June 2008 Investment Report

Oil prices continued to surge, with no sign of retreat …

Oil prices continued to advance in June, peaking at $142 a barrel, before ending the month at $141 a barrel. Prices soared throughout the month due to a combination of dollar weakness, speculation, comments from investment analysts and geopolitical worries. The U.S. dollar continued to be under pressure in June, weakening against other major currencies. With oil priced in dollars, a weaker dollar would make oil less expensive for investors dealing in other currencies. Thus, the price of oil will rise to compensate for the devaluing of the dollar. Many analysts believe that the steady decline of the U.S. dollar is the primary contributor to the recent increase in the price of oil. Other contributors to oil’s rise include comments from analysts forecasting increasing prices due to various trends and concerns over supply disruptions. News of a potential attack on Iran’s nuclear facilities by Israel concerned investors, as Iran is a major oil producer that likely would reduce production and shipments in the event of an attack. Additional labor and political struggles in Nigeria also unsettled investors. Not even a pledge from Saudi Arabia to increase production was able to ease investors’ concerns.

… as credit concerns resurfaced …

In addition to surging oil prices, investors were also faced with new worries for financial companies. Although investors had hoped that the credit crisis ended with the rescue of Bear Stearns by the Federal Reserve back in March, financial stocks had more bad news in June. One of the largest bond-rating agencies, Moody’s, downgraded the credit ratings of the largest two bond insurers, MBIA and Ambac, raising concern over the solvency of the insurers. Together, these firms guarantee more than $1 trillion in corporate, municipal and other types of debt. Additionally, banking analysts at Goldman Sachs reported that major lenders will likely need more capital and that current efforts to clean up balance sheets were insufficient. Analysts continue to be concerned that large banks face lower earnings in the months ahead and may have to reduce dividends. The stocks of Lehman Brothers, Washington Mutual and Wachovia all declined dramatically in the month.

… and economic weakness lingered.

Besides renewed concerns about financial stocks, investors are continuing to deal with a weak economy, as housing continues to struggle, consumers appear to be drowning in debt and inflation percolates. The employment report released in June reflected a fifth straight month of job losses, as nonfarm payrolls declined by 49,000 jobs and the unemployment rate experienced a significant increase from 5.0% to 5.5%. A weak job market coupled with soaring fuel costs directly impact consumers, whose purchases account for more than two-thirds of U.S. economic activity. The Conference Board, an organization composed of top business leaders from around the world, publishes a consumer confidence index which fell to 50.4 in June. This is down from 57.4 in May, and is attributable to job losses, higher food and fuel costs and deteriorating home prices. The soaring energy prices were evident in economic data in the U.S. consumer price index (CPI), which rose 0.6%. However, the core CPI, which excludes food and energy, only rose 0.2%, suggesting that the higher raw-materials costs haven’t yet seeped into the broader economy, impacting goods such as those in non-energy sectors like clothing. Investors fear that higher fuel costs will eventually stoke inflation by leading to higher prices of other goods and services in the economy. Concern over the inflationary impact of oil has led to increased speculation that the Federal Reserve may be forced to raise interest rates in order to control inflation. This course of action would be the exact opposite needed for an economy experiencing weak growth, as higher interest rates will restrain growth. At its June meeting, the Federal Reserve kept interest rates unchanged, noting in its accompanying statement that “although the downside risks to growth remain … the upside risks to inflation and inflation expectations have increased."

Market Reaction

As crude oil prices hit new highs and uncertainty reigned over Wall Street firms’ ability to withstand additional credit issues, stocks tumbled, dipping into “bear” territory, traditionally defined as a 20% drop from a high (in this case, in October 2007). The S&P 500 fell 8.4%, the Nasdaq declined 9.3% and the Dow Jones Industrial Average retreated 10.0%. International markets declined as well, as a global index excluding U.S. stocks declined 8.3% in June. With the deteriorating stock markets, investors sought the safety of low-risk U.S. Treasury debt, sending prices up and yields down. The 10-year Treasury yield was 3.9% at the end of June, down from 4.1% at the end of May.

With June’s significant declines, stock returns for 2008 remain well into negative territory. For the year, the S&P 500 is down 11.9%, the Nasdaq has decreased 13.2% and the Dow has declined 13.4%. International markets remain down as well, with a global index excluding U.S. stocks falling 10.3%.

Investment Fund Review

Given the turbulent market in June, only one of the daily priced funds offered by the General Board, the Inflation Protection Fund, increased in value during the month. For the year, only the Domestic Bond Fund and Inflation Protection Fund have generated positive returns among the daily priced unitized funds. The Stable Value Fund has also generated positive returns in 2008.

Inflation Protection Fund

Fund June Q208 Year-to-Date
Inflation Protection Fund +2.0% +1.7% +6.1%
BCGI Inflation Linked Index +1.7% -0.3% +4.8%
Difference +0.3% +2.0% +1.3%
  • Super-safe U.S. Treasury inflation-protected securities represented one of very few types of investments that gained in June because of investor pessimism and desire to avoid higher-risk investments. The Inflation Protection Fund outperformed its benchmark in June due to the fund’s allocation to commodities. This was partially offset by the fund’s allocation to international inflation-linked bonds, which underperformed U.S. inflation-linked bonds.
  • For the quarter, the fund has outperformed its benchmark due to its allocation to commodities as well as the fund’s allocation to inflation-linked bonds from developing international markets.
  • For the year, the fund has produced a positive investment return because of investor concerns about the economy, which have resulted in a flight to low-risk investments. The fund remains ahead of its benchmark, supported by its 10% allocation to commodities and bonds from developing international countries.

Domestic Bond Fund

Fund June Q208 Year-to-Date
Domestic Bond Fund -0.4% -0.8% +3.9%
Lehman U.S. Universal (ex MBS) Index -0.4% -0.5% +0.3%
Difference +0.0% -0.3% +3.6%
  • Despite positive returns from U.S. Treasury securities, the Domestic Bond Fund, along with the broad bond market, retreated slightly in June as a result of investor uncertainty regarding economic growth. Corporate bonds and asset-backed securities lost value as investors opined that these bonds have greater risk. The fund matched the performance of its benchmark. The fund’s exposure to international bonds helped performance due to its exposure to low-risk foreign government bonds. In addition, the fund’s positive social purpose investments (primarily affordable housing) helped its performance. These positive contributions, however, were offset by the fund’s exposure to higher-risk bonds, such as high-yield corporate bonds and bonds from developing countries.
  • For the quarter, the fund trailed its benchmark primarily due to less-than-benchmark performance by the fund’s active core U.S. bond manager.
  • For the year, the fund is substantially ahead of its benchmark, primarily due to the one-time adjustment to the pricing methodology for valuing the fund’s holding of positive social purpose investments. Additionally, as a result of weakness in the U.S. dollar, the fund benefited from its holdings of foreign-currency bonds.

Domestic Stock Fund

Fund June June Year-to-Date
Domestic Stock Fund -7.6% -1.2% -9.6%
Russell 3000 -8.3% -1.7% -11.1%
Difference +0.6% +0.5% +1.4%
  • Along with the overall U.S. stock market, the Domestic Stock Fund struggled in June. The fund slightly outperformed its benchmark due to the fund’s allocation to private real estate investments and private equity, which did not change in value. These investments are revalued as partnership statements are received at the General Board, generally on a quarterly basis. The fund also benefited from its higher-than-market weighting in stocks from midsize and small companies, which did not decline as much as stocks of large companies.
  • The fund declined in the quarter but outperformed its benchmark. The fund benefited from its higher-than-market weighting in stocks from midsize and small companies, which produced positive investment returns for the quarter compared with stocks of large companies, which declined. This was partially offset by the portfolio’s holdings of real estate investment trusts, which declined about 5% for the quarter.
  • For the year, the fund has lost nearly 10% of its value, but has outperformed its benchmark. The better-than-benchmark performance is attributable to the higher–than-benchmark holdings in small and midsize companies as well as the fund’s exposure to private real estate and private equity.

International Stock Fund

Fund June Q208 Year-to-Date
International Stock Fund -9.3% -3.1% -10.2%
MSCI ACWI x US -8.3% -1.2% -10.3%
Difference -1.0% -1.9% +0.1%
  • The International Stock Fund declined in June and meaningfully underperformed its benchmark. The underperformance is primarily attributable to the fund’s holdings of international real estate investment trusts and the fund’s allocation to stocks from developing countries. Additionally, two of the fund’s investment managers underperformed their respective benchmarks by slightly more than 2%.
  • The fund also meaningfully underperformed its benchmark for the second quarter due the same factors contributing to the June performance shortfall.
  • For the year, the fund has declined slightly more than 10% and is marginally outperforming its benchmark. Collectively, the fund’s investment managers have produced better returns than their respective benchmarks, though the fund’s holdings of real estate investment trusts have detracted from returns compared with the benchmark.

Multiple Asset Fund

Fund June Q208 Year-to-Date
Multiple Asset Fund -5.3% -1.2% -4.9%
Composite Benchmark -5.3% -1.1% -6.5%
Difference  0.0% -0.1% +1.6%
  • For the month, the fund declined along with the broader market but performed in line with its benchmark.
  • For the quarter, the fund slightly underperformed its benchmark due to less-than-benchmark performance by the International Stock Fund, though this was partially offset by the better-than-benchmark performance of the Domestic Stock Fund and Inflation Protection Fund.
  • For the year, the fund is outperforming its benchmark due to better-than-benchmark performance by all of the underlying funds.

Balanced Social Values Plus Fund

Fund June Q208 Year-to-Date
Balanced Social Values Plus Fund -5.2% -5.2% -6.8%
Composite Benchmark -5.5% -5.5% -7.2%
Difference +0.3% +0.3% +0.4%


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