December 2013 Investment Report

Markets

  • U.S. equities as represented by the Russell 3000 Index increased 2.6% during December. The market reacted positively to the U.S. Federal Reserve’s (Fed’s) decision to taper its bond-buying program and to the approval of a budget agreement in the U.S. Congress. The Dow Jones Industrial Average completed the year up 26.5%, its biggest annual rally since 1995.
  • Investors favored large companies during the month, with the Russell 1000 Index of large companies gaining 2.7% while the Russell 2000 Index of small companies gained 2.0%. For the year though, the Russell 2000 Index gained 38.8% compared to the Russell 1000 return of 33.1%. Companies with strong earnings growth performed better than those classified as “value” for the quarter and the year, across all market capitalizations.
  • Developed country international equities as measured by the MSCI EAFE Index gained 1.5% during the month. Developing country equities as measured by the MSCI Emerging Markets Index IMI declined 1.3%. For the year, developed country international equities gained 23.3% while riskier emerging (developing) market equities declined 2.2%.
  • The U.S. Treasury yield curve rose during December, with the largest yield increases occurring in the intermediate portion of the yield curve. The 2-year U.S. Treasury Note yield increased by 0.10% to 0.38%. The 10-year Note yield increased by 0.29% to 3.04%, which was its highest yield in more than two years. The long bond (30-year U.S. Treasury) increased 0.16% in yield to 3.98%.
  • U.S. Treasury securities as measured by the Barclays U.S. Treasury Index decreased 0.9% in December, reflecting the increase in yields along most of the Treasury yield curve. Investment-grade debt as measured by the Barclays U.S. Credit Index decreased 0.3% during the month. Below-investment-grade debt as measured by the Barclays U.S. Corporate High Yield Index increased 0.5% and outperformed less-risky government and investment-grade debt, as investors favored the more risky below-investment grade bonds in light of moderate economic improvement.
  • The U.S. dollar as measured by the U.S. Dollar Index decreased 0.8% in December. During the month, the euro increased 1.1% relative to the dollar. The euro’s strength was partially attributed to comments by European Central Bank President Mario Draghi that no further interest rate reductions are needed. The British pound increased 1.2% amid positive economic signs in the United Kingdom. The Japanese yen decreased 2.7%, reflecting Japan’s continued commitment to highly accommodative monetary policies that caused the yen to decline 17.6% relative to the dollar during 2013.
  • Commodities as represented by the Dow Jones UBS Commodity Index increased 1.2% in December. Energy and industrial metals were the strongest segments of the index and increased 4.8% and 4.9%, respectively. Grains and precious metals were the weakest segments and decreased 3.9% and 3.7%, respectively. Within precious metals, the price of gold decreased 4.1% in December. Gold’s one-year price decline of 28.3% has been attributed to decreasing Federal Reserve stimulus, improvement in the economic outlook, low inflation and strong stock market returns.

Economics Highlights

  • The Federal Reserve announced it will reduce the pace of its monthly bond purchase stimulus beginning in January to $75 billion from the $85 billion it had been buying since September 2012. The news sent markets sharply higher as Fed Chairman Ben Bernanke explained the decision was based on the “cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions.” Bernanke will step down as Fed chairman on January 31 and will be replaced by Janet Yellen.
  • President Obama signed into law a two-year, bipartisan budget agreement introduced by Sen. Patty Murray (D-Washington) and U.S. Rep. Paul Ryan (R-Wisconsin). The deal avoids a cycle of fiscal brinksmanship by preventing another partial government shutdown for nearly two years. The deal, however, does not address the $16.7 trillion federal debt ceiling that will be reached in the first half of 2014.
  • The Individual Mandate of the Patient Protection and Affordable Care Act, also known as ACA or “Obamacare,” went into effect on January 1, 2014. The ACA, which aims to increase the quality and affordability of health insurance, continued to garner media attention during December as the Obama Administration offered a last-minute extension to the sign-up deadline, and Supreme Court Justice Sonia Sotomayor issued an eleventh-hour stay preventing portions of the mandate from taking effect for certain religious organizations.

Geopolitical Headlines

  • Nelson Mandela, former president of South Africa, died at the age of 95 at his Johannesburg home after a long illness. Mandela rose from being an imprisoned anti-apartheid activist to become the first black president of South Africa and a global symbol of racial reconciliation.
  • Two federal judges reached opposite conclusions regarding constitutionality of the U.S National Security Agency’s (NSA’s) gathering of massive amounts of private telephone and computer data throughout the world. Sen. Rand Paul (R- Kentucky) introduced a class action suit against the NSA’s spying program in an effort to protect the Fourth Amendment.
  • Less than two months before the start of the 2014 Winter Olympics in Sochi, Russia, a pair of suicide bombings killed at least 34 people in that country.
  • U.S. Secretary of State John Kerry visited multiple Middle Eastern countries in an effort to further peace talks regarding the Syrian Civil War. The ongoing conflict between those loyal to the Ba’ath government and those opposed to it broke out in March 2011 and has resulted in more than 130,000 deaths.

Sources: Bloomberg News, the Economist, the Wall Street Journal, CNBC, CNN, Associated Press, Reuters and Bridgewater Associates

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

M/M=Month-over-month (% change since last month)
Q/Q = Quarter-over-quarter (% change since last quarter)
Y/Y = Year-over-year (% change since the same month, last year)
SA = Seasonally adjusted
SAAR = Seasonally adjusted annual rate

Source: briefing.com–economic statistics; Econoday; description of the economic indicators

Investment Fund Review (Net of Fees Performance)

For returns of one year, three years, five years and Since Inception periods, please visit our Historical Funds Performance page.

Inflation Protection Fund (IPF)

Fund December QTD Year-to-Date
Inflation Protection Fund -0.83% -1.24% -6.59%
Barclays Capital U.S. Government Inflation-Linked Bond Index -1.52% -2.16% -9.26%
Difference +0.69% +0.92% +2.67%

 

  • The Inflation Protection Fund declined 0.83% in December but outperformed the fund’s benchmark return of -1.52%. The Federal Reserve’s decision to begin tapering its bond-buying program signaled its confidence that future economic growth will result in higher real interest rates for inflation protection assets. All of the fund’s diversifying strategies contributed to the IPF’s better-than-benchmark performance, with the fund’s 10% allocation to commodities futures contracts gaining 1.9%.
  • For the quarter, the Inflation Protection Fund declined 1.24% and outperformed its benchmark return by 0.92%. As with the month of December, all of the fund’s diversifying strategies contributed to the IPF’s positive benchmark-comparative performance. The fund’s 10% allocation to floating rate senior-secured loans contributed the most, gaining 1.7% for the quarter. The fund’s 10% allocation to commodities futures contracts gained 0.4%.
  • For the year, the Inflation Protection Fund was the worst-performing General Board/Wespath fund, as it declined 6.59% but produced meaningful excess performance compared to the fund’s benchmark return of -9.26%. Three of the fund’s diversifying strategies contributed positively to benchmark-relative performance, including the fund’s allocation to floating rate senior-secured loans, which gained 5.1% in 2013. The allocation to floating rate senior-secured loans was the best-performing strategy within the Inflation Protection Fund. The fund’s allocation to inflation-linked bonds of developed countries and commodities futures contracts performed better than the benchmark, declining 3.7% and 4.4% respectively. However, the fund’s allocation to bonds from developing countries detracted from performance, declining 13.3% in 2013.

Fixed Income Fund (FIF)

Fund December QTD Year-to-Date
Fixed Income Fund -0.28% +0.84% -0.73%
Barclays Capital U.S. Universal (ex MBS) Index -0.42% +0.43% -1.32%
Difference +0.14% +0.41% +0.59%

 

  • The Fixed Income Fund declined 0.28% in December and outperformed its benchmark return by 0.14%. The fund’s two higher-risk bond strategies contributed positively to benchmark-relative performance, gaining about 0.5%. In addition, the fund’s allocations to bonds from developed and developing countries contributed to FIF’s excess benchmark returns by producing modest gains during the month. FIF’s 9% allocation to positive social purpose loans detracted from the fund’s benchmark-relative performance, declining 1.6% due to the loans’ longer maturity and the increase in long-term interest rates resulting from the Fed’s decision to begin tapering its bond-buying program.
  • For the quarter, the Fixed Income Fund gained 0.84% and outperformed the benchmark return by 0.41%. The fund’s two allocations to below-investment-grade debt gained about 3% and contributed positively to benchmark-relative performance. The fund’s 9% allocation to positive social purpose loans declined 0.4% and detracted from performance.
  • For the year, the Fixed Income Fund declined 0.73%, which was the first negative return for the fund since its inception in 1998. The fund outperformed its benchmark return by 0.59%. FIF’s two allocations to below-investment-grade debt gained more than 7% and contributed positively to benchmark-relative performance. The fund’s allocation to positive social purpose loans gained 3.6% and contributed positively to benchmark-relative performance. However, FIF’s allocation to developing countries declined 6.7% and detracted from performance.

U.S. Equity Fund (USEF)

Fund December QTD Year-to-Date
U.S. Equity Fund +2.86% +8.97% +34.29%
Russell 3000 +2.64% +10.10% +33.55%
Difference +0.22% -1.13% +0.74%

 

  • The U.S. Equity Fund gained 2.86% in December and outperformed the fund’s Russell 3000 Index benchmark by 0.22%. The fund’s positive benchmark-relative performance resulted primarily from recognition of gains in its private equity holdings.
  • For the quarter, the U.S. Equity Fund advanced 8.97% but underperformed the fund benchmark return of 10.10%. USEF’s exposure to private and public real estate detracted from its benchmark-relative performance; USEF lost 1.3% while its benchmark gained 0.3%. In addition, the fund’s higher-than-benchmark allocation to small and mid-sized companies detracted from its performance, as the Russell 2000 Index of small companies gained 8.7% compared to the S&P 500 gain of 10.1%. A third factor contributing to USEF’s underperformance in this quarter was the below-benchmark fourth-quarter performance by Seattle-based Zevenbergen Capital Investments, which otherwise was USEF’s best-performing manager for 2013. After a very strong first nine months, the manager’s portfolio gained 6.2% in the fourth quarter compared to the manager’s benchmark return of 10.2%.
  • Despite its fourth-quarter underperformance, the U.S. Equity Fund gained 34.29% for the year, which represents the best annual performance in the fund’s history, surpassing its 2003 return of 30.93%. USEF outperformed its benchmark return by 0.74% for the year. The fund’s active managers collectively outperformed their respective benchmarks by benefiting from their collective higher-than-benchmark allocations to small and mid-sized companies. The Russell 2000 Index of small companies gained 38.8% for the year. Major contributors to the fund’s excess performance were Zevenbergen Capital Investments and the small company portfolio managed by Baltimore-based Brown Capital Management, which achieved 2013 returns of 62.0% and 51.3% respectively. Both portfolios substantially outperformed their respective portfolio benchmarks. The contributions from the USEF’s active managers, however, were partially offset by the fund’s allocation to the diversifying strategies of public real estate investment trusts (REITs) and alternative investments. The fund’s public real estate portfolio gained only 1.0% for the year, and the fund’s allocations to private real estate and private equity returned 11.5% and 14.8% respectively.

International Equity Fund (IEF)

Fund December QTD Year-to-Date
International Equity Fund +1.21% +4.57% +16.51%
MSCI ACWI ex US +0.99% +4.75% +15.82%
Difference +0.22% -0.18% +0.69%

 

  • The International Equity Fund advanced 1.21% in December and outperformed its benchmark return of 0.99%. The fund benefited from its slightly below-benchmark allocation to the stocks of developing countries, as the MSCI Emerging Markets Index declined 1.3% for the month. In addition, IEF’s allocation to international REITs declined 0.9% and detracted from performance. Finally, the fund’s performance benefited from the daily valuation policy implemented in September by the General Board’s Wespath investment management division. The new policy will positively or negatively impact benchmark-relative performance, depending on what transpires in the U.S. markets on the last business day of each month. The U.S. markets gained late in the day on December 31, resulting in the recognition of additional gains for the fund. The international daily valuation policy is described here.
  • For the quarter, the International Equity Fund gained 4.57% and slightly underperformed the fund’s benchmark by 0.18%. The fund’s allocation to international REITs detracted from benchmark-relative performance, declining 0.1%. IEF benefited from recognition of the U.S. market gain on December 31 as described above.
  • For the year, the International Equity Fund gained 16.51% and outperformed its benchmark return by 0.69%. IEF’s allocation to small international companies gained 24.9% and positively contributed to the fund’s benchmark-relative performance. The fund has also benefited from its below-benchmark allocation to the stocks of developing countries, as the MSCI Emerging Markets Index declined 2.2% in 2013. The fund’s allocation to international REITs gained 6.1% for the year and detracted from benchmark-relative performance. In addition, one of the fund’s active managers underperformed its benchmark by approximately six percentage points, further detracting from the fund’s benchmark-relative performance. Finally, as described above, IEF’s year-long performance benefited from recognition of the U.S. market gain December 31, as described above.

Multiple Asset Fund (MAF)

Fund December QTD Year-to-Date
Multiple Asset Fund +1.38% +5.04% +17.08%
Composite Benchmark +1.13% +5.32% +15.99%
Difference +0.25% -0.28% +1.09%

 

  • For December, the Multiple Asset Fund gained 1.38% and outperformed its fund benchmark by 0.25%. All four of the fund’s strategies contributed to its positive benchmark-relative performance.
  • For the quarter, the MAF returned 5.04% but underperformed its benchmark’s 5.32% return. Both the Fixed Income Fund and Inflation Protection Fund contributed positively to MAF’s performance, but their contributions were more than offset by the underperformance of MAF’s two equity funds (USEF and IEF).
  • For the year, MAF gained 17.08% and outperformed its benchmark return by 1.09%. All four of the fund’s strategies contributed to the fund’s excess performance as they all outperformed their respective benchmarks.

Balanced Social Values Plus Fund (BSVPF)

Fund December QTD Year-to-Date
Balanced Social Values Plus Fund +1.53% +5.93% +20.06%
Composite Benchmark +1.58% +5.92% +20.08%
Difference -0.05% +0.01% -0.02%

 

 
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