March 2006 Investment Report

The Markets Continue to Roar

The stock markets came roaring into March and left largely the same way. Though economic reports kept investors on edge throughout the month, it could not hold back stocks as they registered another month of excellent performance. Strong economic data during the month kept investors speculating that the Federal Reserve (Fed), under new chairman Ben Bernanke, would continue its rate tightening campaign in order to reduce the potential for higher inflation. A strong job market and consumer confidence, at its highest since May of 2002, gave strength to that perspective. Still, weaker economic data, such as retail sales, durable goods, and the Producer Price Index, gave investors hope that the Fed would pause.

Investor hope proved short-lived as the Federal Reserve boosted the Fed Funds Rate to 4.75% …

… the highest level in five years. This marks the 15th consecutive quarter-point move since the Fed began tightening back in June 2004. This was Chairman Ben Bernanke's first interest rate policy meeting. Some economists believe several more rate hikes might be forthcoming. The strategy has been to hike rates gradually to fight inflation while not giving a jolt to investors. The Fed's goal has been to reach an interest-rate level that is neither stimulating nor depressing to economic growth. Investor concern of higher interest rates negatively impaired performance of the broad bond market, which declined nearly 1% for the month of March.

Rates on 30-year mortgages jumped to the highest level in 3 1/2 years …

… driven higher by inflation worries in the financial markets. The rising rates have begun to adversely impact the housing market, which has experienced record growth over the last five years. In February, new homes sales plunged by the largest amount in nearly nine years, and the median price fell for the fourth month in a row. Many fear that the housing market bubble may burst, as did the stock market in 2000.

Employers added 243,000 jobs in February …

… the most in three months. While wage growth is good for workers, a big pickup in wages—if sustained—can stir fears about inflation among economists and at the Federal Reserve.

America's current account deficit hits record of $804.9 billion in 2005 …

… as the country went deeper into debt to foreigners. The Commerce Department said the deficit in the current account was up 20.4% from the previous record of $668.1 billion set in 2004. The current account is the best measure of trade because it tracks not only goods and services but also investment flows between countries. Economists worry that the trade deficit has grown so large that foreigners may balk at holding so much of their investments in U.S. assets such as stocks and bonds. If they began selling their U.S. assets, it could send the value of U.S. stocks and bonds plunging, pushing up American interest rates and weakening the value of the dollar. If the disruptions were severe enough, it could push the country into a recession.

Given the uncertainty surrounding interest rates …

… stocks could face additional volatility going forward as higher rates would cut into corporate profitability and bonds could become more attractive investments. Oil continues to be a factor. There is great concern that inflated oil prices will creep into the economy and fuel inflation, spurning further interest-rate hikes. During March, oil prices opened the month at $64.06 a barrel and closed at $68.67 a barrel. Finally, first quarter earnings season will start in April; investors will watch closely for signs inflation cutting into corporate profits.

Fund Performance

For the month of March, performance for the General Board's funds was mixed. Stock funds and funds with a significant exposure to stocks gained about 1-2%, while the two bond funds lost 1-2% of their value. Four of the six funds outperformed their respective performance benchmarks. For the first three months of the year, all but one of the General Board's funds produced positive returns and all but one fund had better than benchmark performance.

The Inflation Protection Fund (IPF) declined 1.7% for the month, but outperformed its benchmark by 0.5%. Although the benchmark for the fund fell 2.2%, it is not unusual for the returns on inflation protected securities to fluctuate with investor expectations for returns after inflation. Inflation protected securities are predominantly high quality government bonds with fairly predictable long-term real rates of return (i.e. after factoring out the impact of inflation). Investors should generally ignore the month to month fluctuations in the fund as they are more related to imbalances in the supply and demand for inflation protected securities as opposed to weakness in the fundamentals of the issuing countries. The fund did outperform its benchmark because of two factors. The investment manager for a portion of the fund added value through active selection of inflation protected securities that did not perform as poorly as the benchmark. Additionally, the General Board's recent investment of 10% of the fund in commodities futures contracts added value as commodity prices generally rose in March. For the year, the IPF has declined 2.0% and its performance benchmark has declined 2.1%.

The Domestic Bond Fund (DBF) declined 1.0% during March, and slightly underperformed its benchmark return of -0.9%. The fund declined as a result of rising interest rates. Rising interest rates negatively affect the price of bonds. The fund's performance was impaired by its exposure to bonds from lesser developed countries. This was partially offset, however, by the fund's exposure to bonds denominated in currencies other than the U.S. dollar. The dollar fell relative to other currencies in February. For the year, DBF is up 0.3% and is handily outpacing the performance benchmark's return of -0.5%

The Multiple Asset Fund advanced 1.1% during the month and exceeded the return of its performance benchmark by 0.2%. The strong performance of U.S. and international stocks contributed to the fund's gain for the month. The benchmark relative performance of the fund was primarily helped by the returns of the Domestic Stock and Inflation Protection components, and slightly offset by the benchmark relative return of the International Stock component. For the year, the fund remains comfortably ahead of its benchmark and is up 4.8% compared to the benchmark return of 3.9%. The benchmark relative performance of the Domestic Bond and Domestic Stock Funds has enhanced returns, whereas the benchmark relative performance of the International Stock Fund has detracted from returns for the first three months of the year.

The Domestic Stock Fund advanced 2.4% in March and meaningfully surpassed its performance benchmark return of 1.7%. Once again, gains in the real estate holdings of the fund helped performance. Additionally, exposure to stocks of small and mid-sized companies also meaningfully contributed to performance results. For the year, the fund is up 6.9% and its benchmark is up 5.3%. The same factors that contributed to relative performance for March have also added to performance for the year.

The International Stock Fund gained 2.3% for the month of March. However, the fund underperformed its benchmark, which gained 2.9%. The fund's meaningful exposure to stocks of lesser developed countries detracted from performance along with the collective underperformance of the fund's developed country international managers. For the year, the fund is up 8.9% and trails the benchmark return of 9.7%. For the three month period, the return of stocks from lesser developed countries has helped performance, but five of the fund's six investment managers have underperformed their benchmarks, and this has detracted from the fund's performance.

The Balanced Social Values Plus Fund gained 1.2% in March compared to a gain of 0.8% for its benchmark. The fund's exposure to companies with earnings growth that is faster than the overall market and its exposure to stocks of small and mid-sized companies helped performance. For the year, the fund is up 4.1%, which is 0.8% better than the performance benchmark.

Market Indices for March 2006

sp0603 The S&P 500 Index was up 1.0% in March and is up 3.7% for the year.
russ0603 The Russell 2000 Index was up 4.7% in March and is up 13.6% for the year.
msci0603 The MSCI World ex-USA Index was up 2.7% in March and is up 8.7% for 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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