April 2007 Investment Report

First: inflation …

In April, economists and investors continued to monitor any data on the direction of economic growth versus the level of inflation. First: inflation. There are two key measures of inflation: Producer Price Index (PPI) which measures inflation on the wholesale level and the Consumer Price Index (CPI) which measures inflation at the consumer level. The PPI measure released in April reflected a larger than expected increase in inflation. The PPI is considered a leading indicator of future price changes. After all, if companies have to pay more for materials, they may pass on raw material price increases to consumers. Higher inflation readings may also cause the Federal Reserve to raise interest rates. Thus, the higher than expected reading for PPI was a concern in April. However, the CPI data released in April was better received, as inflation measured by CPI came in lower than expected. The level of Inflation will continue to be monitored.

Next: growth …

The advanced first estimate of Gross Domestic Product (GDP) for the first three months of the year was lower than expected at 1.3%, and lower versus the last three months of 2006 reading of 2.4%. The lower GDP reading was primarily due to a decline in exports and a decline in housing related activities. This release marked the fourth time in a row that GDP growth was less than 3%, considered the long-run potential of the economy. However, other reports revealed some strength in the economy. The durable goods report released in April, which measures orders for big –ticket items like machinery and equipment, was strong. This gave investors hope that business spending was strong and that the slowdown in housing was not dragging down the economy. Additionally, the Institute of Supply Management index, which measures manufacturing on a national level, also rose by more than expected.

So, despite the slowdown as measured by the advance estimate of the first quarter’s GDP, signs of growth at the business level appear on track. Some concern remains regarding the consumer, given that consumer spending has kept the economy strong. Consumer Confidence continued to fall in April as consumers are concerned about the current state of the economy. Consumers are most likely feeling pressured by higher gasoline prices, lower home prices, and increasing foreclosures. The consumer confidence measure is used as an indicator of future consumer spending.


Although Iran released British naval personnel at the beginning of April, concluding a tense time and ending speculation of British military action against Iran, the price of oil did not retreat as hoped. Worry shifted to low gasoline inventories, refinery outages, and the possibility of an active hurricane season. Oil ended the month at $65.71/barrel, barely budging from the run-up created by the British-Iran conflict.

Market Reaction

The mix of hopeful economic news and strong earnings reports yield enthusiastic stock markets. Better than expected earnings report from companies like Microsoft, Apple, Google, and hope that the slowdown in housing wasn’t spreading through the economy drove the Dow above 13000 for the first time ever. Company earnings reports were strong as growth outside the U.S. continues to be robust, benefiting U.S. multinationals. A weaker U.S. dollar is also boosting overseas revenues for large multinationals.

In April, the Dow was up 5.7%, the S&P500 gained 4.4% and the Nasdaq returned 4.3%. There was enough uncertainty in the markets to keep investors interested in fixed income as U.S. bond markets gained in April as well. The strong April returns boosted financial markets back into positive territory for the year. For the year, the Dow is up 4.8%. The S&P 500 is up 5.1% and the Nasdaq is up 4.6%.

Investment Fund Review

All six daily priced funds offered by the General Board increased in value in April. International stock markets outperformed U.S. stock markets in April and so far in 2007. For the year, all of the General Board’s funds have produced positive returns. Four funds have outperformed their respective benchmarks and two funds have underperformed.

The Inflation Protection Fund gained 0.8% in April, surpassing its performance benchmark which returned 0.7%. The fund’s 10% allocation to commodities continued to help the fund’s performance in April as commodity prices rose and the fund’s commodities manager outperformed its benchmark. For the year, the fund has gained 3.3%, ahead of its benchmark return of 3.2%. The strong performance by commodities and by the fund’s commodities manager contributed the most to the fund’s outperformance. This was partially offset by the fund’s exposure to international inflation-linked bonds, which have failed to match the performance of U.S. Treasury Inflation Protected Securities.

The Domestic Bond Fund gained 0.8% in April, also ahead of its performance benchmark which returned 0.6%. The primary factor influencing the fund’s return in April was the allocation to debt from lesser developed countries and global bonds. Continued weakness in the U.S. dollar also helped the fund’s performance of non-U.S. bonds. This was partially offset by a market anomaly that adversely affected the fund’s affordable housing portfolio. Bond investors have indiscriminately penalized mortgage backed securities due to problems in the sub-prime mortgage market. As the fair value of the fund’s affordable housing loans are directly linked to the market price of mortgage securities, the value of the fund’s affordable housing loans have also declined. However, the affordable housing portfolio has absolutely no exposure to sub-prime mortgages and we believe this anomaly will correct in coming months. For the year, the fund has gained 2.3%, slightly ahead of the 2.2% return of its performance benchmark. The primary factors influencing the fund’s performance year to date are the same factors cited for the month of April.

The International Stock Fund was the best performing fund at the General Board in April, soaring 4.7%, ahead of its performance benchmark which produced an investment return of 4.6%. As economies outside of the United States continue to grow, foreign stocks continue to profit. The International Stock Fund’s performance reflects this growth. For the year, the fund has gained 8.4% compared to the benchmark return of 8.5%. The fund has benefited from its exposure to small international companies and stocks from companies domiciled in lesser developed countries. The positive impact of these two factors, however, has been offset by the fund’s investment management and fund administration expenses.

The Multiple Asset Fund turned in solid performance in April, gaining 2.9%, and matched the results of its benchmark. For the year, the fund has gained 5.5% compared to its benchmark return of 5.0%. This outperformance is attributable to the better than benchmark performance of the Domestic Stock Fund.

The Balanced Social Values Plus Fund advanced 1.3% in April, underperforming its benchmark by 1.3%. The primary factor contributing to the fund’s underperformance was poor performance by the equity portion of the fund. Several of the manager’s positions were adversely impacted by poor earnings reports. For the year, the fund has gained 3.4% compared to the 4.0% return of the benchmark.

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