January 2006 Investment Report

Corporate Earnings Help January Markets

Despite several adverse economic events during the month, favorable investor reaction to strong corporate earnings reports influenced stock prices to move higher. At month's end, with about half of the Standard & Poor's 500 stocks having issued their latest quarterly reports, 63% reported earnings greater than analysts' expectations. Although the "headline" S&P 500 Index advanced 2.7%, small company stocks and world markets surged. In the U.S., the Russell 2000 Index (the most popular index for small company stocks) advanced 9%. The stocks of companies domiciled in the 20 developed countries outside of the U.S. advanced 6% and the stocks of companies domiciled in underdeveloped countries surged 11%.

Oil prices rise steeply over global unrest …

… resulting mainly from threats to supply if the United Nations were to impose sanctions against Iran, OPEC's second-largest producer, as a result of its nuclear ambitions. Disruptions in Nigerian oil supplies amid rising civil unrest also impacted prices. Oil began the month at $62.35 a barrel and ended at $69.28. The concern is how these prices will be reflected not only in the price of the gasoline we pay at the pump, but in other goods and services that are dependent upon the price of gasoline and other oil products.

Weekly jobless claims reach a five-year low …

… when the number of newly laid-off workers filing claims for unemployment benefits fell to 288,500. This is the lowest level since September 2000, which was the conclusion of one of the country's longest and vibrant economic expansions.

2005 orders for big-ticket factory goods climb to all-time high …

… as demand for military aircraft, machinery and autos all posted strong gains. This was the third consecutive annual increase following a 10% increase in 2004 and 4.2% in 2003 after posting declines in 2002 and 2001, the year the country was in recession. Gains in big-ticket goods are often an indictor of economic activity and can signal strength in the labor market.

Construction of new single-family homes surged to an all-time high in 2005 …

… but recent trends in construction are negative, possibly signaling the nation's housing boom could be cooling off. Sales of both new and existing homes have been at record levels for five straight years. This is largely attributable to favorable interest rates and increased speculation by individuals purchasing second (and third and fourth) homes. The concern is that housing prices have steeply increased, and many consumers have borrowed against equity in their homes and could be holding debt backed by an asset that has reduced in value. If they are required to sell their homes to cover debt, they may have to sell at prices less than what they paid.

Americans are more optimistic about the economy …

… as indicated by The Conference Board, which reported that its consumer confidence index rose to 106.3, the highest level since June 2002, when the reading was also 106.3.

The Federal Reserve boosts interest rates one-quarter percentage point …

… to 4.50% in Alan Greenspan's last meeting as Chairman of the Federal Open Market Committee, known as the Fed and the governing body that sets the Fed funds rates and influences other interest rates. Greenspan retired after 18 years of running the Fed and is succeeded by Ben Bernanke, who had been a professor and chair of the Economics Department at Princeton University and Chairman of the President's Council of Economic Advisors. All indications are that Chairman Bernanke will closely monitor the economy for signs of inflationary pressures and quickly act (through interest rate hikes) on any hints that inflation may threaten the economy.

Wholesale prices increase at the fastest pace since 1990 …

… the year when Iraq invaded Kuwait and impacted global energy prices. Surging gasoline costs following Hurricane Katrina are largely to blame for the overall price spike. Economists fear that producers will pass wholesale prices through to consumers, creating inflation and impeding their spending power.

Consumer prices in 2005 experience biggest jump since 1990 …

… reflecting a surge in energy costs. The overall Consumer Price Index was up 3.4% for the year. However, core inflation, which excludes food and energy, increased 2.2% in 2005, unchanged from the 2004 gain. For December, inflation actually dropped by 0.1%. Inflation will be the key measure the Fed will consider when determining whether or not to increase rates.

And the dollar weakens …

… as investors anticipate an end to interest rate hikes. During 2005, the dollar strengthened as the U.S. currency became more attractive while the Federal Reserve continued to raise interest rates. In January, however, investors began anticipating a near term end to interest rate increases, reducing the appeal of the U.S. currency.

Fund Performance

On January 1, 2006, the General Board restructured five of its investment funds. The Inflation Protection Fund, the Domestic Bond Fund, and the Domestic Stock Fund have changed from employing solely passive investment management strategies to employing combinations of active and passive investment management strategies. The International Stock Fund continues to employ an active investment management strategy, with a broader universe of investment managers. The Multiple Asset Fund is now comprised of portions of four other General Board funds, rather than a separately managed stand-alone fund that is invested in the asset classes represented by the four funds. It is a "fund of funds," investing in predetermined allocations of the Inflation Protection Fund, the Domestic Bond Fund, the Domestic Stock Fund and the International Stock Fund. Although changing structurally, the Multiple Asset Fund offers the same investment managers and investment styles as it previously did.

The changes to the four of the five funds (excluding the Multiple Asset Fund) result in greater diversification both in terms of investment managers and investment management styles. The General Board believes that these changes will contribute to improved investment performance. Performance results for the month of January validated this belief, though admittedly it is far too early to draw any meaningful conclusions. Four of the five restructured funds meaningfully surpassed the investment returns of their respective benchmarks. Except for the Inflation Protection Fund, all General Board funds achieved positive returns in the first month post-restructuring.

The Inflation Protection Fund produced a very slight negative return for the month and slightly underperformed its performance benchmark, which returned 0.1%. The portfolio's fractional decline is attributed to transaction costs resulting from large purchases by the fund as a result of the transition to the LifeStage Investment Management Service.

The Domestic Bond Fund rose 0.7% during January, and meaningfully outperformed its benchmark by 0.6%. The fund's holdings in bonds from developed and emerging countries denominated in non-U.S. currencies provided most of this excess performance as a result of the weakening dollar. These holdings are actively managed and were added as part of the January 1 restructuring.

The Multiple Asset Fund advanced a strong 3.6% during the month and also meaningfully outperformed its benchmark by 0.7%. Due to large increases in values of the Domestic Stock Fund and the International Stock Fund, the Multiple Asset Fund had a slight overweight in its holdings of these two funds by the end of the month. This, in combination with the excess performance attained by the underlying funds, led to MAF's favorable performance compared to the benchmark. In accordance with the General Board's policies for managing the fund, MAF was rebalanced at the beginning of February, in order to bring the holdings of underlying funds back in line with target guidelines. Rebalancing in this fashion allows MAF investments to be allocated as originally intended and also takes advantage of selling high and buying low, i.e., selling some investments when they have appreciated in price and purchasing other investments when they have not appreciated as much or have depreciated in price.

The Domestic Stock Fund advanced 4.1% in January, ahead of its performance benchmark, the Russell 3000 Index, by 0.8%. The Domestic Stock Fund holds more small/mid cap stocks than does its performance benchmark, and the excess investment returns for the month of January are almost entirely attributable to the fund's exposure to these stocks.

The International Stock Fund produced an excellent investment return of 7.6% for the month of January and also beat its performance benchmark, returning 0.6% more than the MSCI All Country World Index, ex-USA (the new benchmark for the International Stock Fund). Dollar weakening and the very strong performance in the stock markets of underdeveloped (emerging) countries were the primary contributors to this excess performance.

The Balanced Social Values Plus Fund was unaffected by the January 1 restructuring. The fund returned 3.1% for the month, meaningfully ahead of its benchmark by 1.0%.

Market Indices for January 2006

sp0601 The S&P 500 is up 2.5% for January and the year.
russ0601 The Russell 2000 is up 8.9% for January and the year.
msci0601 The MSCI World ex-USA index is up 6.28% for January and the year.

The performance data for these charts is based on price changes only and do not include the impact of dividend payments.

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