July 2010 Investment Report

Markets

  • Equities rebounded strongly in July as the markets reacted positively to corporate earnings announcements. U.S. equity markets, represented by the Russell 3000, gained 6.9%. However, economic uncertainty continues as unemployment remains high and the effects of expiring government stimulus programs continue.
  • Large-company U.S. stocks slightly outperformed small-company U.S. stocks. Among large-company stocks, those with strong earnings growth potential performed the best. Among small-company stocks, those classified as “value” performed the best.
  • International equities outperformed U.S. equities largely due to a weaker U.S. dollar. The dollar declined 6.2% against the euro primarily because of easing concerns over the European debt crisis. The bellwether MSCI EAFE Index, which measures performance of developed-country stocks, gained 9.5%. Stocks of developing countries, as measured by the MSCI Emerging Markets Index, gained 8.2% during the month.
  • U.S. credit markets advanced in July. High-quality “investment-grade” bonds, as measured by the Barclays U.S. Credit Index, advanced 1.9%. Investor demand for higher-risk assets increased as economic news generally improved from the prior month, resulting in tighter credit spreads (the interest rate premiums charged to corporate bond issuers).
  • The yield on the 10-year Treasury note ended the month at 2.9%, essentially even with the yield at the end of June, despite potential upward pressure on interest rates due to the sale of $104 billion in new Treasury notes.

Economics Highlights

  • A preliminary estimate of second-quarter Gross Domestic Product (GDP) growth at 2.4% reflected a slowdown in economic activity from the first-quarter rate of 3.7%. The largest positive contribution to GDP came from business and residential investment on durable goods, which made up for mediocre consumer demand. While businesses are experiencing a period of strong profit growth, consumers have seen little wage growth and remain concerned with the employment picture.
  • The pace of manufacturing activity, while still expanding, appears to have slowed in recent months, according to the Institute of Supply Management (ISM) report. The report also showed a drop in new orders, which is an indicator for future manufacturing output.
  • Housing data continues to be a mix of good and bad news. While housing prices in May increased almost 5.0% year-over-year, the absolute level of home prices is still well off peak values. New home sales, while up significantly year-over-year, are nevertheless near a 47-year low. The housing market is experiencing a variety of “headwinds,” including the expiration of the homebuyer’s tax credit programs, the high level of foreclosure activity and the slow pace of the federal government’s loan modification initiative.
  • Employers reduced jobs by 171,000 in June, continuing the negative trend from last month. Similar to last month, markets reacted negatively to the disappointing news that the private sector added only 71,000 jobs, less than the 100,000 that economists expected. The unemployment rate held steady at 9.5%. Job creation and unemployment continue to be the biggest impediments to a full-fledged economic recovery.

Geopolitical Headlines

  • European regulators conducted “stress tests” on 91 banks in 20 European countries. The tests, which were widely criticized as not strenuous enough, indicated that only seven banks would require additional equity capital under a significantly adverse economic scenario.
  • British Petroleum (BP) succeeded in stemming the flow of oil from its leaking offshore well. The incident and its increasingly negative ramifications led to the replacement of current CEO, Tony Hayward, with Robert Dudley, a U.S. citizen, effective October 1, 2010. In addition, BP announced that it would take a $32 billion charge against earnings and sell $30 billion in assets in an effort to deal with the costs associated with the Gulf oil spill.

Investment Fund Review

Effective August 1, 2010, the names of three General Board investment funds changed:

  • The Domestic Stock Fund (DSF) changed to the U.S. Equity Fund (USEF).
  • The International Stock Fund (ISF) changed to the International Equity Fund (IEF).
  • The Domestic Bond Fund (DBF) changed to the Fixed Income Fund (FIF).

The General Board changed these funds’ names to align them more closely with the funds’ investment strategies. Only the names of these funds changed. The funds’ investment strategies, investment managers, fund expenses, management and administration remain the same. Click on the following links for more information:

Inflation Protection Fund

Fund July Year-to-Date
Inflation Protection Fund +0.9% +3.7%
Barclays Capital U.S. Government Inflation-Linked Bond Index +0.1 +4.6%
Difference +0.8% -0.9%
  • The Inflation Protection Fund outperformed its benchmark in July primarily due to the fund’s allocation to commodities and inflation-linked bonds from developing countries.
  • For the year, the fund has underperformed its benchmark primarily due to its allocation to both commodities and inflation-linked bonds of developed countries. The fund’s allocation to bonds from developing countries, however, has positively affected performance.

Fixed Income Fund

Fund July Year-to-Date
Fixed Income Fund +2.0% +6.8%
Barclays Capital U.S. Universal (ex MBS) Index +1.5% +7.2%
Difference +0.5% -0.4%
  • The Fixed Income Fund outperformed its benchmark in July as a result of its allocation to global, developing-market and high-yield bonds. Similar to last month, the fund’s positive social purpose lending strategy detracted from performance during the month.
  • For the year, the fund has underperformed its benchmark primarily due to the fund’s allocation to global bonds, which were negatively affected by the European sovereign debt crisis. The fund’s positive social purpose lending strategy has generated the highest absolute return year-to-date.

U.S. Equity Fund

Fund July Year-to-Date
U.S. Equity Fund +6.6% +1.0%
Russell 3000 +6.9% +0.5%
Difference -0.3% +0.5%
  • The U.S. Equity Fund underperformed its benchmark in July due to the fund’s allocation to private real estate and benchmark-relative underperformance by the fund’s large company growth managers, though this was partially offset by the fund’s allocation to public real estate securities.
  • For the year, the fund has outperformed its benchmark due primarily to the fund’s allocation to private equity, the stocks of small and mid-sized companies and public real estate securities. Underperformance by 10 of the fund’s active strategies, however, partially offset this positive contribution.

International Equity Fund

Fund July Year-to-Date
International Equity Fund +8.1% -0.6%
MSCI ACWI x US +8.9% -2.4%
Difference -0.8% +1.8%
  • The International Equity Fund underperformed its benchmark in July primarily because of the benchmark-relative underperformance of the fund’s core developed-market equity strategies and its private real estate allocation. However, the benchmark-relative outperformance by one of the fund’s developing-market managers contributed positively to relative performance.
  • For the year, the fund has outperformed its benchmark due primarily to the benchmark-relative outperformance of the fund’s developed-market managers and one developing-market manager and the fund’s overall allocation to developing-country stocks.

Multiple Asset Fund

Fund July Year-to-Date
Multiple Asset Fund +5.0% +2.4%
Composite Benchmark +5.3% +2.2%
Difference -0.3% +0.2%
  • The Multiple Asset Fund underperformed its composite benchmark slightly in July, due to the relative underperformance of the International Equity Fund and U.S. Equity Fund. However, this underperformance was offset by the better-than-benchmark performance of the Inflation Protection Fund and Fixed Income Fund.
  • For the year, the fund has outperformed its composite benchmark due to the relative outperformance of the International Equity Fund and U.S. Equity Fund. However, this outperformance was offset by the less-than-benchmark performance of the Inflation Protection Fund and Fixed Income Fund.

Balanced Social Values Plus Fund

Fund July Year-to-Date
Balanced Social Values Plus Fund +3.8% +1.2%
Composite Benchmark +4.0% +0.6%
Difference -0.2% +0.6%

 

 
close (X)