its performance benchmark. The fund benefited from its exposure to the stocks of companies from lesser developed countries which advanced more than 7% during the month. November added to a recent string of months with excess performance compared to the performance benchmark, although the fund's year to date performance continues to lag. The fund is the best performing General Board fund for the year and has provided participants with a return of 21.1%. The benchmark return for the same period is 22.8%. This relative performance differential is attributed to generally poor performance of the fund's investment managers compared to their respective performance benchmarks. Four of the fund's six managers have underperformed their respective benchmarks. This is primarily due to a less-than-market weighting in energy stocks, which have performed well and a greater-than-market weighting in technology stocks, which have performed poorly.

The Multiple Asset Fund advanced 2.4% during November and surpassed its performance benchmark by 0.3%. The better-than-benchmark performance is attributable to better-than-market performance of all four underlying funds. For the year, the fund has produced a return of 13.0%, which is 0.5% better than the benchmark. The relative performance of the Domestic Bond Fund is primarily responsible for the fund's excess performance, although this has been offset by the less than benchmark performance of the International Stock Fund and the impact of fund management and administration expenses.

The Balanced Social Values Plus Fund increased 1.9% in November and was 0.2% ahead of its performance benchmark. The fund benefited from its exposure to stocks of smaller companies. For the year, the fund is up 6.7%, but trails its benchmark return of 10.7% as a result of its emphasis on stocks expected to grow earnings faster than the overall economy. These stocks have generally underperformed the broad stock market.

Market Indices for October 2006

sp0611 The S&P 500 Index was up 1.6% in November and is up 12.2% for the year.
russ0611 The Russell 2000 Index was up 2.2% in November and is up 16.4% for the year.
msci0611 The MSCI World ex-USA Index was up 2.7% in November and is up 19.5% for the year.

The performance data for these charts is based on price changes only and do not include the impact of dividend payments.

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