August 2011 Investment Report


The month of August experienced excessive volatility in the equity markets, with U.S. and international stock markets declining approximately 13% in the first week. Despite wild gyrations for the remainder of the month, the markets recovered slightly more than half of the first week’s losses, ending the month with a 6% loss. International markets fared slightly worse, declining over 8% for the month.

The primary focus of the financial markets during most of the month was concern about the European banking sector and its exposure to sovereign debt of the European periphery countries of Greece and Portugal. The Greek government has been unable to convince the markets it can make the requisite reforms that will help it avoid a default or major restructuring of its debt. The concern is not so much about the impact of the Greek situation in isolation, but rather a perceived “contagion” effect among some of the other debt-challenged countries, notably Italy and Spain. The European debt situation is reminiscent of the sub-prime mortgage crisis that began in 2007. Market observers opined that the damage resulting from loose underwriting standards for sub-prime mortgages would be contained to a small sector of the fixed income market. The subsequent contagion to other fixed income sectors eventually led to the 2008 economic crisis.

In addition to the European debt crisis, weaker U.S. economic statistics have reignited concerns among some investors that U.S. contraction (i.e., recessionary conditions) may resume. As discussed in our Chief Investment Officer’s August letter, investors may have exacerbated the volatility in August by observing, reacting and panicking to stock market conditions regardless of their knowledge of the fundamental condition of the U.S. economy. If the average investor believes the stock market “has it right” regarding the future prospect for the U.S. economy, the impact of their collective behavior could result in a “self-fulfilling prophecy.” The collective actions of consumers, who significantly reduced their purchases of goods and services because of the stock market collapse, were a significant contributor to the 2008-2009 recession. Consequently, U.S. manufacturers and other providers of goods and services were forced to lay off millions of workers as sales volumes dramatically decreased.

Despite these concerns and apparent investor aversion to risk, U.S. and world government and monetary authorities are presently considering numerous alternatives to help stimulate the economy and avoid further recession. Action over the next couple of months will shape the economic landscape for the next two or three years. We continue our steadfast belief in managing our funds with a disciplined, long-term focus ignoring short-term fears and volatility often caused by the irrational behavior of market speculators.


  • As reported above, U.S. equities represented by the Russell 3000 Index declined 6.0% for the month.
  • Large-company U.S. equities outperformed small-company U.S. equities due to the market’s perception small, less-established companies will perform worse in a possible “double-dip” recession. For both large and small stocks, companies with strong earnings growth performed better than equities classified as “value.”
  • International developed equities, as measured by the MSCI EAFE Index, declined 9.0% in dollar terms. The U.S. dollar posted small gains relative to developed-market currencies, which detracted modestly from developed-market equity performance. Equities of developing countries also declined as the MSCI Emerging Markets IMI Index dropped 9.2% during the month.
  • Investors sought the safety of U.S. Treasuries despite a credit downgrade by Standard and Poor’s (S&P). The yield on U.S. 10-Year Treasury Notes meaningfully declined from 2.82% to 2.23%, and the Barclays Capital (BC) U.S. Treasury Index advanced 2.8% for the month. “Long Bonds” (bonds with long maturities, generally 10 years or more) were the top-performing fixed income sector in August as the BC U.S. Treasury Long Index gained 8.8%. Treasury Inflation Protected Securities (TIPS) underperformed traditional U.S. Treasury securities as the BC U.S. Government Inflation-Linked Bond Index gained 0.9% in August. The underperformance was attributable to investor perceptions that the rate of inflation will be less if U.S. economic growth stagnates or declines.
  • Investment grade debt, as represented by the BC U.S. Credit Index, advanced 0.4%. Lower-rated debt securities underperformed higher-rated debt securities as the Barclays Capital Corporate High Yield Index declined 4.0% in August. Non-investment grade debt performs poorly in periods where the markets reflect pessimism about the U.S economy.
  • The value of the U.S. dollar strengthened slightly relative to a basket of currencies as the ICE Dollar Index advanced 0.3% in August. Commodities advanced 1.0% during the month as represented by the Dow Jones UBS Commodity Index. Gold advanced 12.2% on concerns of a global slowdown and falling equity prices.

Economics Highlights

  • After months of bi-partisan debate, Congress finally passed legislation to increase the debt ceiling limit. This allowed the U.S. government to remain current on its financial obligations. Congress also established a bi-partisan committee of six senators and six congressional representatives, equally divided between the two parties, to find spending cuts in the federal budget.
  • S&P downgraded the ratings of U.S. treasuries to AA+. Fitch and Moody’s affirmed their AAA rating. In S&P’s view, the deficit reduction plan passed by Congress did not go far enough to stabilize the country’s debt situation.
  • U.S. Gross Domestic Product was revised down to 1% from 1.3%, spreading fears of a double dip recession. Consumer confidence also plunged in August.
  • Europe continued to attract headlines as the peripheral countries of Greece, Italy, and Spain continued to try to install austerity measures. Interest rates on 10-year government bonds in Italy and Spain surpassed 6% at the beginning of the month, but declined as their respective governments took action. Spain is trying to add a constitutional clause limiting the country’s budget deficit and public debt levels. Trade unions in Italy called for general strikes in the wake of government attempts to pass emergency budgets.
  • Hurricane Irene caused widespread damage and power outages from North Carolina to Vermont as it hammered the East Coast. Flooding caused the majority of the estimated $7 to $13 billion in damages. In addition, the East Coast suffered a 5.8 magnitude earthquake, which is quite rare for that part of the country.

Geopolitical Headlines

  • Libyan rebels captured Tripoli, bringing the civil war closer to an end. Muammar Qaddafi is still at large.
  • Japan installed a new Prime Minister, Yoshihiko Noda, who was previously the Finance Minister. He is the sixth prime minister in five years.
  • Japanese and Swiss central banks intervened in the currency market in an effort to halt the appreciation of their currencies, which have attracted investor capital. Currency appreciation could undermine their economies by making their exports too expensive.

Key Monthly Economic Statistics

This table contains a list of key monthly economic statistics. Each statistic is listed with a link to a Web page that provides a thorough description of the economic indicator.

  Positive Statistics
  Neutral Statistics
  Negative Statistics

Source:–economic statistics; Econoday–description of the economic indicators

Investment Fund Review (Net of Fees Performance)

Inflation Protection Fund

Fund August Year-to-Date
Inflation Protection Fund +0.7% +8.4%
Barclays Capital U.S. Government Inflation-Linked Bond Index +0.9% +11.1%
Difference -0.2% -2.7%
  • The Inflation Protection Fund gained 0.7% in August as the portion of the fund invested in U.S. Treasury Inflation Protected Securities (TIPS) gain nearly 1% along with the rest of the U.S. government bond market as investors increased their demand for these securities because of increased recessionary fears. The value U.S. TIPS is nearing unrealistic levels as many shorter-maturity TIPS are trading at negative real yields. This means investors are willing to incur a guaranteed loss of purchasing power due to fear of losses from investing in higher risk assets. All three of the fund’s diversifying strategies detracted from the fund’s relative returns.
  • For the year, the Inflation Protection Fund is the best-performing fund and has gained 8.4%, but is meaningfully underperforming the fund benchmark. The fund’s benchmark, which is comprised exclusively of U.S. TIPS, has gained 11.1% and it is the best-performing asset class so far in 2011. Investors perceive U.S. TIPS as the safest asset class and they have increased significantly in value due to investor fears of a possible double-dip recession.

Fixed Income Fund

Fund August Year-to-Date
Fixed Income Fund +0.1% +5.6%
Barclays Capital U.S. Universal (ex MBS) Index +0.9% +5.7%
Difference -0.8% -0.1%
  • The Fixed Income Fund produced a modest 0.1% gain in August but significantly underperformed the fund benchmark. U.S. Treasury fixed income securities produced significant gains during the month due to investor fears of recession and a desire to avoid risk. The fund holds fewer U.S. Treasury securities relative to the fund benchmark. The fund’s holdings of positive social purpose loans gained 2.4% and added value relative to the benchmark due to the long maturity of these loans versus maturity of similar assets in the benchmark. Longer maturity loans increase in price more than shorter maturity loans in a falling interest rate environment. This positive contribution to performance was offset by the fund’s exposure to below investment grade bonds and bonds from developing countries that declined in value. This is because these investments are viewed as more risky and investors sought to avoid lower risk assets in August.
  • For the year the fund has gained 5.6%, but is now underperforming its benchmark due to poor relative performance in August.

U.S. Equity Fund

Fund August Year-to-Date
U.S. Equity Fund -6.0% -3.1%
Russell 3000 -6.0% -2.3%
Difference +0.0% -0.8%
  • The U.S. Equity Fund declined 6.0% in August, matching the decline in the overall market. While the fund’s 10% exposure to alternative investments of private equity and private real estate benefitted relative performance, the fund’s greater-than-benchmark exposure to stocks of mid and small companies detracted from performance. The S&P 500 declined 5.4%, whereas the Russell 2000 Index of small companies fell 8.7%.
  • After August’s decline, the U.S. Equity Fund is now recording a 3.1% negative return for the year, and continues to trail its benchmark by 0.8%. The fund’s holdings of public real estate investment trusts have gained 6.1% and positively contributed to benchmark relative performance. In addition, the fund’s alternative investments have also added relative value. However, the fund’s larger-than-benchmark allocation to stocks of mid and small companies have more than offset the positive contributions of these asset classes. The Russell 2000 Index has declined 6.5% compared to the 1.8% loss of the S&P 500.

International Equity Fund

Fund August Year-to-Date
International Equity Fund -8.4% -7.1%
MSCI ACWI x US -8.6% -6.5%
Difference +0.2% -0.6%
  • The International Equity Fund declined 8.4% in August and modestly outperformed its benchmark. The fund’s exposure to international real estate contributed positively to benchmark relative returns, along with better-than-benchmark performance of the fund’s international growth manager. This positive performance was slightly offset by the 10% decline in the value of the fund’s small company strategy.
  • For the year, the International Equity Fund trails its benchmark by 0.6%. The fund’s underperformance is primarily attributable to the 9.2% decline of the small company portfolio.

Multiple Asset Fund

Fund August Year-to-Date
Multiple Asset Fund -4.2% -0.5%
Composite Benchmark -4.1% +0.2%
Difference -0.1% -0.7%
  • For the month of August, MAF declined 4.2% and slightly underperformed the fund’s benchmark.
  • For the year, the fund is underperforming its benchmark by 0.7%. All four funds that comprise MAF are underperforming their respective benchmarks.

Balanced Social Values Plus Fund

Fund August Year-to-Date
Balanced Social Values Plus Fund -2.4% +0.7%
Composite Benchmark -2.9% +0.0%
Difference +0.5% +0.7%


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