March 2009 Investment Report

World stock markets stage strong rally …

Following positive earnings forecasts from Citigroup and Bank of America and increasingly decisive action on the part of the Obama administration to improve the credit flow, the U.S. and world equity markets produced strong returns in March and partially reversed losses incurred in the two previous months. Although the S&P 500 rose 9% in March, the index still posted a decline of 11% for the first three months of the year. An index for economically developed countries outside of the U.S. declined 14% year-to-date through March. However, stocks from less developed countries advanced 14% for the month of March, primarily due to stronger commodity prices and a belief that their economies will not experience as significant deterioration as is forecast for the more developed world. For the first three months of 2009, an index of developing-country stocks has increased by 1%.

… while the economic decline may be ending …

The economic news was still mostly negative, but there were a few signs of stabilization. The final results for the fourth quarter 2008 Gross Domestic Product (GDP) confirmed preliminary estimates of a steep decline of 6.3% in the nation’s output. However, the Institute for Supply Management (ISM) report for March indicated that company purchasing managers believe that the rate of deterioration in the manufacturing sector may be slowing. While inventories declined in March, a sub-index measuring new orders actually showed a 25% increase during the month.

February retail sales registered a 0.1% decline from January. However, if auto sales are excluded, sales actually increased by about 0.7% when adjusted for seasonal and other variations. This marked the second gain in a row for retail sales excluding automobiles after five consecutive monthly declines. Consumer confidence was basically flat compared with the prior month’s all-time low, perhaps suggesting that consumers believe things can’t get any worse at this point in the cycle. Automobile sales fell by 41% year-over-year in February. General Motors, amid a sales decline of 53%, failed to convince the government that it was moving quickly enough with its turnaround plans. As a result, CEO Rick Wagoner was forced to resign, and bankruptcy appeared as an increasingly likely option for the company (as well as Chrysler) to help relieve its burdensome pension and health benefit obligations.

There was a glimmer of hope on the housing front, as existing February home sales were up 5.1% from January. So-called “distressed” sales, typically priced about 20% below normal market prices, made up nearly half of total sales. New home sales actually climbed 22% in February, reversing a seven-month downward trend. The number of building permits issued during February rose, suggesting a positive future direction in housing starts as well. The Case-Shiller home price index, which is usually one month delayed, was down 19% in January 2009 compared with January 2008. The data suggest that prices are finally starting to reach a threshold below which the current nine to 10 months of housing inventory can start to decline. Another potential driver of home sales is the one-time $8,000 tax credit offered to qualified first-time home buyers as part of the recently enacted government stimulus bill.

Inflation continues to be a non-factor in the short-term as both the core Consumer Price Index and Producer Price Index for February increased 0.2%. With no room to lower interest rates to generate further economic stimulation, the Federal Reserve Bank (Fed) announced that it would aggressively apply a monetary policy by which it purchases Treasury bonds from banks as a way of increasing the money supply and encouraging more private lending. Bond prices rose dramatically after the announcement, driving the 10-year Treasury note rate down by almost 0.5%—the largest one-day drop since the aftermath of the 1987 market crash. By month-end, the 10-year Treasury yield began returning to its previous level somewhat, but was still about 0.33% below its level prior to the Fed announcement. Coupled with the decline in Treasury yields, corporate credit (AA rated) interest rates declined, suggesting more confidence on the part of lenders in business prospects and fewer concerns about credit stability. Another positive indicator is that the market for short-term corporate borrowing (commercial paper) appears to be functioning, albeit with Fed support. Corporate interest rates compared with risk-free U.S. government securities have returned to their 2008 pre-Lehman bankruptcy levels of around 1%, yet still above historical rates. Government efforts to improve investor confidence for these markets still have a long way to go, though.

Commodity prices, with the exception of gold, rebounded in March. The Dow Jones AIG commodity futures index was up almost 4% in the month, sparked by increases in crude oil (+10%), copper (+21%), corn (+15%) and wheat (+4%). Crude oil spiked in anticipation of an OPEC meeting and the expectation that supply cuts might be forthcoming. Commodity prices may also be rising in anticipation of resumption in demand, particularly in China, and amid signs that the global economy is stabilizing. In addition, gold, which has seemed a “safe haven” investment in these chaotic recent months, declined with the reduction in financial market volatility in March and a willingness of investors to take on more risk.

… with government stimulus efforts finally appearing to succeed.

During the month, the Obama administration provided additional clarity and reassurance to the markets on its stimulus programs—the Term Asset-Backed Securities Loan Facility (TALF), the Public-Private Investment Fund (PPIF) and the Homeowner Affordability and Stability Plan (HASP). In addition, the president’s team has been continuing to implement its fiscal budget plan in cooperation with both houses of Congress. As a result, financial stocks represented the best-performing sector of the market in March, up 15%, though they still ended as the worst-performing sector for the quarter, down 27%. However, controversy surfaced mid-month, when it was revealed that some business executives in TARP-supported companies—most notably, insurance provider AIG, which received the most TARP funds—received bonus payments despite their perceived contribution to their companies’ problems. This news elicited a sharp rebuke from President Obama and led to the introduction of legislation that would have imposed a tax of 90% on the bonuses unless they were paid back. The issue seems to have faded as the punitive spirit of Congress has worn down and as Congress has become aware of adverse secondary consequences of the imposition of such a tax. Also, several executives in question offered to return the bonuses despite their contractual right to retain them.

Market Reaction

As indicated, the U.S. and world stock markets rebounded across the board during the month, primarily on the strength of the government’s stimulus efforts and the view that the worst may be over for certain sectors of the economy, such as housing. For the month of March, the Russell 3000 Index rose just under 9%, but this increase wasn’t enough to generate positive quarterly performance. Both small- and large-company stocks performed about equally well in March, but large-company stocks (down 11%) outperformed small-company stocks (down 15%) for the quarter. International stocks (MSCI ACWI ex-US: up 8%) underperformed U.S. stocks modestly. Developing-country equities (up 14%), with their fortunes tied to commodity prices, performed very well in March relative to developed-country (EAFE) markets (up 6%). Currency markets also stabilized in the month, with the dollar down against the Euro (-4%) and basically flat against the British pound sterling and the Japanese yen. Japan’s economy, with its heavy reliance on exports and its equity markets, has been hit especially hard in the global economic downturn.

Investment Fund Review

Inflation Protection Fund

Fund March Year-to-Date
Inflation Protection Fund +4.8% +1.9%
Barclays Capital Inflation Linked Index +5.9% +4.7%
Difference -1.1% -2.8%
  • The Inflation Protection Fund underperformed its benchmark in March, primarily as a result of its diversification into inflation-based strategies other than U.S. Treasury Inflation-Protected Securities. Although all of the diversifying strategies (commodities and global inflation-linked bonds) increased in value in March, the benchmark composed exclusively of U.S. Treasury Inflation-Protected Securities increased significantly on concerns that stimulus measures may have an inflationary impact in the U.S.
  • The fund did return to positive performance for the year, due to increases in the value of the domestic and global inflation-linked bond sectors. For the year, however, the fund is significantly underperforming its benchmark for the same reasons cited above. The fund’s commodities investments have declined nearly 10% since the beginning of the year. Despite this underperformance, the General Board continues to adhere to its philosophy of building broadly diversified funds and believes that such a strategy will benefit its participants in the long term.

Domestic Bond Fund

Fund March Year-to-Date
Domestic Bond Fund +1.9% +0.2%
Barclays Capital U.S. Universal (ex MBS) Index +1.6% -0.6%
Difference +0.3% +0.8%
  • The Domestic Bond Fund had positive performance in March, as credit spreads for most fixed-income instruments narrowed with respect to U.S. Treasury securities. Relative to the fund benchmark, the outperformance is primarily attributable to excellent returns from bonds of developed and developing countries. The U.S. dollar substantially weakened against foreign currencies after the Fed announced its aggressive monetary action, which increased the value of foreign bonds. The fund’s investments in loans supporting affordable housing also contributed to better-than-benchmark performance. Primary detractors from performance were the fund’s investment in corporate debt and the benchmark-relative underperformance of its core fixed-income and high-yield managers.
  • As a result of strong March performance, the fund generated positive year-to-date performance and continued to exceed its benchmark. The fund benefited from its holdings of distressed and below-investment-grade debt, as historic high-spread differentials for these securities at the end of 2008 improved relative to low-risk U.S. Treasury securities. In addition, the fund’s holdings of bonds from developing countries have also contributed to better-than-benchmark performance, due to strengthening currencies and a belief that these countries’ economies will not contract as much as originally expected.

Domestic Stock Fund

Fund March Year-to-Date
Domestic Stock Fund +7.1%  -8.9%
Russell 3000 +8.8% -10.8%
Difference -1.7% +1.9%
  • The Domestic Stock Fund advanced strongly in March, but it underperformed its benchmark, due primarily to negative contribution from the fund’s private real estate and private equity investments, as the value of these investments typically trail the performance of the public markets. Active managers added value over the benchmark primarily through an overweight in information technology stocks and, to a lesser degree, in consumer discretionary stocks.
  • For the year, returns for the Domestic Stock Fund remain negative, but the fund had regained almost half of the losses it incurred through February. Nearly all of the fund’s active managers are outperforming their respective benchmarks, with eight managers surpassing their respective benchmarks by at least 3%.

International Stock Fund

Fund March Year-to-Date
International Stock Fund +8.5% -8.6%
MSCI ACWI x US +8.0% -10.3%
Difference +0.5% +1.7%
  • Similar to its domestic counterpart, the International Stock Fund had strong positive performance in March as a result of broad strength in the global equity markets. The fund outperformed its benchmark by 0.5%, primarily as a result of the fund’s allocation to stocks from developing countries, which advanced approximately 14% for the month.
  • As a result of strong March performance, the fund almost regained half of its losses from the first two months and continues to outperform its benchmark. Stocks from developing countries represent the largest contributor to outperformance. Similar to last month, all but one active manager are outperforming their respective benchmarks.

Multiple Asset Fund

Fund March Year-to-Date
Multiple Asset Fund +5.5% -5.1%
Composite Benchmark +6.5% -6.7%
Difference -1.0% +1.6%
  • For the month, the fund underperformed its benchmark, due to underperformance in the Domestic Stock Fund and Inflation Protection Fund.
  • For the year, the fund remains ahead of its benchmark, due to the strong relative performance of the Domestic Stock Fund, International Stock Fund and Domestic Bond Fund.

Balanced Social Values Plus Fund

Fund March Year-to-Date
Balanced Social Values Plus Fund +5.9% -4.8%
Composite Benchmark +6.2% -4.9%
Difference -0.3% +0.1%


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