July 2008 Investment Report

Oil prices declined in July …

Reversing course in July, oil prices declined 11.4%, falling from $140/barrel to $124/barrel by the end of the month. Investors greeted this news with enthusiasm, hopeful that oil prices may have finally peaked, motivating consumers to change behavior and reduce gasoline consumption. Additionally, ongoing weak economic forecasts have led to decreased demand for fuel. The easing of tensions between Iran and the U.S. has helped with supply concerns, although ongoing problems remain in Nigeria. Finally, the strengthening U.S. dollar also influenced lower oil prices. All of these factors may have resulted in some of the speculative money invested in oil, such as hedge funds, to reposition their portfolios away from commodities, creating additional selling pressure and further driving prices lower.

… financial stocks rebounded …

As oil corrected, financial stocks seemed to benefit, soaring 14% in the month. Investors, eager to find a bottom in financial shares, were encouraged by analysts’ positive comments regarding their outlook for the sector and regulatory actions to limit short selling in certain large financial institutions. However, the path for financial stocks was not straight up in the month, but rather a zigzag pattern, with large gains quickly followed by large losses. Additionally, markets were further unsettled over concerns that government-sponsored mortgage giants Fannie Mae and Freddie Mac would be unable to raise capital amidst losses on mortgages. However, a government plan to support these agencies positively influenced the prices of financial stocks. Better-than-expected earnings reports from large institutions, such as JPMorgan Chase and Bank of America, also sent prices higher. But news headlines of IndyMac Bancorp’s failure, with television reports of depositors queuing up to redeem accounts, raised awareness that the credit crisis was not over. Investors realized that the central bank may not be able to rescue every financial institution, such as Bear Stearns, and financial stocks fell on the news. However, in another reversal at month-end, markets advanced as Merrill Lynch announced plans to sell $30 billion of its mortgage portfolio in order to strengthen its financial position. This action seemed to lead investors to conclude that the end of the credit crisis was near and that banks were conducting a “final” clean up.

… but economic weakness continued.

Despite lower oil prices and soaring financial stocks, general weakness in the economy continued to worry investors. Better-than-expected readings on new-home sales, durable-goods orders and consumer confidence released in July were not enough to convince investors that the economy is on the road to recovery. Sales of existing homes fell to a 10-year low, and foreclosures continued to rise. A Gross Domestic Product reading for the fourth quarter of 2007 was revised to -0.2%, raising speculation of future negative revisions for other quarters that will show that the U.S. has entered a recession. In addition to slowing growth, inflation remains a concern, despite the fall in oil prices. The core Consumer Price Index (CPI) rose 0.3%, above expectations of a 0.2% rise. Including food and energy, the CPI rose 1.1%, the most in 26 years, moving the annual CPI to 5.0%.

Market Reaction

Despite the positive impact of oil prices and higher financial stocks, investors remained concerned with the direction of the broader economy, as a prolonged economic slowdown will weigh on corporate earnings. The S&P 500 fell 0.8%, the technology-focused Nasdaq rose 1.5% and the Dow rose 0.4%. International markets have declined by an even larger amount, as exports to the U.S. have declined, local currencies have weakened against the U.S. dollar and inflation continues to be a threat. A global index excluding U.S. stocks dropped 3.7% in July. Government bond yields held steady in July, as the 10-year Treasury yield ended July at 3.9%, unchanged from June month-end. The Lehman U.S. Universal index fell -0.1%.

Major stock indices continue to struggle for the year. The S&P 500 is down 12.7%, the Nasdaq is down 11.9% and the Dow has declined 13.0%. International markets remain down as well, with a global index excluding U.S. stocks falling by 13.6%.

Investment Fund Review

Inflation Protection Fund

Fund July Year-to-Date
Inflation Protection Fund -1.3% +4.7%
BCGI Inflation Linked Index -0.7% +4.1%
Difference -0.6% +0.6%
  • The Inflation Protection Fund underperformed its benchmark in July, primarily due to the fund’s 10% allocation to commodities.
  • For the year, the fund remains ahead of its benchmark, supported by the fund’s 10% allocation to commodities and its allocation to inflation-protection securities from developing countries.

Domestic Bond Fund

Fund July Year-to-Date
Domestic Bond Fund +0.5% +4.5%
Lehman U.S. Universal (ex MBS) Index -0.2% +0.1%
Difference +0.7% +4.4%
  • The Domestic Bond Fund advanced in July, meaningfully outperforming its benchmark, which is attributable to the fund’s allocation to foreign debt of both developed and developing countries and its allocation to positive social purpose investments.
  • For the year, the fund is ahead of its benchmark, reflecting the one-time adjustment to the pricing methodology for valuing the fund’s holding of positive social purpose investments. The fund’s allocation to international bonds and its excellent benchmark-relative performance by nearly all of the fund’s managers also have contributed to the fund’s outperformance.

Domestic Stock Fund

Fund July Year-to-Date
Domestic Stock Fund +0.1% -9.6%
Russell 3000 -0.8% -11.8%
Difference +0.9% +2.2%
  • The Domestic Stock Fund also meaningfully outperformed its benchmark in July, primarily due to the fund’s allocation to managers with portfolios holding stocks of small and mid-sized companies. Additionally, several of the fund’s managers of large company stocks experienced significant outperformance compared with benchmarks. Collectively, the General Board’s U.S. stock managers have below-market exposure to energy stocks, which performed poorly, and above-market exposure to financial stocks and technology stocks, which outperformed in July.
  • For the year, the Domestic Stock Fund remains in negative territory but ahead of its benchmark, due to the fund’s allocation to public real estate securities and private equity.

International Stock Fund

Fund July Year-to-Date
International Stock Fund -3.9% -13.8%
MSCI ACWI x US -3.7% -13.6%
Difference -0.2% -0.2%
  • The International Stock Fund declined nearly 4% in July, and it slightly underperformed its benchmark. The underperformance is primarily attributable to benchmark-relative underperformance by the largest fund manager, although the fund’s exposure to international real estate securities positively influenced performance.
  • For the year, the fund has meaningfully declined and slightly trails its benchmark, due to the fund’s allocation to international real estate securities. Part of the underperformance has been offset by strong performance from two of the fund’s active managers, particularly one of the emerging markets managers and the manager of small company stocks.

Multiple Asset Fund

Fund July Year-to-Date
Multiple Asset Fund -0.8% -5.6%
Composite Benchmark -1.2% -7.6%
Difference +0.4% +2.0%
  • For the month, the fund declined along with the broader market but outperformed its benchmark, due to the strong performance by the Domestic Bond Fund and the Domestic Stock Fund.
  • For the year, the strong benchmark-relative performance of the same two funds is responsible for the excellent benchmark-relative performance of the fund.

Balanced Social Values Plus Fund

Fund July Year-to-Date
Balanced Social Values Plus Fund +0.4% -6.4%
Composite Benchmark  0.0% -7.1%
Difference +0.4% +0.7%


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