June 2009 Investment Report

Although the rally in equities appears to have stalled, bond markets continue to advance.

Major equity markets continued to rise for the first two weeks of June. However, subsequent declines essentially negated earlier gains for both domestic and international markets. The Russell 3000, a broad indicator of U.S. equity performance, was up 0.3% in June, helping investment returns for U.S. stocks remain positive for the first half of 2009. International equities, as measured by a broad index of stocks issued by foreign countries, registered modestly negative performance for the month. Bond markets, on the other hand, continued to contribute positive performance for the month. Investment-grade bonds issued by U.S. companies, as measured by the Barclay’s Corporate Debt Index, advanced 2.4% for the month, bringing year-to-date performance to 6.9%. Riskier instruments, such as non-investment-grade bonds, displayed stronger performance, as was the case in May.

The General Board continues to follow its long-term diversified investment strategy and does not attempt to predict the future direction of the U.S. and world stock and bond markets. We strongly believe that this approach is the most prudent and offers the best opportunity for ensuring participants’ retirement security.

Economic signals are mixed, with employment and consumer confidence continuing to languish …

Progress for the U.S. and world economies was mixed in June as witnessed by a number of conflicting statistical reports. While the final announcement of first-quarter 2009 U.S. Gross Domestic Product (GDP) was revised slightly to -5.5% from -5.7%, several other news items implied that recovery was far from certain. The monthly job loss report was probably the most discouraging indicator, coming in at 467,000 and sending the national unemployment rate up to 9.5%. Economists had been expecting an improvement from last month’s result of 322,000 jobs lost. The U.S. has now lost about 6.5 million jobs since the recession began in December 2007. The consensus among economists seems to be that while the rate of economic decline has slowed, weak demand will necessitate further reductions in work force and manufacturing capacity.

The Federal Reserve Bank (Fed) also reflected ambivalence about the state of the economy in the minutes released from its June 24 Federal Open Market Committee (FOMC) meeting. The FOMC’s statement contained no change in policy, such as a near-term increase in interest rates or an increase in the purchase of U.S. Treasury securities. But the FOMC’s tone seemed somewhat pessimistic in terms of its forward-looking expectations. References were made to the slowing decline in the economy and expectations of weak growth ahead. Although there was no longer a mention of deflation, the FOMC acknowledged that, despite recent commodity price increases, inflation is expected to remain subdued due to overcapacity in the economy and overall weak demand for goods and services. Stability appears to be the theme most employed by market watchers these days. However, that stability is at a very low level of economic activity and certainly not sufficient to make much of an impact on the increasing unemployment rate.

Consumer confidence, a guide to future spending behavior, declined as it fell below a reading of 50 and retreated for the first time in three months. Although retail sales actually rose by 0.5% in May, much of the increase was due to higher gasoline prices. In general, households have been showing a propensity to consume less and save more; the May household savings rate was 6.9%, its highest level in 15 years. Part of the reason for the rise in savings was a significant increase in payments from Social Security and other government benefit programs, as well as tax credits related to President Obama’s stimulus plan combined with the average consumer’s desire to build a safety net should hard times continue.

… though manufacturing and housing may have bottomed.

The manufacturing sector, while challenged, also appears to be stabilizing. The Institute for Supply Management (ISM) Index, a measure of manufacturing activity, increased modestly from the prior month to a reading of 42.8. An ISM reading below 50 indicates that the manufacturing sector is contracting. However, this was the best reading for the index in eight months. Motor vehicle sales were reported at an annualized 9.7 million rate in June—below May’s reading, but above the average of the first five months of the year. Durable-goods orders increased 1.8% in May—while this increase was flat compared with April, it still suggests stability, albeit at low levels.

The U.S. housing market clearly remains depressed. Mortgage rates have increased in recent weeks and dampened refinancing activity. The rate of decline in home prices appears to have flattened—the Case-Shiller Home Price Index for April was down 18.1% from one year ago, but it matched declines in February and March. Average home prices are down about 33% from their peak in 2006. Existing and new home sales appear to have bottomed at an annual rate around 4.7 million and 340,000, respectively, still well below the levels from a year ago. While stability in the housing market is desirable, such low levels reflect painful operating conditions for anyone employed in housing-related businesses, such as real estate agents, builders and contractors.

Credit markets continued to improve …

Interest rate levels at the end of June do not accurately reflect the volatility that credit markets experienced during the month. Interest rates moved significantly higher during the month, but then reversed course and ended the month considerably lower than the highs experienced around June 11. 10-year U.S. Treasury rates briefly surpassed 4% on that day, but closed the month almost a half of a percent lower at 3.53%. The lower interest rates can be attributed to multiple successful auctions of new Treasury securities and strong investor demand. Short-term interest rates, however, have moved higher recently as investors began to consider near-term Fed reaction to the potential for inflation. The difference in interest rates between super-safe U.S. Treasury securities and most other fixed-income securities continued to narrow, albeit at a much slower rate compared with April and May. Higher-risk, credit-related bonds generated low single-digit returns for the month of June and have generated solid double-digit returns year-to-date.

… amid positive capital-raising activity …

Despite the fact that commercial banks do not appear to have resumed lending in any major way to corporate America, the securities markets have demonstrated meaningful recovery in recent months. The sale of new stock and bond issues by public companies rose to almost $2 trillion in the second quarter. This is an increase of 9% compared with the first quarter of 2009 and double that of the second half of 2008, when capital markets were effectively closed. The increase in new stock sales is attributable to the recovery in the equity markets since March and financial institutions’ desire to repay government stimulus funds. In addition, the commercial real estate investment trust (REIT) sector has been issuing stock to reduce heavy debt loads, and nonfinancial firms, such as Pfizer, Ford and Dow Chemical, are attempting to build cash reserves in case of a further economic downturn. The initial public offering (IPO) market, which facilitates the entry of private companies onto a public stock exchange and broadly represents the capital markets’ interest in new businesses, also showed signs of life in the second quarter of 2009. Worldwide, 78 companies raised $10.6 billion in IPOs in the second quarter, up from 54 deals that raised $1.3 billion in the first quarter. It is worth noting that despite this recovery, the IPO market’s pace is still about two-thirds lower than it was one year ago, when 243 new public companies sold $33.4 billion in shares.

… and fewer worries about inflation.

With the economy still struggling, inflation fears receded somewhat in the month. Inflation, as measured by the primary indices for core consumer and producer prices, registered less than a 0.2% rise in May. Commodity market prices slowed their advance or, in some cases, retreated after rising strongly during May. Crude oil futures prices climbed modestly (up 5.6%) in June to $70 per barrel. Gold ended the month about 5% lower, while corn and wheat prices declined more than 20%. The Dow Jones UBS Commodity Index, a broad measure of commodity prices, decreased about 2% for the month.

Market Reaction

The strength of the U.S. stock market abated in June after three straight months of meaningful positive performance. The Russell 3000 Index rose 0.3% for the month, bringing the year-to-date return to just over 4%. Small-company stocks, as measured by the Russell 2000 Index, advanced 1.5% for the month and modestly outperformed large-company stocks, which were up 0.2% for the month. International stocks failed to advance for the fourth month in a row and declined 0.9%, as measured by the MSCI ACWI ex-US index. For the year, international stocks are still well ahead of U.S. stocks. The dollar was basically unchanged against major currencies during the month. World news was dominated by headlines of street protests stemming from the disputed Iranian presidential election, the withdrawal of U.S. troops from Iraqi cities and action by the Honduran army at the direction of the country’s supreme court to remove the elected president Zelaya for alleged constitutional breaches. Closer to home, Bernard Madoff was sentenced to 150 years in prison for his role in the largest financial fraud in history.

Investment Fund Review

Inflation Protection Fund

Fund June Q2 09 Year-to-Date
Inflation Protection Fund +0.8% +4.1% +6.0%
Barclays Capital Inflation Linked Index +0.5% +0.6% +5.3%
Difference +0.3% +3.5% +0.7%
  • The Inflation Protection Fund had positive performance in June as it benefited from the overall strength in the fixed-income markets. The fund outperformed its benchmark primarily as a result of the fund’s diversification into inflation-based strategies other than U.S. Treasury Inflation Protected Securities. Specifically, the diversifying strategies of inflation-linked bonds from international and developing countries added the most value in June.
  • For the quarter, the fund very meaningfully outperformed its benchmark due the fund’s diversification strategies, including inflation-linked bonds from developing countries and commodities.
  • The fund is outperforming its benchmark for the year-to-date period as a result of the abovementioned diversification.

Domestic Bond Fund

Fund June Q2 09 Year-to-Date
Domestic Bond Fund +1.1% +6.4% +6.5%
Barclays Capital U.S. Universal (ex MBS) Index +1.1% +4.1% +3.5%
Difference +0.0% +2.3% +3.0%
  • The Domestic Bond Fund performed in line with its benchmark in June as investor sentiment continued to reflect a greater willingness to invest in higher-risk, credit-related securities. The fund’s allocation to investment-grade and below-investment-grade corporate bonds contributed positively to performance for the month. The primary detractor was the fund’s investment in positive social purpose investments, which are significantly linked to the performance of U.S. Treasury securities.
  • For the quarter, the fund remained meaningfully ahead of its benchmark due to an overweight exposure to credit-related sectors as investors generally sought more risk in their fixed-income portfolios.
  • As a result of strong June performance, the fund continues to maintain positive year-to-date performance and exceeds its benchmark due to the same reasons indicated above for the quarter.

Domestic Stock Fund

Fund June Q2 09 Year-to-Date
Domestic Stock Fund +0.4% +14.0% +3.8%
Russell 3000 +0.3% +16.8% +4.2%
Difference +0.1% -2.8% -0.4%
  • The Domestic Stock Fund advanced modestly in June as the negative contribution from the fund’s private real estate and private equity investments impaired the potential for otherwise strong performance by the fund’s active public equity managers. The valuations of these nonmarketable investments typically lag the performance of the public securities markets.
  • For the quarter, the fund lagged its benchmark due to the negative contribution from alternative investments.
  • For the year, returns for the Domestic Stock Fund continue to slightly underperform the benchmark due to valuation reductions in the private real estate and private equity holdings. Nearly all of the fund’s 13 active public equity managers are outperforming their respective benchmarks, with 10 managers surpassing their respective benchmarks by at least 3 percentage points.

International Stock Fund

Fund June Q2 09 Year-to-Date
International Stock Fund -0.5% +29.8% +18.7%
MSCI ACWI x US -0.9% +28.6% +15.4%
Difference +0.4% +1.2% +3.3%
  • The International Stock Fund had slightly negative performance in June as a result of a mild decline in the international equity markets. The fund outperformed its benchmark by 0.4% primarily as a result of the fund’s allocation to international public real estate securities.
  • For the quarter, the fund modestly outperformed its benchmark. Stocks from developing countries represented by the MSCI EM index contributed to above-benchmark performance with strong gains in April and May. Developing country stocks recorded their largest quarterly gain since the inception of the MSCI EM index. Similarly, stocks of international real estate investment trusts rose by more than 30% for the quarter, also contributing to the fund’s outperformance.
  • Despite the negative June performance, the fund has outperformed its benchmark on a year-to-date basis. Stocks from developing countries, developed country market small-cap stocks and international public real estate securities represented the largest contributors to outperformance. In addition, all active managers with the exception of one are outperforming their respective benchmarks.

Multiple Asset Fund

Fund June Q2 09 Year-to-Date
Multiple Asset Fund +0.5% +13.6% +7.7%
Composite Benchmark +0.3% +14.1% +6.5%
Difference +0.2% -0.5% +1.2%
  • For the month, the fund slightly outperformed its benchmark as all four of the underlying funds matched or outperformed their respective benchmarks.
  • For the quarter, the fund trailed its benchmark as a result of the below-benchmark performance of the Domestic Stock Fund, which was partially offset by the better-than-benchmark performance of the other three funds comprising the Multiple Asset Fund.
  • For the year, the fund remains ahead of its benchmark due principally to the strong benchmark-relative performance of the Domestic Bond Fund and the International Stock Fund.

Balanced Social Values Plus Fund

Fund June Q2 09 Year-to-Date
Balanced Social Values Plus Fund +0.5% +10.2% +4.9%
Composite Benchmark +0.4% +9.9% +4.5%
Difference +0.1% +0.3% +0.4%


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