April 2009 Investment Report

The March rally continued in April …

The March advance in the world stock markets continued throughout April, achieving seven weekly gains over the last two months. This rally was driven by some modestly positive signs in the economy and the perception that government actions to stabilize the credit environment may finally be having an impact. The Dow Jones Industrial Average had its best percentage rise for two consecutive months during the past seven years. The current rally is broad-based, as international stocks, both in developed and developing markets, performed even better than U.S. stocks.

… amid possible signs of “green shoots” in the economy …

The term “green shoots” has been used to describe indications of a tentative economic revival amid a barren landscape of otherwise bad news. A preliminary release of the first-quarter 2009 Gross Domestic Product (GDP) came in at -6.1%, marking the economy’s worst six-month performance in 51 years. However, it is instructive to look at the contributors to GDP growth.

Consumer spending was actually a “green shoot” as it rebounded in the first quarter of 2009, up 2.2% from a 4% decline in the second half of 2008, possibly in anticipation of the government’s stimulus spending programs. Despite a 1% drop in retail sales in March compared with February, the more forward-looking consumer confidence indicator improved in April. However, it still remains at a very low level. Automobile (car and truck) sales actually increased modestly from February and January levels. The fact that current sales were still down 37% compared with last year highlighted auto manufacturers’ continuing difficulties. In response, the government proposed a comprehensive financing plan for Chrysler that involved making United Auto Workers union retirees and the Italian car producer Fiat the principal owners of the company’s stock. The plan was challenged by certain senior secured creditors who felt that their rights as bondholders were being abrogated. The disagreement led to Chrysler filing for Chapter 11 bankruptcy protection—the sixth-largest filing ever and the first for a major U.S. auto manufacturer. Bankruptcy also looms for General Motors, which offered a new turnaround plan involving the U.S. government owning a majority stake in the company in exchange for fresh capital.

Other positive economic signs were that U.S. exports rose in February (according to data released in April) for the first time in seven months, and new jobless claims showed the largest drop since January, despite unemployment reaching 8.5%. However, the GDP report revealed that businesses were reducing capital spending on new manufacturing facilities and equipment to conserve cash and cutting inventories in response to the prior quarters’ dramatic fall-off in consumer spending.

… although housing remains a concern.

While not exactly a “green shoot”, the all-time-low level of 15- and 30-year mortgage interest rates at under 5% has to be considered a strong driver of any potential housing-led recovery. These low rates have led to a threefold rise in refinancing applications over the past year, according to the Mortgage Bankers Association. However, fully 80% of all mortgage applications are to refinance existing loans as opposed to new home purchases. Home affordability is also moving in the right direction, as home prices are continuing to fall. The Case-Shiller home price index, which is published with a two-month lag, was down a further 19% year-over-year in February 2009. This was the same rate of decline experienced in January.

Credit conditions are beginning to improve …

The Federal Open Market Committee (FOMC) indicated in its late-April meeting that the economic outlook had “improved modestly.” As a result, the Federal Reserve Bank (Fed) chose not to increase the size of its program for buying U.S. Treasury securities. Inflation appears low on the list of Fed concerns, as the core Producer Price Index (PPI) in March was flat compared with February, while the core Consumer Price Index (CPI) increased a modest 0.2% compared with the previous month. Despite low inflationary readings, interest rates on U.S. Treasury securities moved considerably higher during the month of April as investors were met with two coincident forces: signs that the deterioration in the economic landscape might be slowing and the continued massive supply of additional Treasury issuance to fund fiscal policy initiatives. Although shorter-term interest rates moved only modestly higher, rates on the 10-year Treasury bond moved about 0.45% higher to 3.1% by the end of the month, topping the psychologically important 3% threshold. Despite interest rates moving higher, credit markets generated impressive returns in April, with U.S. high-yield securities up 12.1% and U.S. investment-grade corporate bonds up 2.8%. The anxiously awaited introduction by the U.S. Treasury of new guidelines for the Term Asset-Backed Securities Loan Facility (TALF) and the Public-Private Investment Program (PPIP), which are designed to reinvigorate the securitization markets, had a significant impact on the performance of commercial mortgage-backed securities (CMBs). CMBs generated a return of 7.8% for the month of April.

Commodity prices were basically unchanged in April, further calming inflation fears. Crude oil futures hovered around $50 per barrel. Movement in the other major commodity indices was mixed but not dramatic: gold fell 4%, copper rose 11%, corn fell 2% and wheat fell 2%. The impact of huge economic stimulus spending in China is a possible wild card that investors are studying diligently to help predict the future direction of commodity prices.

… but investors should continue to be cautious.

Despite the continued improvement in stock prices, it is clear that investors remain watchful of government actions. In a midmonth preview of the results of bank stress tests, Treasury Secretary Timothy Geithner reassured a congressional panel that the vast majority of banks had adequate capital to remain solvent. However, that reassurance seemed to conflict with the actual release of the results at month-end, which revealed that 10 of the 19 banks surveyed—including two of the largest banks, Citigroup and Bank of America—would need to raise additional equity.

As to the state of the credit crisis, an article in The Wall Street Journal on April 20 said that in spite of the influx of government Troubled Asset Relief Program (TARP) funds, bank lending continues to be weak. According to the article, the biggest recipients of taxpayer aid originated or refinanced 23% fewer new loans in February than in October, the month in which the Treasury Department initiated the TARP plan. One positive sign in the credit community is that fewer banks in the U.S. are tightening lending standards. Forty percent of banks tightened lending standards in February, while 65% did in January, according to an April Fed survey of 53 banks. This survey marked the first time since January 2008 that the percentage of banks reporting such tightening fell below 50%.

The real estate industry, a lagging economic indicator, continues to suffer under massive amounts of borrowing used to finance property acquisitions during the previous five-year market cycle. General Growth, a large publicly traded retail mall owner, declared bankruptcy, since it was unable to develop a workable plan to restructure its balance sheet. Other highly leveraged real estate investment trust (REIT) companies recently have turned to the public markets to raise capital to ease debt burdens despite the dilution these stock offerings have on their existing shareholder base.

Finally, late in the month, news of the “swine flu” outbreak, alleged to have originated in Mexico, raised concerns that an international pandemic could temporarily set back the fragile “green shoots” economic recovery.

Market Reaction

The U.S. and world stock markets continued their positive progress during the month as investors ignored the bad news and focused on the good news, such as corporate earnings reports, reassuring government pronouncements and favorable economic indicators. For the month of April, the Russell 3000 Index rose 10.5%, erasing nearly all of the losses in 2009. Small-cap company stocks (up 15.5%), as measured by the Russell 2000 Index, outperformed large-cap stocks (up 10.1%) during the month. International stocks (MSCI ACWI ex-US: up 14.0%) reasserted their dominant performance over U.S. stocks. Developing-country equities (up 16.7%), perceived as the biggest immediate beneficiaries of a potential global recovery, performed better than developed-country (EAFE) markets (up 13.0%). Currency markets continued to demonstrate stability in the month, with the dollar basically flat against other major currencies.

Investment Fund Review

Inflation Protection Fund

Fund April Year-to-Date
Inflation Protection Fund -0.5% +1.4%
Barclays Capital Inflation Linked Index -1.9% +2.7%
Difference +1.4% -1.3%
  • The Inflation Protection Fund outperformed its benchmark in April, primarily as a result of its diversification into inflation-based strategies other than U.S. Treasury Inflation-Protected Securities. In particular, the diversifying strategy of emerging-market inflation-linked bonds added the most value in April, as the benchmark composed exclusively of U.S. Treasury Inflation-Protected Securities declined due to increased U.S. government debt issuance and investors’ willingness to accept more risk.
  • The fund maintained positive performance for the year. However, the fund has underperformed its benchmark, primarily due to its commodities investments, which have declined nearly 11%. 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 April Year-to-Date
Domestic Bond Fund +2.3% +2.4%
Barclays Capital U.S. Universal (ex MBS) Index +1.4% +0.8%
Difference +0.9% +1.6%
  • The Domestic Bond Fund had positive performance in April, as investors became less risk-averse, resulting in credit spreads for most fixed-income instruments narrowing with respect to U.S. Treasury securities. The fund outperformed its benchmark, primarily as a result of good returns from the below-investment-grade, opportunistic debt and developing-country bond portfolios. The primary detractor was the fund’s investment in positive social purpose investments, which are significantly linked to the performance of U.S. Treasury securities. As previously indicated, U.S. bonds declined in April.
  • As a result of strong April performance, the fund generated positive year-to-date performance and has meaningfully surpassed its performance benchmark for the same reasons specified above.

Domestic Stock Fund

Fund April Year-to-Date
Domestic Stock Fund +9.4% -0.4%
Russell 3000 +10.5% -1.4%
Difference -1.1% +1.0%
  • The Domestic Stock Fund advanced strongly in April, but it underperformed its benchmark, primarily as a result of negative contribution from the fund’s private real estate and private equity investments, as the value of these nonmarketable investments typically lag behind the performance of the public securities markets.
  • For the year, the Domestic Stock Fund performance remains modestly negative, yet ahead of its benchmark. Nearly all of the fund’s active managers are outperforming their respective benchmarks, and nine managers are surpassing their respective benchmarks by at least 3 percentage points.

International Stock Fund

Fund April Year-to-Date
International Stock Fund +14.0% +4.2%
MSCI ACWI x US +14.0% +2.2%
Difference 0.0% +2.0%
  • Like its domestic counterpart, the International Stock Fund had strong positive performance in April as a result of broad strength in the global equity markets. The fund matched the performance of its benchmark as positive contributions from developing-country and international real estate securities offset negative benchmark-relative performance from developed-country managers.
  • As a result of strong April performance, the fund’s year-to-date return is now positive, and the fund continues to outperform its benchmark. Stocks from developing countries represent the largest contributor to outperformance. All but two active managers are outperforming their respective benchmarks.

Multiple Asset Fund

Fund April Year-to-Date
Multiple Asset Fund +7.0% +1.5%
Composite Benchmark +7.6% +0.5%
Difference -0.6% +1.0%
  • For the month, the fund underperformed its benchmark due to the benchmark-relative underperformance of the Domestic Stock Fund.
  • For the year, despite April’s performance, the fund remains ahead of its benchmark due to the strong benchmark-relative performance of the Domestic Stock Fund, International Stock Fund and Domestic Bond Fund.

Balanced Social Values Plus Fund

Fund April Year-to-Date
Balanced Social Values Plus Fund +6.5% +1.4%
Composite Benchmark +6.3% +1.1%
Difference +0.2% +0.3%


close (X)