May 2008 Investment Report

Surging oil prices …

Surging oil prices caused investors to pause in May. Hope for a continuation of the stock market rally that began in April quickly faded as soaring oil prices made headlines. Stocks had rallied in April on the belief that the U.S. economy might be able to avoid a recession, though economic growth would be vulnerable if consumers refrained from spending. Higher crude oil prices are expected to impact consumer spending. Unfortunately, the price of oil is unlikely to retreat until supply-and-demand forces become more balanced. Currently, worldwide demand is heavily influenced by fast-growing countries, such as China, where a slowdown in economic growth is unlikely to happen anytime soon. Meanwhile, crude oil supplies continue to be constrained by violence, political instability, drilling restrictions and relatively inefficiently operated state-owned oil companies abroad. Additionally, some market observers have attributed the recent increase in oil prices to speculative buyers, including hedge funds and pension funds, which have no intention of actually buying barrels of crude oil. U.S. regulators recently announced a nationwide investigation of possible oil-market manipulation, with the hope of better controlling the price of oil. Oil began the month at $113/barrel, soaring rapidly to peak at $133/barrel before retreating to $127 by month-end.

… increased inflation expectations …

As prices of oil and other commodities continue to soar, investors have begun to be more concerned about the negative consequences of inflation in addition to prospects for future economic growth. Even the Federal Reserve expects inflation to be higher than initially forecast, as reported in the policy makers’ April meeting notes, which were released in May. However, reported inflation data released in May were relatively benign, as the core Consumer Price Index (which excludes food and energy) increased by 0.1%. Heavy discounting by retailers helped to control prices. Within the report, however, food costs rose 0.9%. The core Producer Price Index (a measure of wholesale inflation) rose 0.4%, suggesting that as growth has slowed, businesses have not yet passed down the higher raw materials costs to consumers. There is concern, however, that companies may try to pass increasing commodity costs to consumers, thus fanning the inflation flames.

… and weak economic data caused investors to reflect in May.

Investors also considered many other economic reports, spanning from manufacturing to housing to the consumer. Manufacturing activity in the U.S., as measured by the Institute of Supply Management, contracted for the fourth month in a row, although exports remain high. Durable goods orders fell by less than expected, with orders excluding transportation actually rising, perhaps influenced by the economic stimulus package. This package included not only tax rebate checks for consumers, but also an additional $50 billion in tax deductions on new equipment and software for companies. The U.S. housing market continues to be weak. Sales of new homes actually increased in April, as builders are successfully working through inventories. However, sales of new homes compete with sales of existing homes, which declined again in April. The median home price continues to decline, and inventories of homes for sale continue to rise as buyers remain on the sidelines. Declining home prices, coupled with soaring food and gasoline costs, have really pressured consumers. In fact, the Consumer Confidence Index for May fell to 59.5%, a level typically associated with recessions, and far below expectations.

Market Reaction

Despite signs that there are still numerous hurdles for the economy to overcome, stocks rallied in May. The S&P 500 rose 1.3%, and the Nasdaq rose 4.7%, but the Dow Jones Industrial Average declined 1.0%. International markets were also positive in May. A global index excluding U.S. stocks rose 1.8%. Although credit market concerns have stabilized somewhat, increasing inflationary concerns have negatively affected bond yields, and bond prices declined in May. The 10-year Treasury yield ended May at 4.00%, up from 3.73% at the end of April.

While this was another positive month for equities, it wasn’t enough to completely reverse the year-to-date decline of the equity markets. For the year, the S&P 500 has declined 3.8%, the Nasdaq has fallen 4.5% and the Dow Jones has retreated 3.7%. International markets remain down as well, with a global index excluding U.S. stocks falling by 2.1%.

Investment Fund Review

Five of the daily priced funds offered by the General Board increased in value in May, and only the Domestic Bond Fund declined. For the year, the Domestic Bond Fund, Inflation Protection Fund and MAF have generated positive returns. All of the General Board’s investment funds are outperforming their respective fund benchmarks.

Inflation Protection Fund

Fund May Year-to-Date
Inflation Protection Fund +0.9% +4.1%
BCGI Inflation Linked Index +0.2% +3.1%
Difference +0.7% +1.0%
  • The Inflation Protection fund outperformed its benchmark in May due to the fund’s allocation to commodities, which benefited from a rise in oil and other commodity prices. Inflation-protected securities in developing countries also positively influenced the performance of this fund.
  • For the year, this fund remains ahead of its benchmark, supported by the fund’s 10% allocation to commodities and 10% allocation to bonds from developing countries. These two allocations have returned 9% and 7%, respectively.

Domestic Bond Fund

Fund May Year-to-Date
Domestic Bond Fund -0.2% +4.3%
Lehman U.S. Universal (ex MBS) Index -0.7% +0.7%
Difference +0.5% +3.6%
  • The Domestic Bond Fund retreated slightly in May, but surpassed the performance of its benchmark. The fund benefited from its below-market weighting in U.S. Treasury securities as credit concerns eased during the month. The fund’s allocation to bonds from developing countries also positively contributed to results. However, this was partially offset by the fund’s allocation to non-U.S. dollar bonds from developed countries as the dollar strengthened relative to other currencies during the month.
  • For the year, the fund is ahead of its benchmark due to several factors. The biggest factor was the one-time adjustment to the pricing methodology for valuing the fund’s holding of positive social purpose investments. Another contributing factor has been the fund’s exposure to bonds from developing countries, its exposure to non-dollar-denominated bonds due to the weakening of the U.S. dollar and the excellent relative performance of the fund’s active core bond manager.

Domestic Stock Fund

Fund May Year-to-Date
Domestic Stock Fund +1.9% -2.2%
Russell 3000 +2.0% -3.0%
Difference -0.1% +0.8%
  • Along with the overall U.S. stock market, the Domestic Stock Fund increased in May. Although the fund’s larger-than-benchmark allocation to small and mid-sized companies helped its performance, several investment managers had disappointing performance relative to their benchmarks. In addition, the fund’s allocation to private real estate and private equity detracted from returns, as these investments are only revalued as partnership statements are received at the General Board, generally on a quarterly basis.
  • For the year, the fund remains ahead of its benchmark, due to the fund’s larger-than-benchmark allocation to small and mid-sized companies, its allocation to real estate investment trusts and its allocation to real estate and private equity. This has been partially offset by meaningful below-benchmark performance by one of the fund’s large company growth managers.

International Stock Fund

Fund May Year-to-Date
International Stock Fund +1.9% -1.1%
MSCI ACWI x US +1.8% -2.1%
Difference +0.1% +1.0%
  • The International Stock Fund advanced in May and outperformed its benchmark. The fund’s allocation to small-company international stocks and stocks of developing markets contributed positively to performance, though its allocation to global real estate investment trusts detracted from performance.
  • For the year, the fund is outperforming its benchmark due to strong stock selection by several of the fund’s active managers, particularly the manager of international growth stocks and the manager of small-company stocks. However, the fund’s allocation to global real estate investment trusts has partially offset these positive contributions.

Multiple Asset Fund

Fund May Year-to-Date
Multiple Asset Fund +1.3% +0.5%
Composite Benchmark +1.1% -1.2%
Difference +0.2% +1.7%
  • For the month, the fund outperformed its benchmark due to better-than-benchmark performance by the Domestic Bond Fund and the Inflation Protection Fund.
  • For the year, the fund is outperforming its benchmark due to better-than-benchmark performance by all of the underlying funds.

Balanced Social Values Plus Fund

Fund May Year-to-Date
Balanced Social Values Plus Fund +0.9% -1.6%
Composite Benchmark +0.7% -1.9%
Difference +0.2% +0.3%


close (X)