August 2008 Investment Report

Oil prices declined in August …

Oil prices continued to decline in August, falling from $124/barrel to $115/barrel by month end. Oil may finally be on its way to a more “normal” price, due to a number of factors. Consumers may have responded to high gas prices by changing their driving behavior. U.S. government data revealed that Americans drove 4.7% fewer miles in June of this year than a year ago. In addition, investors appear to be anticipating a more widespread decrease in demand, primarily due to the likelihood of a broader economic slowdown reaching far beyond U.S. borders. If U.S. economic growth continues to weaken, economies dependent on exports to the U.S. will also weaken. Such a slowdown will eventually reduce demand for oil and oil-based materials used in construction. Indeed, weaker economic reports have been released from countries such as Germany. The European Central Bank has also commented on the weakening state of the Euro-zone economy as a whole. Even news of the conflict between energy-rich Russia and former Soviet satellite Georgia failed to influence higher oil prices. However, oil’s decline did stall toward month end, as investors tracked the projected path of tropical-storm-to-hurricane Gustav, which was forecast to reach the Louisiana Gulf Coast, a central region for the U.S.’s crude oil production and refining capability.

… as inflation expectations moderated.

Reports of growing worldwide economic weakness have strengthened demand for the dollar. Investors anticipate that the future direction of interest rates in various countries around the world favor the dollar. A stronger dollar, lower commodity prices and growing economic weakness have led to diminished concerns of inflation. Federal Reserve Chairman Ben Bernanke, at a central bank conference in Jackson Hole, Wyoming, appeared encouraged by the recent decline in commodity prices and the strengthening dollar. If inflation moderates on its own, the Federal Reserve will be able maintain low interest rates. Such action will keep borrowing costs low for consumers and businesses, encouraging spending and investment and ultimately leading to economic growth.

August economic reports were mixed …

Inflation data released in August, however, did not reflect the recent decrease in the price of oil. In fact, the level of inflation remains elevated. The Producer Price Index, a measure of wholesale inflation, jumped 1.2% in July. Additionally, the Consumer Price Index advanced 0.8%. Oil’s plunge, however, positively influenced consumer confidence due to lower gas prices, but falling housing prices continued to have a negative psychological affect on consumers. Sales of new and existing homes were above expectations in July, but the supply of homes for sale continues to grow due to foreclosures, and the median home price continues to decline. The Commerce Department provided economic observers with good news when it released an upward revision to second-quarter Gross Domestic Product (GDP). The revised 3.3% annual growth rate eclipsed the 1.9% rate initially reported. The increase in GDP is primarily attributable to stronger exports (resulting from a weaker dollar in the second quarter) and consumer spending (influenced by tax rebate checks). However, a strengthening dollar, the end of stimulus checks and housing woes likely will contribute to weaker growth in the third quarter.

… and the financial sector continued to suffer.

Finally, investors continued to monitor closely the financial sector in August, eagerly awaiting an end to Wall Street’s credit crisis. Unfortunately, there’s no end in sight yet. Suggestions that mortgage lenders Fannie Mae and Freddie Mac may need a federal bailout sent both companies’ shares plummeting. Wall Street’s credit crisis, which has lasted over a year, continues to haunt investors with expectations of additional write-downs and losses into the foreseeable future.

Market Reaction

Stocks seesawed throughout August, which is typically a slow month with low trading activity. Investors remained uncertain about the economic outlook and fearful of other unpleasant surprises in the financial sector. Despite this uncertainty, however, the S&P 500 rose 1.5%, the technology-focused Nasdaq rose 1.9% and the Dow rose 1.8%. International markets continued to struggle, declining 4.7% as a result of a strengthening dollar, and the outlook for economic growth deteriorated. U.S. government bond yields decreased in August as the 10-year Treasury yield ended the month at 3.8%, down from 3.9% at the end of July. The Lehman U.S. Universal index rose 0.9%.

Despite advancing in August, major stock indices remain in negative territory for the year. The S&P 500 is down 11.4%, the Nasdaq is off 10.2% and the Dow has declined 11.4%. International markets are now down 17.7%.

Investment Fund Review

Inflation Protection Fund

Fund August Year-to-Date
Inflation Protection Fund -0.1% +4.6%
BCGI Inflation Linked Index +1.0% +5.1%
Difference -1.1% -0.5%
  • The Inflation Protection Fund underperformed its benchmark in August, due, in large part, to the fund’s 10% allocation to commodities. Commodities retreated 7.3% in August, primarily driven by the decrease in the price of oil.
  • For the year, the fund is slightly behind its benchmark. With the large decline in August, the allocation to commodities is now detracting from the fund’s performance. However, the fund’s allocation to inflation-protected securities from developing countries partially offset the weaker performance from commodities.

Domestic Bond Fund

Fund August Year-to-Date
Domestic Bond Fund +0.0% +4.5%
Lehman U.S. Universal (ex MBS) Index +0.7% +0.8%
Difference -0.7% +3.7%
  • The Domestic Bond Fund remained unchanged in August, but it underperformed its benchmark. The fund’s allocation to foreign debt of both developed and developing countries detracted from performance as a result of the strengthening U.S. dollar.
  • For the year, the fund remains ahead of its benchmark, reflecting the one-time adjustment to the pricing methodology for valuing the fund’s holding of positive social purpose investments.

Domestic Stock Fund

Fund August Year-to-Date
Domestic Stock Fund +1.7% -8.0%
Russell 3000 +1.6% -10.4%
Difference +0.1% +2.4%
  • The Domestic Stock Fund slightly outperformed its benchmark in August, primarily due to the fund’s greater-than-market exposure to stocks of small and mid-sized companies, which performed better than the broader market.
  • For the year, the Domestic Stock Fund remains in negative territory but meaningfully ahead of its benchmark, because of the fund’s allocation to private equity and private real estate and its exposure to small and mid-sized companies.

International Stock Fund

Fund August Year-to-Date
International Stock Fund -4.2% -17.4%
MSCI ACWI x US -4.7% -17.7%
Difference +0.5% +0.3%
  • The International Stock Fund declined in August, but it surpassed its benchmark, due to excellent benchmark-relative performance by three of the fund’s managers.
  • For the year, the fund has meaningfully declined, but it is slightly ahead of its benchmark. Although several of the fund’s investment managers have produced positive benchmark-relative performance, the fund’s allocation to international public real estate investment trusts has detracted from performance.

Multiple Asset Fund

Fund August Year-to-Date
Multiple Asset Fund -0.1% -5.6%
Composite Benchmark  0.0% -7.6%
Difference -0.1% +2.0%
  • For the month, the fund slightly underperformed its benchmark, due to the less-than-benchmark performance by the Domestic Bond Fund and the Inflation Protection Fund.
  • However, for the year, the fund is meaningfully outperforming its benchmark, due to the strong benchmark-relative performance of the Domestic Stock Fund and the Domestic Bond Fund.

Balanced Social Values Plus Fund

Fund August Year-to-Date
Balanced Social Values Plus Fund +2.0% -4.5%
Composite Benchmark +2.1% -5.1%
Difference -0.1% +0.6%


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