December 2009 Investment Report

2009 was one of the best years for credit and equity market performance ...

U.S. and world equity markets closed the year on a positive note, reflecting confidence in the global economic recovery. However, investors remain anxious about the future. In particular, they are concerned with the durability of the recovery as the U.S. government reduces its stimulus programs. Another issue is the threat of increasing interest rates due to anticipated inflation. In December, the Russell 3000 Index, a broad index of U.S. equities, advanced 2.9%. For the year, the Russell 3000 increased a remarkable 28.3%, even after losing nearly a quarter of its value through early March.

U.S. credit markets broke a string of consecutive monthly gains with losses in December. High-quality “investment-grade” bonds issued by U.S. companies, measured by the Barclay’s Corporate Debt Index, declined 1.0% for the month. Despite that decline, the index finished the year with an impressive gain of 16.0%.

… as investors gained confidence that the economic rebound was sustainable.

Economic indicators were generally positive in December. Trends are difficult to observe on a monthly basis and are clearer over longer-term horizons, such as six to 12 months. There is no question, though, that the global economy is in better shape now than it was one year ago.

The housing sector showed improvement in 2009, primarily due to tremendous financial support from the federal government. Two of the most encouraging indicators of improvement in the housing market are existing home sales and home price affordability. Existing home sales steadily increased from the lows experienced last January, while home prices began to rise mid-year, as measured by the Case-Shiller 20-city price index. Government support for housing is continuing in 2010 with the extension of the homebuyer tax credit and renewed efforts by the Federal Deposit Insurance Corporation to redesign the mortgage loan modification program for homeowners in default. While the Federal Reserve Bank (Fed) and the U.S. Treasury Department will be ending their aggressive mortgage purchase program soon, the government announced it would continue to strengthen the troubled government housing agencies, Freddie Mac and Fannie Mae.

Manufacturing activity has also rebounded from the depths of the recession. After hitting a low point in early 2009, the Institute of Supply Management (ISM) manufacturing index has improved steadily. This indicates that the manufacturing sector of the economy has generally expanded since August. While progress in manufacturing is encouraging, it is useful to keep in mind that industrial production remains well below the pre-crisis peak level.

Retail sales, a barometer of consumer health, continued to show improvement. Early reports on the holiday shopping season reveal that sales increased about 4% over last year’s weak levels. Businesses also raised inventory levels for the first time since 2008, suggesting faith in improving retail sales trends. Like housing and manufacturing activity, however, retail sales have a long way to go before recovering to their previous peak levels.

Job losses and unemployment continue to be the most closely watched economic statistics. The Labor Department reported greater-than-expected job losses of 85,000 in December, yet the unemployment rate held steady at 10.0%. Companies may have significantly slowed the pace of employee terminations, but it is clear they are still a long way from hiring workers back.

Credit markets broadly reversed direction ...

Returns in the investment-grade corporate credit markets turned negative in December, driven by rising Treasury rates. This impact was somewhat muted by the continued tightening of credit spreads. These reflect the premium over U.S. Treasury rates that corporate issuers of debt need to pay to compensate investors for credit risk. In the non-investment-grade sector, demand for risky assets helped fuel positive returns. For the month and year, the Barclays U.S. High Yield Index returned 3.3% and 58.2%, respectively, as investors gravitated to riskier assets amid a gradually recovering U.S. economy.

… despite limited inflation worries.

As expected, the Fed kept policy rates unchanged at its December meeting. Market watchers expect short-term rates to remain low for some time, as inflation does not appear to be a major concern of the Fed for now. For example, the Core Consumer Price Index, a key indicator of inflation, was flat in November. However, the combination of significant U.S. Treasury Department refinancing needs and a gradually improving economy placed upward pressure on longer-term Treasury security rates last month. The yield on the 10-year Treasury Note ended 2009 at 3.8%, which was 0.6% higher than at the start of the month. The Treasury issued $2.1 trillion of new debt during 2009, more than double the amount issued in the prior two years combined. Expected issuance for 2010 is projected to be even higher at $2.5 trillion.

Despite significant volatility during December, the Dow Jones-UBS Commodity Index, a broad index of commodity prices, rose 2%. Crude oil prices fell almost 8% during the month, but rallied and ended the month with a 3% gain. Most notable in the commodity sector was the 7% drop in gold prices coincident with a rally in the dollar against other developed-nation currencies. The dollar strengthened on the view that the Fed will have to consider raising interest rates if the economic recovery continues at its current pace.

Market Reaction

In December, investors in the U.S. markets overcame a variety of concerns, including global credit market risk, Congressional gridlock over health care reform and a possible resurgence of terrorism on U.S. soil. Markets rose for the ninth time in the last 10 months. The broad-based Russell 3000 Index rose 2.9% in December. Large-company stocks rose 2.4%, but underperformed small-company stocks, which advanced 8.1% for the month. International stocks underperformed U.S. stocks. Stocks of companies in developed countries advanced 1.4 %, while stocks of companies in developing countries increased 4.1% for the month. A global composite of developing-market equities generated an annual return of 80%, the best performing asset category for 2009.

Investment Fund Review

Inflation Protection Fund

Fund December Q4 09 Year-to-Date
Inflation Protection Fund -0.9% +3.1% +14.1%
BCGI Inflation Linked Index -2.2% +1.8% +10.5%
Difference +1.3% +1.3% +3.6%
  • The Inflation Protection fund outperformed its benchmark in December by a margin of +1.3%. All three of the fund’s diversifying strategies contributed positively to performance as U.S. Treasury Inflation Protected Securities declined along with other U.S. Treasury securities.
  • For the quarter, the fund strongly outperformed its benchmark, principally due to its allocation to inflation-linked bonds from developing countries and commodities.
  • The fund meaningfully exceeded its performance benchmark for the year, again because of strong performance by inflation-linked bonds from developing countries and exposure to commodities. These strategies produced investment returns of 37.6% and 24.5%, respectively.

Domestic Bond Fund

Fund December Q4 09 Year-to-Date
Domestic Bond Fund -1.0% +1.6% +16.4%
Barclays Capital U.S. Universal (ex MBS) Index -1.2% +0.6% +9.9%
Difference +0.2% +1.0% +6.5%
  • The Domestic Bond Fund modestly outperformed its benchmark in December. The fund benefited from the diversifying portfolio strategies of below-investment-grade debt and debt from developing countries. The gains from these strategies were partially offset by the fund’s non-dollar bond holdings, which were adversely affected by strength in the U.S. dollar.
  • For the quarter, the fund remained meaningfully ahead of its benchmark due to an overweight allocation to credit-related sectors, as investor appetites for risk in fixed-income products increased.
  • The fund ended the year significantly ahead of its benchmark due to very strong performance of debt from developing countries and below-investment-grade debt strategies. Three portfolios using these strategies produced returns in excess of 35% for the year. Other positive contributors to fund outperformance included the meaningfully better-than-benchmark performance by the fund’s core, global and corporate debt strategies.

Domestic Stock Fund

Fund December Q4 09 Year-to-Date
Domestic Stock Fund +3.2% +5.1% +23.7%
Russell 3000 +2.9% +5.9% +28.3%
Difference +0.3% -0.8% -4.6%
  • The Domestic Stock Fund outperformed its benchmark for the month because of several factors, including the fund’s overweight to small- and mid-cap stocks, the performance of domestic REIT securities and a positive year-end adjustment to the fund’s private equity portfolio. These gains were partially offset by negative year-end adjustments to the fund’s private real estate holdings.
  • For the quarter, the fund slightly lagged its benchmark due to negative contribution from the fund’s private real estate investments. The valuations of these nonmarketable investments have declined throughout the year as a result of the negative outlook for commercial real estate. The poor real estate results were offset by strong performance by a majority of the fund’s active equity managers.
  • For the year, the return of the Domestic Stock Fund underperformed its benchmark due to valuation reductions in the private real estate and private equity investments. Eleven out of 15 active managers outperformed their individual benchmarks for the year. Five managers outperformed their benchmarks by 10 percentage points or more.

International Stock Fund

Fund December Q4 09 Year-to-Date
International Stock Fund +2.1% +4.2% +50.5%
MSCI ACWI x US +2.2% +3.7% +43.6%
Difference -0.1% +0.5% +6.9%
  • The International Stock Fund slightly underperformed its benchmark in December. Stocks of companies in developing countries and international small-company stocks in developed countries provided the best performance relative to the fund’s benchmark. Nevertheless, the other fund-diversifying portfolio strategies detracted from overall performance.
  • For the quarter, the fund modestly outperformed its benchmark. The fund’s international private real estate holdings and allocation to stocks from developing countries contributed to above-benchmark performance.
  • The International Stock Fund finished as the best-performing General Board fund for the year and significantly outperformed its benchmark. The fund’s best-performing strategies included stocks from developing countries, international small-company stocks from developed countries and international public and private real estate portfolios. Further, all active managers with the exception of one outperformed their respective benchmarks.

Multiple Asset Fund

Fund December Q4 09 Year-to-Date
Multiple Asset Fund +1.5% +3.8% +25.8%
Composite Benchmark +1.2% +3.7% +24.7%
Difference +0.3% +0.1% +1.1%
  • For the month, the Multiple Asset Fund outperformed its composite benchmark due to the relative outperformance of the Inflation Protection Fund, Domestic Bond Fund and Domestic Stock Fund.
  • For the quarter, the fund slightly outperformed its benchmark. The Inflation Protection Fund, Domestic Bond Fund and International Stock Fund positively affected the performance, while the Domestic Stock Fund negatively affected benchmark-relative performance of the fund.
  • For the year, the fund remained ahead of its benchmark due to the strong benchmark-relative performance of the Inflation Protection Fund, Domestic Bond Fund and International Stock Fund, though partially offset by underperformance of the Domestic Stock Fund.

Balanced Social Values Plus Fund

Fund December Q4 09 Year-to-Date
Balanced Social Values Plus Fund +1.2% +4.4% +20.7%
Composite Benchmark +1.3% +4.6% +20.6%
Difference -0.1% -0.2% +0.1%


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