March 2008 Investment Report

Economic data continued to show signs of recession …

Although economic data released in March eased market fears of accelerating inflation, much of the economic data confirmed that the U.S. economy is near or already in a recession. The month began with the release of the Department of Labor employment report, which reflected a loss of 63,000 jobs in February, following January’s loss of 22,000 jobs. Back-to-back employment losses typically only occur during recessions. Orders for durable goods (those designed to last more than three years) unexpectedly declined by 1.7%. Businesses are clearly becoming more cautious. The hope that business investment will offset the drag on the economy caused by housing is waning. Although the Institute for Supply Management’s Manufacturing Index reported an improvement in manufacturing purchasing, its value was still below the key “50” mark, signifying economic contraction.

… as a continued decline in home prices slowed consumer spending.

Median home prices continue to decline, and inventories of homes for sale (both new and existing homes) continue to rise. Although sales of existing homes rose unexpectedly in February, a surplus of homes will continue to weigh on home values for the foreseeable future. The combination of falling home prices, soaring gas prices, growing job losses and recession fears have resulted in consumers becoming understandably cautious about making major purchases. Additionally, the Consumer Confidence Index plunged unexpectedly in March by declining 40% compared to the prior year, further supporting the notion of a likely curtailment in consumer spending. With consumers accounting for two-thirds of economic output, the outlook for growth is not favorable.

A near financial panic resulted from the imminent failure of an
investment bank …

The Federal Reserve initiated several unprecedented moves intended to stimulate economic growth and slow the deterioration of credit conditions. Bank losses resulting from careless lending activity and market fears regarding loan defaults have caused lenders to severely tighten their lending standards. First, the Fed implemented a new program allowing investment banks to borrow $200 billion of U.S. Treasury securities using distressed mortgage-backed securities as collateral for up to 28 days. Investors reacted positively to this action. However, this move came too late for the fifth-largest Wall Street investment bank, Bear Stearns, which found itself short of cash and facing the possibility of bankruptcy. As is common on Wall Street, rumors of the firm’s impending demise sent shockwaves through the financial markets, threatening the short-term viability of stable functioning markets.

… but ultimately, the Fed’s intervention averted widespread disruption in the markets.

Given Bear Stearns’ significant presence in the overnight investment market, the interconnectedness of financial markets and the potential for a major market meltdown that a bankruptcy could cause, the Fed orchestrated a plan that would guarantee Bear Stearns’ investment portfolio while relying on JPMorgan to assume responsibility for managing the assets. This plan involved JPMorgan purchasing Bear Stearns for $2 per share, which was significantly lower than the price at which Bear Stearns stock traded the previous day and substantially lower than the almost $150-per-share price that the stock traded for in 2007. If the assets guaranteed by the Fed decline in value, U.S. taxpayers would incur the loss. To facilitate this unprecedented action, the Fed’s governors unanimously voted to waive the usual prohibition on Fed loans to nonbanking institutions. The Fed announced measures that would allow Wall Street securities firms to borrow directly from the Fed via its lending facility at the same terms normally reserved for regulated banks. Finally, the Fed resorted to the traditional method of encouraging lending by lowering the target federal funds rate by 0.75% to 2.25%.

But will the Fed’s actions be enough?

The steps the Fed has taken clearly reflect the magnitude of the problems in the economy. Because of this crisis, which began with rising defaults on subprime mortgages a year ago, some well-known and previously highly respected firms now are unable to repay loans. Investors remain optimistic that the Fed’s actions, combined with the economic stimulus tax rebate checks, will help spur economic growth.

Market Reaction

The Federal Reserve’s actions seemed to stabilize the financial markets in March. The S&P 500 declined by as much as 4.5% by mid-month but recovered to end the month a slight 0.4% lower than the previous month. The Nasdaq rose 0.4%, and the Dow Jones barely advanced 0.1%. International markets without aggressive central banks, however, fared worse than U.S. markets, with a global stock index excluding U.S. stocks falling 2.2%. With volatility in equity markets, investors sought the safety of U.S. Treasury securities, sending prices up and yields down. The 10-year U.S. Treasury yield ended March at 3.41%, down from 3.51% at the end of February.

The turmoil in financial markets is reflected in the year-to-date stock market returns. For the year, the S&P 500 has declined 9.4% through the end of March, the Nasdaq has fallen 13.9% and the Dow Jones has dropped 7.0%. International markets retreated as well, with the global index excluding U.S. stocks falling 9.2%.

Investment Fund Review

The Domestic Bond Fund, Multiple Asset Fund, and Balanced Social Values Plus Fund increased in value in March. The Domestic Stock Fund’s value was unchanged this month. The Inflation Protection Fund and the International Stock Fund declined in March. For the year, the Domestic Bond Fund and Inflation Protection Fund have generated positive returns, whereas the other funds have declined in value.

Inflation Protection Fund

Fund March Year-to-Date
Inflation Protection Fund  -0.8% +4.3%
BCGI Inflation Linked Index +0.1% +5.1%
Difference -0.9% -0.8%
  • The Inflation Protection Fund underperformed its benchmark in March due to the fund’s allocation to commodities and inflation-linked bonds of developing countries. Commodity prices fell sharply this month. For example, after peaking at $110/barrel in mid-March, oil declined to $102/barrel. The prices of other commodities also fell due to investors’ fears that a global recession would result in reduced demand for commodities. Additionally, some market observers believe that short-term speculators have been responsible for recent increases in commodity prices and that the speculators were reducing their investments. Developing-country bonds declined, since many of these countries depend on revenue from the sale of commodities. Investors increasingly fear that these countries’ economies will suffer in a global recession.
  • For the year, the fund has fallen behind its benchmark due to adverse performance of the fund’s commodities manager and the fund’s manager of inflation-linked bonds in developing markets.

Domestic Bond Fund

Fund March Year-to-Date
Domestic Bond Fund +2.9% +4.8%
Lehman U.S. Universal (ex MBS) Index  0.0% +0.8%
Difference +2.9% +4.0%
  • The performance of the Domestic Bond Fund was both positively and negatively influenced by a number of factors. A major positive contributor was the one-time adjustment resulting from a change in methodology for determining the fair market value of the fund’s holdings of positive social purpose investments (primarily loans to fund affordable housing). The fund also benefited from its exposure to bonds denominated in foreign currencies resulting from weakness of the U.S. dollar. These gains were partially offset by further deteriorating credit conditions that negatively impacted the fund’s holdings of corporate bonds and bonds from developing countries. Nearly all of the fund’s investment managers have greater-than-market exposure to credit risk, and this detracted from the fund’s performance.
  • For the year, the fund is substantially ahead of its benchmark as result of the aforementioned change in methodology, excellent performance of its global bond portfolio due to the weakening U.S. dollar and the strong performance of its diversified core bond manager. This has been slightly offset by the fund’s exposure to credit risk in its high-yield and developing-country debt portfolios. Additionally, a second core manager in the fund has meaningfully underperformed its benchmark due to its excessive exposure to asset-backed securities.

Domestic Stock Fund

Fund March Year-to-Date
Domestic Stock Fund 0.0% -8.6%
Russell 3000 -0.6% -9.5%
Difference +0.6% +0.9%
  • Despite the volatility in the stock market, the Domestic Stock Fund’s value was unchanged in March. The fund benefited from its greater-than-benchmark allocation to small and mid-sized companies, gains recognized from the fund’s allocation to private equity and private real estate investments and generally better-than-benchmark performance by a majority of the fund’s investment managers. Additionally, the fund’s portfolio of publicly traded real estate investment trusts performed strongly in March.
  • For the year, compared to its benchmark, the fund has benefited from its allocation to publicly traded real estate investment trusts, private equity and private real estate.

International Stock Fund

Fund March Year-to-Date
International Stock Fund -1.9% -7.3%
MSCI ACWI x US -2.2% -9.1%
Difference +0.3% +1.8%
  • With recession fears growing in the U.S., investors have been apprehensive about how the rest of the world will fare in the event of a U.S. slowdown. International stocks may be under selling pressure as various investors, such as hedge funds, consider selling some of their positions given tighter credit markets. Additionally, the weaker U.S. dollar is impacting international companies, which are finding it more difficult to compete as their products have gotten more expensive. International markets retreated in March amidst the growing uncertainty.
  • The International Stock Fund outperformed its benchmark in March due to strong performance by the fund’s emerging markets managers and the fund’s growth manager.
  • For the first quarter, the fund is outperforming its benchmark due to better-than-benchmark performance by all but one of the fund’s active managers. In particular, the two emerging markets managers have both substantially outperformed their performance benchmarks as a result of their less-than-benchmark weightings in the Chinese and Indian stock markets. Both markets have declined approximately 25% for the first three months of the year.

Multiple Asset Fund

Fund March Year-to-Date
Multiple Asset Fund +0.3% -3.7%
Composite Benchmark -0.7% -5.4%
Difference +1.0% +1.7%
  • For the month, the fund outperformed its benchmark due primarily to the aforementioned change in valuation methodology of the General Board’s affordable housing loans in the Domestic Bond Fund, which comprises 25% of the Multiple Asset Fund.
  • For the year, the fund is outperforming its benchmark due to better-than-benchmark performance by all of the underlying funds except the Inflation Protection Fund.

Balanced Social Values Plus Fund

Fund March Year-to-Date
Balanced Social Values Plus Fund +0.4% -4.7%
Composite Benchmark +0.4% -5.0%
Difference  0.0% +0.3%


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