November 2009 Investment Report

The markets extended their gains for the year ...

U.S. and world equity markets returned to positive performance in November, reflecting general confidence in the health of the global economic recovery and the belief that governments will continue stimulus efforts amid a lack of near-term inflationary concerns. The Russell 3000 Index, a broad index of U.S. equities, advanced 5.7% in November. This brings the year-to-date increase in the Russell 3000 to 24.8%.

The U.S. credit market recorded its ninth consecutive monthly gain. Investment-grade bonds issued by U.S. companies, as measured by the Barclay’s Corporate Debt Index, advanced 1.5% for the month. International bonds outperformed U.S. fixed-income securities.

… amid steady but slow progress on the economic front.

Many economists have described the progress of the economy since September 2008 as resembling the mathematical “square root” symbol. As a metaphor for the economy, this pattern represents a steep drop in activity followed by a sharp recovery and then stability or modest growth. While the economy has experienced recovery, activity remains well below peak levels experienced from 2005 to 2007. The big question confronting the markets is whether the economy can continue its recovery as the federal government gradually winds down its stimulus efforts. These diverse efforts have supported housing, infrastructure projects, automobile manufacturers and the financial system.

While the economy continues to move in a modestly positive direction, stock and bond market investors are paying particular attention to unemployment figures. In November, the Labor Department reported that job losses totaled 11,000, the smallest number since December 2007. This led to a decline in the unemployment rate as it fell from a 26-year high of 10.2% to 10.0%. Despite this positive news, November marked the 23rd straight month of job losses, totaling 7.2 million jobs lost since the start of the recession in 2007.

The trends for housing, manufacturing and consumer spending—the key components of Gross Domestic Product (GDP) growth—are generally favorable, but only marginally so. In housing, home price affordability is at all-time highs. Affordability includes two key components: the sale prices of homes and mortgage rates. Standard and Poor’s Case-Shiller index of home prices across 20 national markets indicates that home prices have declined precipitously since 2005, although the pace of decline has been slowing in recent months. In December, mortgage rates dipped to the lowest level in 38 years. Because of attractive affordability and the anticipated expiration of the $8,000 first-time homebuyer tax credit, existing and new home sales reached near-term highs in October. In an effort to prolong the gains in housing, Congress extended the first-time homebuyer’s tax credit through April 2010 and introduced a $6,500 tax credit to existing homeowners who purchase a replacement home before July 2010. Despite improved affordability, roughly 25% of all homeowners with mortgages owe more on their homes than their homes are currently worth. In addition, mortgage payment delinquencies and foreclosures continue to rise dramatically.

Manufacturing’s story is similar to that of housing—very modest improvement at constrained levels of activity. U.S. industrial production has trended upward since mid-year, but production remains far below peak levels. At the current rate of growth, industrial production should return to its prior peak in about two years. Factory capacity utilization and business fixed investment have improved slightly, but they remain close to historic lows. Nonfinancial corporations, such as manufacturing firms, have cut costs by reducing payrolls and capital expenditures as demand has disappeared. Corporate cost cutting has led to strong profitability, and corporations have accumulated historically high cash positions.

Retail sales have grown at a moderate pace despite the recent volatility in sales from the government auto rebate program. “Black Friday,” the first shopping day after Thanksgiving and a leading indicator of retail sales in the holiday season, produced mixed results. While more shoppers patronized stores, the average amount spent per customer was less than during last year’s slow Christmas shopping season. Customers focused on the most deeply discounted electronics goods, such as flat-screen TVs and computers. The current contraction in retail sales relative to 2005 peak levels is larger than any other experienced in the last 50 years.

Banks are being replaced by public securities markets as sources of financing ...

Over the last year, the Federal Reserve Bank (Fed) has taken extraordinary measures to provide capital to the banking system. Banks used most of this money to strengthen their balance sheets rather than as a source of funds for loans to businesses and consumers. U.S. commercial banks now hold $1 trillion in excess reserves over the amount required by the Fed. Despite these significant reserves, the total value of loans made by banks fell 3% in the third quarter, the biggest decline since the Federal Deposit Insurance Corporation (FDIC) began recording this information in 1984. Banks have generally been unwilling to provide essential financing to the broader economy. As a result, borrowers in a wide range of industries, from real estate to technology, have taken advantage of the recovery in the stock and bond markets to raise funds through public security sales.

… and inflation concerns remain muted.

November marked a month long rally in U.S. government bonds, driven by the view that the Fed will not raise interest rates as long as unemployment remains high and the economy continues on its path of a subdued recovery. The interest rate on the shortest-term government security, the 3-month Treasury bill, actually was negative in the month, implying that investors were willing to pay the government to hold their money. In an early November meeting, Fed officials reaffirmed its stance on keeping interest rates low and its belief that near-term deflationary trends outweigh any longer-term inflationary fears. Commodity prices, with the exception of crude oil, increased during the month. It was unclear whether this was due to a broad-based deterioration of the dollar against other major trading currencies or to a strong conviction in the strength of the global recovery. Most notably, gold’s price rose throughout the month, due to concerns over the dollar’s weakness, breaking through the $1,200-per-troy-ounce level in early December.

Market Reaction

Investors in the U.S. markets dismissed a number of concerns, such as the weaker dollar, end-of-month jitters regarding the creditworthiness of Dubai and continued job losses, to propel the market to near-term highs. The Russell 3000 Index advanced 5.7% for the month, bringing the year-to-date return to 24.8%. Large-company stocks rose 5.9% and outperformed small-company stocks, which advanced 3.1% for the month. International stocks underperformed U.S. stocks, with stocks of companies in developed countries advancing 2.0%, while stocks of companies in developing countries increased 4.4% for the month.

Investment Fund Review

Inflation Protection Fund

Fund November Year-to-Date
Inflation Protection Fund +2.3% +15.2%
BCGI Inflation Linked Index +2.8% +13.0%
Difference -0.5% +2.2%
  • The Inflation Protection fund advanced 2.3% in November. The fund’s investments in commodities generated a 4.2% return in November. Despite commodities’ strong absolute and better-than-benchmark performance, the overall fund failed to outperform its benchmark due to less-than-benchmark performances of the other two diversifying strategies in the fund.
  • The fund meaningfully exceeds its performance benchmark for the year because of the strong returns for inflation-linked bonds from developing countries and its allocation to commodities.

Domestic Bond Fund

Fund November Year-to-Date
Domestic Bond Fund +1.4% +17.6%
Barclays Capital U.S. Universal (ex MBS) Index +1.3% +11.2%
Difference +0.1% +6.4%
  • The Domestic Bond Fund returned 1.5% for the month of November, outperforming its benchmark by 0.2%. The fund benefited from weakness in the U.S. dollar, which benefited the global and emerging market debt portfolios held in the fund.
  • The fund extended its positive year-to-date performance to 17.6% and significantly exceeds its benchmark due to very strong performance in emerging market and below-investment-grade debt strategies. Other positive contributors to the fund’s outperformance included the meaningfully better-than-benchmark performance by managers of the fund’s core bond and corporate debt strategies.

Domestic Stock Fund

Fund November Year-to-Date
Domestic Stock Fund +4.8% +19.9%
Russell 3000 +5.7% +24.8%
Difference -0.9% -4.9%
  • The Domestic Stock Fund returned 4.8% for the month, underperforming its benchmark by 0.9%. The fund’s alternative investments contributed to underperformance as the roughly 10% allocation to alternatives produced a 0% return in November. This accounted for about two-thirds of the below-benchmark performance. Small-company and medium-sized-company stocks underperformed relative to large-company stocks and contributed to underperformance of the fund relative to its benchmark as the fund has a higher weighting to small and mid stocks compared to the fund benchmark. Public real estate securities performed best in the month.
  • For the year, returns for the Domestic Stock Fund continue to underperform the benchmark due to valuation reductions in the private real estate and private equity investments. Ten out of 15 active managers are outperforming their individual benchmarks for the year.

International Stock Fund

Fund November Year-to-Date
International Stock Fund +2.5% +47.3%
MSCI ACWI x US +2.7% +40.6%
Difference -0.2% +6.7%
  • The International Stock Fund modestly underperformed its benchmark in November. Stocks of companies in developing countries provided the best performance relative to the fund’s benchmark, while international public real estate securities represented the largest detractors to the fund’s performance.
  • The International Stock Fund remains the best-performing General Board fund for the year, returning 47.3% and exceeding its benchmark by 6.7%. The fund’s highest-performing portfolios are those comprising stocks from developing countries, international small-company stocks in developed countries and international real estate securities. In addition, all active managers with the exception of one are outperforming their respective benchmarks.

Multiple Asset Fund

Fund November Year-to-Date
Multiple Asset Fund +3.2% +23.9%
Composite Benchmark +3.7% +23.2%
Difference -0.5% +0.7%
  • For the month, the Multiple Asset Fund underperformed its composite benchmark, due to the relative underperformance of the Inflation Protection Fund, the Domestic Stock Fund and the International Stock Fund, although the underperformance was slightly offset by the outperformance of the Domestic Bond Fund.
  • For the year, the fund remains ahead of its benchmark due principally to the strong benchmark-relative performance of the International Stock Fund, the Domestic Bond Fund and the Inflation Protection Fund, though partially offset by the underperformance of the Domestic Stock Fund.

Balanced Social Values Plus Fund

Fund November Year-to-Date
Balanced Social Values Plus Fund +3.9% +19.3%
Composite Benchmark +3.7% +19.0%
Difference +0.2% +0.4%


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