January 2008 Investment Report

Anxiety continued into January …

Investor sentiment remained negative with particular focus on the financial and housing sectors. Consensus opinion is building that weakness in these two areas will adversely affect the broader economy likely resulting in an economic slowdown, if not a recession. Indeed, one economic data point, the Institute of Supply Management’s index of U.S. manufacturing, declined to 47.7% in December. Measures below 50% signal economic contraction. There was other evidence that housing problems were spreading to manufacturing. Employment growth weakened as the number of jobs added to the economy in December was less than expected. Employment data failed to demonstrate the strength that would enable consumers to continue spending and support the economy. Retail sales, a measurement of consumer spending, decreased in December supporting rumors of weak holiday sales. Housing data released in January continued to highlight problems, as inventories for homes for sale increased and home prices decreased.

… as investors abandoned stocks and sought safety in gold and
U.S. Treasuries.

Investors looking for safe investments sent gold prices soaring from $833.92/oz at the beginning of the month to $925.99/oz by the end of January. Additionally, low risk U.S. Treasury bond prices increased, sending interest rate yields lower.

As a result of economic worries and a rogue trader …

Due to continued fear and uncertainty regarding economic growth prospects, investors looked to the Federal Reserve (Fed) to intervene in the form of interest rate cuts. Rate cuts by the Fed typically lower borrowing costs throughout the economy which encourages investment and spending. This often stimulates growth but also carries the risk of higher inflation. Additionally, the markets were severely impacted on January 21 after a French bank discovered that a junior level trader successfully subverted the bank’s internal control systems to take excessive risk trading index futures contracts for several European stock markets. Efforts by the bank to reverse the fraud caused significant disruption to the markets. Investors around the world panicked as the bank did not disclose the fraud until after it had liquidated the trader’s speculative positions. The U.S. markets were closed for the Martin Luther King holiday and did not suffer as Europe did. However, the pre-market open on Tuesday after the holiday indicated that stocks were likely to experience a major decline.

… the Federal Reserve continued to respond.

However, Fed Chairman Ben Bernanke acted decisively before the markets opened on January 22 and reduced the Fed Funds rate by 0.75% to 3.5%. This unexpected move occurred one week ahead of the Fed’s regularly scheduled meeting and was made to give investors confidence that the Fed would step in and help the economy to avoid a recession. Critics countered that such action may not have been taken were it not for the actions of the French bank. The Fed acknowledged that it did not know about the massive trading loss until after it announced the rate cut. One week later the Fed acted again and reduced the Fed Funds rate by 0.5% to 3.0% providing further stimulus to what it viewed as a faltering economy. Additionally, President Bush and Congressional leadership collaborated to expedite an economic stimulus package in the form of tax rebates.

As investors digested the Federal Reserve’s interest rate cuts, stock prices advanced. But, at month end, new reports on the financial wellbeing of the nation’s bond insurers renewed concerns among investors. Several companies provide insurance to bond investors in the event of default by the company, government or other entity issuing the bond. Massive losses resulting from the subprime mortgage crisis, however, have threatened the ongoing viability of these companies.

Market Reaction

Major equity indices worldwide tumbled in January. The S&P500 declined -6.0%, the Nasdaq fell -9.9%, and the Dow dropped -4.5%. International markets also declined in January, with a global index excluding U.S. stocks falling -9.7%. As indicated previously, investors preferred the safety of U.S. Treasury securities, sending prices up and yields down. The 10-year Treasury yield ended the month at 3.60%, down from 4.02% at December month end. The broader bond market was generally up 1.0% in January.

Investment Fund Review

The General Board’s two daily priced fixed income funds increased in value in January. The General Board’s stock funds decreased in value given the level of investor fear in the market.

Inflation Protection Fund

Fund Jan
Inflation Protection Fund +3.4%
BCGI Inflation Linked Index +3.7%
Difference -0.3%
  • The fund’s performance was strong in an environment of fear and uncertainty due to its significant holdings of U.S. Inflation Protected Securities.
  • The Inflation Protection fund slightly underperformed its benchmark in January due to the fund’s allocation to global inflation-linked bonds, which did not perform as well as U.S. inflation-linked bonds.

Domestic Bond Fund

Fund Jan
Domestic Bond Fund +0.9%
Lehman U.S. Universal (ex MBS) Index +1.3%
Difference -0.4%
  • The fund’s performance was positive in an uncertain market.
  • The fund slightly underperformed its benchmark due to the performance of loans that fund affordable housing. These loans fund housing for low and moderate-income individuals and families, while earning a market rate of return. The General Board determines the fair market value of these loans based on the prices of comparable publicly traded securities. As reported previously, prices for comparable publicly traded bonds have been adversely affected by the credit crisis that originated with problems in the subprime mortgage market. The General Board is highly confident in the quality of these loans and anticipates no material repayment problems.

Domestic Stock Fund

Fund Jan
Domestic Stock Fund -5.6%
Russell 3000 -6.1%
Difference +0.5%
  • U.S. stocks performed poorly due to investor concerns regarding future growth of the economy.
  • The fund outperformed its benchmark due to favorable benchmark relative performance by several of the firm’s investment managers and the fund’s exposure to real estate securities, which were essentially unchanged for the month.

International Stock Fund

Fund Jan
International Stock Fund -8.7%
MSCI ACWI x US -9.8%
Difference +1.1%
  • International stocks declined on fears that a possible U.S. recession will negatively impact foreign economies. In particular, stocks in lesser developed countries such as China and India experienced significant declines due to their ties to the U.S. economy.
  • The fund benefited from better than benchmark performance by all but one of the fund’s investment managers, the fund’s recent allocation to international real estate securities and less exposure to the more speculative markets such as China by the fund’s emerging market managers.

Multiple Asset Fund

Fund Jan
Multiple Asset Fund -3.7%
Composite Benchmark -4.0%
Difference +0.3%
  • The fund outperformed its benchmark due to better relative performance by the Domestic Stock Fund and the International Stock Fund.

Balanced Social Values Plus Fund

Fund Jan
Balanced Social Values Plus Fund -2.9%
Composite Benchmark -3.1%
Difference +0.2%


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