August 2009 Investment Report

Equity and bond markets extended their advance in the month ...

Equity markets registered a sixth consecutive month of positive returns and the best performance for the month of August since 2000. As measured by a broad index of U.S. equities, investment returns for stocks were up 3.6% in the month and up 16.3% year-to-date. International equities modestly outperformed their U.S. counterparts as stocks of companies in developed countries advanced 5.4% in August. Stocks of developing countries underperformed developed-market stocks, despite having meaningfully outperformed for the past several months. This was largely due to a decline in the Chinese stock market. Developing-market equities nevertheless have advanced 50.8% so far in 2009.

Credit markets also performed positively, with investment-grade bonds issued by U.S. companies, as measured by the Barclay’s Corporate Debt Index, advancing 1.8% for the month and resulting in year-to-date performance of 12.9%. Riskier credit instruments, such as non-investment-grade bonds, also performed well.

The General Board has continued to follow its long-term, disciplined and diversified investment strategy of not attempting to predict the future direction of the U.S. and world stock and bond markets. We firmly believe that such an approach continues to be a prudent way to ensure participants’ retirement security.

… as job conditions were signaling improvement ...

Market watchers continued to focus on improving economic news during the month with fresh data suggesting that the economy is recovering. Job losses for August were reported at 216,000, the slowest pace of reductions for 2009. However, the unemployment rate continued to rise, reaching 9.7%, its highest level since 1983. Total job losses since the beginning of the recession have now reached almost 7 million.

… the housing and manufacturing sectors continued to improve …

In the housing sector, sales of both new and existing homes have steadily improved since February. The supply of homes is at its lowest level in at least five months. While still lower year-over-year, housing prices have registered their first positive month-on-month gain since June 2006. The improvement in housing affordability, driven by foreclosure-related deep discounts and low mortgage rates, has been noteworthy. This is particularly true at the low end of the market, where the supply of homes less than $300,000 in value is now six months, compared with eight months one year ago. In addition, a forward-looking indicator of pending home sales increased 3.2% in July after a 3.6% gain in June. This is the sixth consecutive monthly increase. Compared with July 2008, pending home sales jumped 13%. The biggest obstacle to a smooth housing market recovery is the impact of a potential high volume of foreclosures on supply as adjustable rate mortgages reset over the next two years.

Domestic manufacturing production has improved, according to the recent Institute for Supply Management survey of purchasing managers. The survey registered a result of 52.9. A result over 50 implies that both the manufacturing sector and the economy are expanding. Investors likely will be waiting to see whether recent improvement is sustainable or merely a short-term phenomenon resulting from government stimulus programs, such as the “Cash for Clunkers” automotive sales incentive program.

… and government incentives contributed to renewed auto sales.

In August, auto sales accounted for a significant portion of increased industrial production. For the month, automotive sales were reported at an annual rate of 14.1 million units, compared with the below-10 million-unit annual rate experienced throughout most of 2009. Under normal economic conditions, automotive sales plateau at an annual rate of about 16 million units. Most economists predict that auto sales will be lower in September and October, now that the “Cash for Clunkers” program has concluded.

The wide-ranging impact of automotive sales on the economy is evident when examining other indicators. For example, durable-goods orders advanced a very strong 4.9% in July. Excluding transportation-related orders, however, other durable-goods orders were only up 0.8%. Similarly, retail sales in July declined by only 0.1%. However, after excluding auto sales, retail sales declined 0.6%, a fifth consecutive monthly decline. Business inventory reports for June continued to show reductions in inventories, down 1.1% in the month. A reduction in inventories is generally a positive sign for the economy.

The Federal Reserve remains unconcerned about inflation …

In the Federal Open Market Committee meeting on August 12th, the committee reiterated that the Federal Reserve (Fed) funds rate will remain at its current low level for an extended period, suggesting that inflation continues to be of little concern. The release of key inflation indicators, the Consumer Purchasing Index (CPI) and Producer Purchasing Index (PPI), provided support for the Fed’s pronouncements, as the Core CPI rate was up a modest 0.1% and the Core PPI rate was down 0.1% in the most recent July report. The Fed continues to be a major purchaser of housing agency and Treasury debt in its ongoing efforts to stimulate the economy.

… and commodity price trends confirm the prospects for limited inflation.

Prices for commodities were basically flat in the month, with the Dow Jones UBS commodity index down a modest 0.6%. Crude oil futures prices rose 0.6% in August to close at $69.60 per barrel. Copper has been among the stronger commodity performers, up about 8% in the month—more than twice its price at the start of the year. The price of agricultural commodities ended the month lower, driven by favorable crop yield assumptions. Finally, natural gas prices hit a seven-year low, falling below the "$3.00 per million British Thermal Unit (BTU)" barrier. The dramatic price decline in natural gas has been driven by an abundance of supply and continued mild weather conditions.

The credit market rally continued in August …

The difference in interest rates between super-safe U.S. Treasury securities and most other fixed-income securities continued to improve, leading to positive fixed-income market price performance in August. Investors are demonstrating confidence that credit markets will recover, as reflected in demand for all fixed-income securities on the risk spectrum. Month-end buying of Treasury securities propelled Treasury prices higher, as the 10-year Treasury yield fell to 3.4% at month-end, down from 4.0% in June. Treasury bond yields have held at relatively low levels in recent months, despite the mix of improving economic data. As a general rule of thumb, Treasury bond prices will decline (and interest rates will rise) on positive economic news, as investors expect the Fed to raise interest rates to more realistic levels. However, until economic data provide convincing evidence of recovery, the Fed is likely to keep interest rates at historically low levels.

… and corporate merger activity showed signs of improvement.

One sign of confidence in brighter economic prospects is the rebound in corporate mergers and acquisitions (M&A) activity. Mergers with and/or acquisitions of distressed companies is up fourfold over 2008. However, the overall M&A market among healthy companies is still down significantly due to difficulties in obtaining financing. One notable high-profile deal, which did not qualify as distressed, was Disney’s $4 billion acquisition of Marvel Entertainment. Other news stories in the month included the release of two U.S. journalists from North Korea with the assistance of former President Bill Clinton, President Barack Obama’s support of Ben Bernanke for a second term as Fed Chairman, spirited local debates over the future direction of U.S. health care, the death of Senator Ted Kennedy and displacement of the ruling party in Japan after a 50-year run.

Market Reaction

U.S. stock markets improved once again, driven by further reinforcement of a rebounding economy and apparent lack of worry about the diminishing impact of government stimulus efforts. The Russell 3000 Index rose 3.6% for the month, bringing the year-to-date return to 16.3%. Large-company stocks advanced 3.6% for the month. Small-company stocks, as measured by the Russell 2000 Index, advanced 2.9% for the month. Stocks of companies in developing countries, which have produced outstanding returns in 2009, actually declined a modest 0.4%. Stocks of non-U.S. developed countries were the best performers, climbing 5.4%. The dollar ended the month mixed against the major trading currencies of the euro, pound sterling and yen.

Investment Fund Review

Inflation Protection Fund

Fund August Year-to-Date
Inflation Protection Fund +1.3% +8.7%
Barclays Capital Inflation Linked Index +0.8% +6.3%
Difference +0.5% +2.4%
  • The Inflation Protection Fund produced a positive return in August. Similar to last month, the fund outperformed its benchmark, primarily because of its diversification into inflation-based strategies other than U.S. Treasury Inflation Protected Securities. Specifically, the diversifying strategies of commodities and non-U.S inflation-linked bonds added value in August.
  • Because of a strong August performance, the fund meaningfully exceeds its performance benchmark. The diversification benefit from inflation-linked bonds of developing countries and commodities continued to be a value-added factor in year-to-date outperformance.

Domestic Bond Fund

Fund August Year-to-Date
Domestic Bond Fund +1.5% +11.5%
Barclays Capital U.S. Universal (ex MBS) Index +1.4% +7.5%
Difference +0.1% +4.0%
  • The Domestic Bond Fund posted positive performance for the month of August, modestly outperforming its benchmark by 0.1%. The fund’s allocation to investment-grade credit strategies added value in August. The primary detractors were below-investment-grade corporate bonds and the fund’s investment in positive social purpose investments. The latter investments are significantly linked to the performance of U.S. Treasury securities, which have underperformed credit strategies.
  • Because of strong August performance, the fund continues to maintain positive year-to-date performance and meaningfully exceeds its performance benchmark. This is attributable to an overweight exposure to higher-risk, credit-related domestic and international sectors as investors generally continued to seek more risk in their fixed-income portfolios.

Domestic Stock Fund

Fund August Year-to-Date
Domestic Stock Fund +2.2% +12.7%
Russell 3000 +3.6% +16.3%
Difference -1.4% -3.6%
  • Despite a sixth consecutive month of positive performance, the Domestic Stock Fund underperformed its benchmark in August. Similar to last month, this is due to negative contribution from the fund’s private real estate and private equity investments. Commercial real estate markets have been especially adversely affected in the current recession.
  • For the year, returns for the Domestic Stock Fund continue to underperform the benchmark, largely due to valuation declines in the private real estate and private equity holdings. However, a majority of the fund’s active managers are collectively and meaningfully outperforming their respective benchmarks.

International Stock Fund

Fund August Year-to-Date
International Stock Fund +4.4% +36.9%
MSCI ACWI x US +4.0% +31.6%
Difference +0.4% +5.3%
  • The International Stock Fund posted solid performance in August because of the strength in developed-market equities. The fund’s allocation to developed-market, small-company stocks and developed-country growth stocks added the most value in August.
  • Because of strong August performance, the fund’s year-to-date returns have reached 36.9%, and the fund is significantly outperforming its benchmark by 5.3% on a year-to-date basis. Stocks from developing countries, developed-market, small company stocks and international public real estate securities were the largest contributors to outperformance. In addition, all managers except one are outperforming their respective benchmarks.

Multiple Asset Fund

Fund August Year-to-Date
Multiple Asset Fund +2.4% +16.6%
Composite Benchmark +2.8% +16.1%
Difference -0.4% +0.5%
  • Similar to last month, the fund underperformed its benchmark, due to the benchmark-relative underperformance of the Domestic Stock Fund.
  • For the year, the fund remains slightly ahead of its benchmark, due to the continued strong benchmark-relative performance of the International Stock Fund, Domestic Bond Fund and Inflation Protection Fund. However, relative performance has been adversely affected by the below-benchmark performance of the Domestic Stock Fund.

Balanced Social Values Plus Fund

Fund August Year-to-Date
Balanced Social Values Plus Fund +2.4% +13.1%
Composite Benchmark +2.4% +12.8%
Difference +0.0% +0.3%


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