September 2011 Investment Report


As in August, the world stock markets continued to exhibit excessive volatility in September with the U.S. stock markets declining 7.8% and the international markets falling 11.3%. The U.S. and world stock markets have now declined approximately 19% and 23% respectively since their peak near the end of April. In addition, other “risk” assets declined in value as investors across the globe seemed to reach consensus that the world economy is likely to return to recession, though current economic data in the U.S. and the world tend to belie such a notion.

When world investors are pessimistic, they will sell risk assets and migrate to the safety of U.S. Treasury Securities. This means that the U.S. dollar will appreciate against foreign currencies, and increased demand for U.S. Treasury Securities will send their prices higher and interest rates lower. Throughout 2011, interest rates have been at historically low levels for long-term U.S. Treasury Bonds perceived by investors as “super safe.” Still, bond yields plummeted further after the Federal Reserve announced “Operation Twist” (described below) and investor sentiment about the economy became more pessimistic. This occurred despite last month’s downgrade of U.S. debt by Standard and Poor’s (S&P). Remarkably, the Barclays Capital Treasury Long Term Index gained 9.8% for the month and an astounding 24.7% for the quarter ending September 30. When the month ended, investors buying a 30-year U.S. Treasury Bond were willing to accept a mere 2.9% interest rate for the next 30 years. Those purchasing such a bond should exercise extreme caution, as just a 1% increase in interest rates will result in a loss of about 18% of the value of the bond.

The continuing market turmoil is widely attributed to a lack of meaningful resolution to the Greek debt crisis. With a population and land mass similar to the state of Ohio and an economy that comprises less than 2% of the European economy, investors fear that an uncontrolled Greek default will set off a chain of calamities, resulting in the dismantling of the Euro zone and economic hardship for Europe and the rest of the world for years to come. However, near month end, European leaders re-affirmed their commitment for achieving a responsible solution and U.S. Treasury Secretary Timothy Geithner has pledged U.S. support in helping to avert a crisis. We continue to believe that the U.S. and world economies will successfully navigate through the current crisis and modest economic growth will resume.


  • U.S. equities represented by the Russell 3000 Index declined 7.8% for the month, completing the fifth consecutive month of declines.
  • Large-company U.S. equities outperformed small-company U.S. equities due to the perceived relative safety of large-company equities in a possible “double-dip” recession. Among large-company equities, those with strong earnings growth performed better than equities classified as “value.”
  • International developed equities as measured by the MSCI EAFE Index declined 9.5% in dollar terms. Uncertainty regarding the Euro-zone debt crisis continued to drag on markets as the euro declined 6.7% versus the U.S. dollar. Equities of developing countries also declined as the MSCI Emerging Markets IMI Index dropped 14.7% during the month.
  • Yields declined across the U.S. yield curve as investors sought the safety of U.S. Treasuries on concerns surrounding U.S. economic growth, the Euro zone sovereign debt crisis and prospects of slowing growth in China. The yield on the U.S. 10-Year Treasury Note declined from 2.22% to 1.92%. The yield curve also experienced significant flattening during the quarter in anticipation of the Federal Reserve Bank’s (the Fed’s) Operation Twist monetary policy actions, discussed below. The yield on the U.S. 30-Year Treasury Bond declined 69 basis points (more than twice the decline in the 10-Year Note) to 2.91%.
  • Investment grade debt, as represented by the Barclays US Credit Index, advanced 0.2%. Lower-rated debt securities underperformed higher-rated debt securities as the Barclays Capital Corporate High Yield Index declined 3.3% in September.
  • Emerging market debt, particularly debt denominated in non-dollar currencies, experienced price declines as the U.S. dollar strengthened relative to emerging market currencies. For the month, the Brazilian real (-15.4%), Mexican peso (-11.3%), South African rand (-13.7%), and Russian ruble (-10.4%) weakened against the U.S. dollar.
  • Commodities declined on concerns about China’s slowing economy. The Dow Jones UBS Commodity Index fell 14.7% in September. Gold, which provided a perceived “safe haven” for much of the year, declined 12.4%.

Economics Highlights

  • The Fed announced Operation Twist, through which it intends to reduce longer-term interest rates and stimulate capital investment by purchasing $400 billion of long-term U.S. Treasury securities and selling an equal amount of short-term U.S. Treasury securities.
  • Second quarter gross domestic product (GDP) was revised upward to 1.3% from 1.0%, but is still not at a level required to produce significant job growth.
  • Housing remains a major drag on the economy. Residential investment, which measures funds spent on building and renovating homes, stands at 2.2% of GDP, its lowest level since 1945. Between 1950 and 2000, residential investment averaged more than twice the current level at 4.7% of GDP.
  • Uncertainty in the Euro-zone markets was a persistent theme throughout September. Markets seemed to fluctuate in direct relation to the latest news from the region, which included the resignation of a key German official at the European central bank, renewed concern over the solvency of leading French and German banks, and the passage of legislation in Germany to expand the Euro zone’s bailout fund.
  • Spain's government announced good news for those concerned that the Greek sovereign debt crisis may expand beyond Greece. Spain’s budget deficit through August declined and increased the potential that it will be able to meet its 6% deficit goal compared to 9% in 2010.

Geopolitical Headlines

  • The U.S. presidential election season began with several debates and preference polls held among the Republican candidates.
  • A protest movement known as “Occupy Wall Street” began in New York and it has been building momentum across the U.S. and overseas. While the protestors have not presented a common set of demands, its central focus is on economic inequality and corporate greed.
  • A rogue trader in the UBS London office generated over $2 billion of trading losses. This led to the resignation of the firm’s CEO and other top officials and raised questions about management oversight of trading activities in the financial sector.

Sources: Bloomberg News and the Wall Street Journal

Key Monthly Economic Statistics

This table contains a list of key monthly economic statistics. Each statistic is listed with a link to a Web page that provides a thorough description of the economic indicator.

  Positive Statistics
  Neutral Statistics
  Negative Statistics

Source:–economic statistics; Econoday–description of the economic indicators

Investment Fund Review (Net of Fees Performance)

Click here to see Historical Performance for one year, three years, five years, 10 years and since inception for all funds.

Inflation Protection Fund

Fund September Q3 2011 Year-to-Date
Inflation Protection Fund -2.6% +1.0% +5.6%
Barclays Capital U.S. Government Inflation-Linked Bond Index -0.2% +4.8% +10.9%
Difference -2.4% -3.8% -5.3%
  • The Inflation Protection Fund (IPF) declined 2.6% in September and meaningfully underperformed its benchmark as the fund’s 10% allocations to the diversifying strategies of commodities and bonds from developing countries suffered significant declines of 14% and 12% respectively. Global fears of renewed recession resulted in a flight away from risk assets.
  • For the quarter, the fund gained 1.0%, though significantly underperformed the benchmark return. A global sell-off of risk assets that accelerated in August contributed to approximately 12% declines for both commodities and debt from developing countries.
  • For the year, the fund has advanced 5.6% but trails its benchmark by 5.3%. The fund benchmark is comprised exclusively of U.S. Treasury Inflation Protected Securities (TIPS), although the fund invests only a portion of its assets in TIPS. Among all of the various General Board and Wespath strategies, TIPS is the best performing. However, the prospects for future comparable returns are minimal and dependent on rapid acceleration of U.S. inflation, which appears unlikely for the next several years.

Fixed Income Fund

Fund September Q3 2011 Year-to-Date
Fixed Income Fund -1.6% +0.3% +3.9%
Barclays Capital U.S. Universal (ex MBS) Index +0.3% +3.1% +6.1%
Difference -1.9% -2.8% -2.2%
  • As with the Inflation Protection Fund, the Fixed Income Fund (FIF) declined and meaningfully underperformed its benchmark in September. FIF was also the victim of global risk aversion as its developing country bond strategy fell 9.2% and other higher-risk bond strategies declined. The fund’s exposure to bonds denominated in currencies other than the U.S. dollar fell as the U.S. dollar strengthened because of global flight to quality.
  • For the third quarter, FIF recorded a marginal gain but underperformed its benchmark by 2.8%. The higher-risk strategies in the fund contributed to the poor relative performance, with developing country bonds declining 9%, and the fund’s other non-investment grade strategies falling between 4% and 5%. In addition, the fund’s largest core bond manager, PIMCO, suffered from its widely publicized underweight of U.S. Treasury Securities, which increased in value significantly during the quarter.
  • For the year, the fund has gained 3.9% and has underperformed its benchmark by 2.2%. The fund underperformed its benchmark for the same reasons as cited for the third quarter.

U.S. Equity Fund

Fund September Q3 2011 Year-to-Date
U.S. Equity Fund -7.9% -15.7% -10.7%
Russell 3000 -7.8% -15.3% -9.9%
Difference -0.1% -0.4% -0.8%
  • The U.S. Equity Fund suffered along with the broad stock market declining nearly 8% for the month of September and closely matched the performance of the fund benchmark. Several of the fund’s managers were positioned defensively and produced good relative performance for the month. In addition, the fund’s alternative investment strategies of private real estate and private equity helped relative performance. These positive contributions, however, were offset by the fund’s greater-than- benchmark allocation to small- and mid-sized companies, as the Russell 2000 Index of small companies and the S&P 400 Index of mid-sized companies declined 11.2% and 10.6%, respectively.
  • For the quarter, the fund suffered its biggest loss since its 22.2% loss in the fourth quarter of 2008. The fund’s 0.4% relative underperformance was again attributable to its greater-than-benchmark allocation to small- and mid-sized companies. For the quarter, both indexes registered bear market declines of 22% and 20% respectively. The negative contribution from the fund’s allocation to small- and mid-sized companies was partially offset by the fund’s allocation to alternative investment strategies.
  • The third quarter stock market declines erased the gains experienced through June 30, and the U.S. Equity Fund is now down 10.7% for the year, which is 0.8% below the performance of the fund’s benchmark. Although the fund’s two alternative investment strategies have gained roughly 5% for the year, the fund’s greater-than-benchmark allocation to small- and mid-sized companies more than offset the positive contribution from the fund’s alternative investments.

International Equity Fund

Fund September Q3 2011 Year-to-Date
International Equity Fund -11.5% -20.0% -17.9%
MSCI ACWI x US -11.3% -19.9% -17.1%
Difference -0.2% -0.1% -0.8%
  • The International Equity Fund suffered from a combination of the global equity sell-off and dollar strengthening. The fund slightly underperformed its benchmark as the fund’s allocations to small company international stocks, emerging markets stocks and international real estate investment trusts underperformed the broad international markets and detracted from performance. The fund’s modest allocation to private real estate partnerships incurred only a slight loss and partially offset the negative contribution of the other diversifying strategies.
  • For the quarter, the fund lost one-fifth of its value, nearly matching the performance of its benchmark. The fund’s two emerging market strategies declined 21% and 24%, which negatively contributed to relative performance, whereas the fund’s allocation to private real estate positively contributed to relative performance.
  • For the year, the fund has declined 17.9%, underperforming its benchmark return by 0.8%. The fund’s allocation to small company international stocks and emerging markets have detracted from relative returns, and the fund’s private real estate investments have contributed positively to returns.

Multiple Asset Fund

Fund September Q3 2011 Year-to-Date
Multiple Asset Fund -6.4% -11.0% -6.9%
Composite Benchmark -5.7% -9.9% -5.5%
Difference -0.7% -1.1% -1.4%
  • The Multiple Asset Fund (MAF) declined 6.4% for September as all four of MAF’s constituent funds underperformed their respective benchmarks, with the Fixed Income Fund and Inflation Protection Fund responsible for most of the below-benchmark performance.
  • MAF’s 11% decline in the third quarter was the second worst quarterly performance for the General Board’s and Wespath’s diversified/multiple asset strategy for the past 20 years. Only the 14.9% decline during the fourth quarter of 2008 was worse. MAF underperformed its benchmark by 1.1% as all four funds that comprise MAF underperformed their respective benchmarks.
  • For the year, MAF has declined 6.9%, underperforming its benchmark by 1.4% as all four funds have underperformed their respective benchmarks. Though the year-to-date performance of the fund is disappointing on both an absolute and relative basis, the long-term relative performance remains favorable. We believe the MAF is well positioned to excel in the months ahead.

Balanced Social Values Plus Fund

Fund September Q3 2011 Year-to-Date
Balanced Social Values Plus Fund -3.4% -6.5% -2.8%
Composite Benchmark -3.7% -7.4% -3.7%
Difference +0.3% +0.9% +0.9%


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