January 2007 Investment Report

January market movers: solid economic data, falling oil prices, and a continued pause by the Federal Reserve.

U.S. and world stock markets began the year by declining on broad concerns regarding the prospects for world economic growth, particular in Japan. However, the strength of U.S. economic data released during the month of January provided investors with additional confidence regarding the future direction of the world economies. The outlook for the Japanese economy also improved.

Job growth was strong in December …

… as employers added 167,000 new jobs. Additionally, October and November job gains were revised upward. The unemployment rate remained steady and low at 4.5%.

Consumer Confidence edged to a five year high in January.

Consumers appear to be more upbeat given the strong job market and declining energy prices.

Fourth Quarter GDP estimate was higher than expected at 3.5%…

… as consumer spending surged, exports improved, and imports declined. The Q4 estimate of 3.5% is much stronger than 2% recorded for Q3. The continuing slowdown in housing does not seem to be affecting other areas of the economy.

The Federal Reserve left rates unchanged …

… at 5.25%, while acknowledging the improving economy and the stabilization of the housing market. The Fed also noted that “inflation pressures seem likely to moderate,” erasing investor expectations that the Fed may have to raise rates to fight inflation.

Oil prices continued to fall in January …

… on warmer than average weather and an abundance of petroleum supplies. Oil rebounded toward month end on forecasts of colder weather. Lower oil prices could translate into more disposable income for consumers leading to stronger economic growth.

Fund Performance

The General Board’s investment funds generally began the year on a positive note with all but one of the funds increasing in value. Compared to fund benchmarks, three funds performed better than their benchmarks, two funds matched their benchmarks, and one fund underperformed its benchmark.

The Inflation Protection Fund was fractionally higher but very slightly underperformed its performance benchmark return of 0.1%. The Inflation Protection Fund is comprised of three separate investment portfolios. 65% of the assets are invested in an index portfolio that is designed to exactly match the fund’s benchmark. 25% of the assets are invested with an active manager that is permitted to invest in international inflation linked bonds and other types of fixed income securities if the manager believes that better value can be found outside of the U.S. inflation linked bond market. The final 10% of the fund is invested in a portfolio comprised of commodities futures contracts. The commodities portfolio provides diversification and reasonably represents trends in inflation. During January, the active portfolio manager added value by investing a significant portion of the fund’s assets in securities other than U.S. inflation linked bonds. This value added, however, was offset by declining commodities prices which adversely impacted the performance of the fund.

The Domestic Bond Fund was the only fund that declined in value for the month of January. The fund declined 0.3% despite a 0.1% gain in the fund’s performance benchmark. Interest rates increased slightly during the month, which had an adverse impact on bond prices. The average maturity of the bonds held in the fund is longer than the average maturity of the bonds that comprise the benchmark. Hence, the performance of the fund will be adversely impacted when compared to the benchmark in a rising interest rate environment. Additionally, the U.S. dollar appreciated against foreign currencies during the month and this adversely affected the performance of the fund’s global bond portfolio.

The Domestic Stock Fund gained 2.3% in January and produced an investment return that was 0.4% better than the performance benchmark. U.S. stocks advanced as the market gained greater acceptance of the notion that the economy would continue to grow without the threat of inflation. The fund performed better than its performance benchmark due to a slight preference by the fund’s investment managers for investing in companies expected to grow earnings at a rate faster than the overall economy. The fund also benefited from its real estate holdings as a result of a bidding war to acquire the largest publicly traded real estate investment trust (REIT). The General Board’s public REIT portfolio gained 9% in the month of January.

The International Stock Fund gained 0.4% and matched the performance of the fund’s benchmark. Although the manager of the fund’s portfolio that invests in the stocks of small international companies underperformed its benchmark, excess performance compared to benchmarks by other investment managers in the fund offset this shortfall.

The Multiple Asset Fund gained 1.0% compared to the 0.9% return of the fund’s performance benchmark. The fund benefited from both the absolute and benchmark relative performance of the Domestic Stock Fund although this was partially offset by the absolute and benchmark relative performance of the Domestic Bond Fund.

The Balanced Social Values Plus Fund gained 1.9% and outperformed its benchmark by 0.7%. This excess performance is attributable to the investment manager’s investment style that focuses on companies expected to grow earnings faster than the overall economy. Growth stocks performed better than the overall stock market in January.

Note: The stock market tables that normally appear at the end of this report do not appear this month. We are evaluating meaningful alternative charts to present with this report.

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