Fourth Quarter 2009 Performance Recap by Catherine Waterworth, CIO
The glimmer of economic recovery continued to flash in the final quarter of 2009. The trend in job losses and falling home prices appeared to be reaching a trough while businesses began to replenish bare-bones inventories as signs of pent-up consumer demand emerged. The financial markets reflected the improved economic environment. Global equities continued to march upward from the lows reached earlier in the year while interest rates on U.S. government securities rose as investors began to focus on future action (or inaction) by the Federal Reserve to nip inflation in the bud and the considerable supply of Treasuries to come to finance the government’s stimulus program.
Equity markets capped off a remarkable recovery in 2009 with continued positive returns in the last quarter of the year. The S&P 500 added 6.04%, ending 2009 with a total return of 26.47%. Non-U.S. developed markets, as measured by the MSCI EAFE (Europe, Asia, Far East) Index added 2.18%, boosting 2009’s return to 31.78%. Emerging markets, which were the worst performers in 2008, reasserted their leadership in 2009, topping the charts with a final quarter return of 8.55% and a full year, eye-popping return of 78.51% as measured by the MSCI Emerging Market Index. Bonds, as measured by Barclays Capital Government/Credit Index, did not fare well in the last quarter, returning a negative 0.21% but returned a respectable 4.52% return for all of 2009.
United Church Funds performed relatively well in the fourth quarter with mixed results for the year. Regarding Managed Funds, the Fixed-Income and International Funds were standouts for the quarter and the year from a relative performance standpoint. The Fixed-Income Fund recorded a positive 0.61% return in the final quarter compared to a negative return for the benchmark. For the year, this fund returned 10.62%, exceeding the benchmark by more than 6.0%. It continued to benefit from positioning that took advantage of generous yields on corporate securities while at the same time limiting exposure to rising interest rates. The International Fund returned 2.73% in the final quarter and a hefty 43.00% return for the year which exceeded the benchmark in both periods by 0.55% and 11.22%, respectively. The International Fund benefited from benchmark beating performance by both the growth and value managers and the allocation to emerging markets which was the highest performing equity market category in 2009.
The Domestic Core Equity Fund delivered solid performance in the fourth quarter, returning 6.25%. The outperformance in the fourth quarter, however, was not enough to offset the underperformance of earlier quarters with the result that this fund returned 23.76% for the year and fell short of the new Equity Policy Index by 2.7%. The Equity Policy Index is a composite made up of 55% S&P 500, 20% Russell 2000, 20% MSCI EAFA, and 5% EAFA Emerging Market indexes. The main factor in the underperformance was the abrupt change in investor sentiment in the first quarter. The stock selection model used by the manager relies on fundamental analysis which was adversely affected by the extreme behavior in 2009 — overly risk averse at the beginning of the year and then risk seeking after the March lows. With these extremes subsiding, we expect performance to improve as the market returns to the time honored investment practice of evaluating securities based on underlying fundamentals.
The Small Cap Equity Fund was the equity laggard in 2009 primarily due to the underperformance of the growth manager who focused on less risky stocks by concentrating on companies with solid near-term growth potential, high-quality earnings and healthy balance sheets. However, higher performance accrued to riskier stocks which the growth manager avoided. Even though the value manager outperformed the benchmark by a large margin (their strategy is based on very low capitalization stocks which did well in 2009), it was not enough to offset the underperformance of the growth manager, resulting in a return of 3.61% in the fourth quarter, which narrowly underperformed the benchmark and 18.58% for the year which missed its mark by a much wider margin.
Of course, the Total Equity Fund reflected the performance of the three underlying managed funds. The Total Equity Fund returned 4.87% in the last quarter, narrowly underperforming the Equity Policy Index. The underweight in the small caps and the overweight in international holdings which recorded the smallest overall return in the fourth quarter were the primary factors in the shortfall. As noted above, for the year, the Total Equity Fund returned 27.43%, falling short of the Equity Policy Index by 2.71%. The major contributor to the shortfall was the underperformance of the large cap core manager who holds more than half of the fund. Results were also impacted by the underperformance in the Small Cap Equity Fund.
Regarding the Balanced Funds, the Conservative and Moderate Balanced Funds outperformed in the last quarter and for the year due to the strong performance of the Fixed Income Fund and an overweight of equities relative to the benchmark. The Aggressive Balanced Fund nearly matched the performance of the Policy Index in the fourth quarter and narrowly underperformed for the year. With a greater emphasis on equities, the effect of the strong outperformance of the Fixed Income Fund was diluted and overwhelmed by the shortfall in full-year performance of the Total Equity Fund.
Will the recovery continue in 2010? Our feeling is that, given deeply divided opinions about whether the economy needs further government stimulus or whether growth is sustainable without further intervention and given the continued mixed economic signals, further significant gains are going to be more difficult to come by in the months ahead, although they are not out of the question if earnings beat expectations and guidance on future earnings continues to point upward. Fixed income securities, especially U.S. Treasuries, look vulnerable as rates rise in expectation that the Federal Reserve will have to remove monetary accommodation at some point. Investors are likely to remain on edge as policy and regulatory changes continue to be debated.
Net Asset Values
as of 09/03/2010
| Fixed-Income | 4.7382 |
 |
|
| EQUITY FUNDS | |
| Domestic Core | 8.7884 |
| International | 10.3561 |
| Small Cap | 8.2327 |
| Total Equity | 9.1517 |
|
|
| BALANCED FUNDS | |
| Conservative | 10.2429 |
| Moderate | 7.4552 |
| Aggressive | 9.4655 |
Learn more about our funds