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INVESTMENT SUMMARYFOR
SECOND QUARTER OF 2013
July 2013
This Investment Summary will provide information to you about the investment funds offered by the Kansas Area United Methodist Foundation and other account-related information and news. If you should need additional information, please contact the Foundation’s office at 888-453-8405, or by email at .
ECONOMIC MARKETS
2013Second Quarter economic commentary from Bill Miskell, Discretionary Management Services, LLC, Overland Park, Kansas
The economy in the 2nd quarter 2013 continued its slow pace of growth. Once preliminary GDP numbers for the 2nd quarter are released in the coming weeks, it will show that the slow growth of 1.8% in the 1st quarter 2013 will have continued through the spring months. In addition, the expectation for growth for the remainder of 2013 is 1.0% to 2.0%.
Improvements in employment remain slow. The unemployment rate was steady at 7.6% in May and June, reflecting some job growth but also a decrease in the size of the labor force. Job creation was modest, averaging 195,000 per month for the 2nd quarter.
Despite a slow growth economy, U.S. stocks added to their strong one-year gains during the quarterbut most other assets suffered negative returns. Rising interest rates and widening credit spreads led to losses across bond categories, while commodities and emerging markets suffered from China’s slower growth outlook.
Despite modest economic numbers, the market advanced in the 2nd quarter. The S&P 500 Index increased 2.9% during the quarter and 20.6% for the past 12 months. For the quarter the Russell 1000 and the Russell 2000 Indexes returned 21.2% and 24.2% respectively.
Global markets suffered a bout of extreme volatility, and bond yields rose on the perception that monetary conditions would tighten sooner than expected in the U.S. and China.
International stocks lagged in performance when compared to domestic indexes as the MSCI EAFE fell 1.0% for the quarter yet posted an 18.6% gain for the past 12 months. The MSCI Emerging Markets Index fell 8.1% for the quarter but increased 2.9% for the past 12 months. For the past year, value stocks outperformed growth stocks with the Russell 1000 Value Index returned 25.3%, while the Russell 1000 Growth Index returned 17.1%.
Fixed Income markets posted losses during the second quarter as interest rates increased slightly from low levels. The 10-year Treasury yield ended the quarter at 2.52%, up from 1.70% at the end of the first quarter 2013. Investment grade bonds as measured by the Barclays Capital U.S. Aggregate Bond Index returned a negative 2.3% during the quarter. Even though the corporate credit sector of the fixed income markets had a negative return, corporates outperformed Treasuries and high yield continued its stronger performance as investors searched for yield. The high yield index decreased 1.4% for the quarter.
COMMENTS ON FOUNDATION’S INVESTMENT FUNDS by Steven P. Childs, President/Executive Director
From January 1, 2007 through May 2013, $1,274 billion in new funds have been invested in bond funds, while $385 billion has been transferred out of stock funds during the same time period (Source: Investment Company Institute). This history documents investors' flight to safety in bond funds when the stock market began its decline in value in 2007. Investments in stock funds have increased in 2013 through June, helping drive up the fair market value of stocks that we have experienced during the first half of 2013. The S&P 500 returned 23.9% for 7/1/12 to 6/19/13, and then lost 2.3% in the last two weeks of the quarter to end the 12 month period at 20.6%. The comments of Federal Reserve Bank Chairman Bernanke in June of reducing the Federal Reserve Bank's purchase of bonds created a market reaction of reducing existing bond values with the anticipation of increasing interest rates on future offerings.
A large portion of the Foundation's investment portfolio is in our Fixed Income Fund. The December 31, 2012 per share value of our Fixed Income Fund was $10.913. By March 31, 2013, the per share value of the Fixed Income Fund had fallen to $10.8833, and by June 30, 2013 had fallen further to $10.583 per share, for about a 2% decline in share price. Fortunately, the July 31, 2013 share price has improved to $10.6202 per share. Due to the low interest rates that are prevalent in the current markets, the value of the assets of the Fixed Income Fund will be subject to investor speculation on when interest rates will begin to rise and the actual increase in interest rates that we will experience. The Foundation's Investment Committee just recently met with the Discretionary Management Services, LLC financial advisers, and determined that the Foundation does not anticipate making any changes in our current investment philosophy as to bond funds. We will continue to seek investment grade bonds for our intermediate bond fund allocation, but seek a shorter term for the bonds to allow the Foundation to move to higher interest rate bonds more quickly when the interest environment improves. The allocation to higher yield bonds has continued to provide good return for the Fixed Income Fund, with our 10% allocation allowed to increase to 11.3% of our fixed income pool.
FOUNDATION MARKET-BASED INVESTMENT FUNDS
Money Market Fund-this investment fund is commonly used for short-term investments or funds that need to remain readily accessible. This Fund allows you to have access to your money on a daily basis. The Foundation is currently using the Goldman Sachs Financial Square Government Fund (ticker symbol FOAXX) to ensure the safety and stability of the funds in this investment fund. Interest is posted to our clients’ accounts as of the last day of each month.
Short-term Income Fund-this investment fund can provide a safe and conservative investment for your money. The fund invests in only U.S. Treasury obligations and/or jumbo certificates of deposit insured by the FDIC, with maturities of 36 months or less. No assets are sold before they mature, so there is no variation in the principal value of your investment. The Foundation is using the Short-Term Income Fund as an alternative to the money market fund to provide a higher rate of return during this period of lower money market interest rates. At this time all funds are invested in jumbo certificates of deposit, with FDIC coverage. Accrued interest is posted to our clients’ accounts as of the last day of each month. This fund is managed by The Commerce Trust Company of Kansas City, Missouri.
Fixed Income Fund-this investment fund seeks to provide as high a level of current income as is consistent with the preservation of capital for the Foundation’s clients, with theinvestments in intermediate duration securities subject to screening under the Social Principles of The United Methodist Church. The asset targets for this fund are 85% invested in investment grade intermediate term debt obligations, 10% in high yield bonds and 5% in cash. There may be some fluctuation in principal values as assets may be sold before they mature to provide liquidity, and the asset values will fluctuate on a daily market basis. This fund is managed through Discretionary Management Services LLC of Overland Park, Kansas and The Commerce Trust Company, Kansas City, Missouri.
Equity Fund-this investment fund seeks growth through long-term capital appreciation in stocks that are screened under the Social Principles of The United Methodist Church and, if any, mutual funds that are not screened under the Social Principles. The fund’s target allocations are 45.5% in domestic large cap stocks, 19.5% in domestic small cap stocks, 30% in international equities and 5% in domestic cash. This fund is managed by Discretionary Management Services LLC, with subaccount managers of Montag & Caldwell,Atlanta, Georgia (Large Cap Growth), Westwood Management, Dallas, Texas (Large Cap Value), Fiduciary Management, Milwaukee, Wisconsin (Small Cap), Matthews Asia Growth Fund, San Francisco, California (a portion of the international equities with companies located only in Asian countries), and Earnest Partners, Atlanta Georgia (international equities of non-U.S. companies).
REGISTRATION EXEMPTION: Pursuant to the Philanthropy Protection Act of 1995, the Foundation is not required to register under the Investment Company Act of 1940, as amended, and, as a charitable organization that maintains charitable income funds, is exempt from registration under Federal and Kansas securities laws. Accordingly, neither the Funds nor the interests therein, other than investments within such Funds that are individually registered, are registered under the Securities Act of 1933, as amended, or any Kansas securities laws, and neither the Securities and Exchange Commission nor the Kansas Securities Commissioner have reviewed or approved the Funds or interests therein that are not so registered.
FOUNDATION MARKET-BASED INVESTMENT FUNDS PERFORMANCE
SECOND QUARTER 2013
The following chart shows the net returns and current yield for the following investment funds offered by the Foundation for the last twelve months as ofJune 30, 2013. Net returns for a period of one year or more are annualized returns. The net return figures are after the deduction for money manager fees, custodianfees and investment advisor fees. Past performance is not a guarantee of future returns.
The current gross yield figures represent the gross interest or dividend rate earned in each indicated fund as of the last day of the last calendar quarter.
Money Market Fund / Short-Term Income Fund / Fixed Income Fund / The EquityFund
Date of
Inception / 01/01/09 / 01/01/09 / 1/12/09 / 1/26/09
Second Quarter
2013 / N/A / 0.06% / -2.0% / -0.1%
Year to Date
2013 / N/A / 0.57% / -1.5% / 6.7%
One-year average return / N/A / 0.85% / 1.3% / 15.4%
Two-year average return / N/A / 0.93% / 4.1% / 4.8%
Three-year
average return / N/A / 1.08% / 4.3% / 11.0
Four-year
average return / NA / 1.45% / NA / NA
Since
Inception / N/A / 1.74% / 5.8% / 13.3%
Current Gross Yield / 0.01% / 1.1% / 3.25% / 1.10%
ASSET ALLOCATION
For clients who choose to allocate their investment account between the Equity Fund and the Fixed Income Fund, the following net return information as of June 30, 2013for eight different asset allocation models is provided on an annualized basis, with the respective index blended benchmarks for these asset allocation models:
ASSET ALLOCATIONNet ReturnIndexBlended Benchmark
20% Equity Fund/80% Fixed Income Fund
Since inception 7.3% 6.8%
One Year 4.1% 3.4%
Year to Date 0.1% 0.3%
Second Quarter 2013 -1.6%-1.5%
30% Equity Fund/70% Fixed Income Fund
Since inception 8.1% 7.9%
One Year 5.5% 5.3%
Year to Date -1.4%-1.2%
Second Quarter 2013 2.4% 2.6%
40% Equity Fund/60% Fixed Income Fund
Since inception 8.8% 9.0%
One Year 6.9% 7.1%
Year to Date 1.8% 2.5%
SecondQuarter 2013 -1.2% -0.9%
50% Equity Fund/50% Fixed Income Fund
Since inception 9.6% 10.2%
One Year 8.4% 9.0%
Year to Date 2.6% 3.7%
Second Quarter 2013 -1.0% -0.6%
60% Equity Fund/40% Fixed Income Fund
Since inception 10.3% 11.3% One Year 9.8% 10.8%
Year to Date 3.4% 4.8%
SecondQuarter 2013 -0.8% -0.2%
70% Equity Fund/30% Fixed Income Fund
Since inception 11.1% 12.4%
One Year 11.2% 12.7%
Year to Date 4.2% 5.9%
Second Quarter 2013 -0.7% 0.1%
80% Equity Fund/20% Fixed Income Fund
Since inception11.8%13.5%
One Year12.6%14.5%
Year to Date` 5.0% 7.0%
Second Quarter 2013 -0.5% 0.4%
99% Equity Fund/1% Fixed Income Fund
Since Inception 13.2% 15.6%
One Year 15.3% 18.0%
Year to Date 6.6% 9.1%
Second Quarter 2013 -0.1% 1.0%
BENCHMARKS
The Index Blended Benchmark is determined by asset classifications within each fund that are identified with the following market indexes, and then blended according to their respective percentages of the total investment fund. The Index Blended Benchmark uses gross return figures, without any money manager fees, investment advisor fees or custodial fees deducted, which will automatically create a difference in comparison with the Foundation’s investment funds’ net returns.
In addition, the Foundation’s investment funds are screened according to the Social Principles of The United Methodist Church, and the Index Blended Benchmarksare not screened for socially responsible investing, which may also result in some difference in return performance.
INDEX BLENDED BENCHMARK:
INVESTMENT FUNDINDEXES USED IN BENCHMARK
EQUITY FUND45.5%S&P 500-a free-float capitalization-weighted index published by Standard & Poor’s of the prices of 500 large-cap common stocks actively traded in the United States.
19.5%Russell 2000-a small-cap benchmark index of the bottom 2,000 stocks in the Russell 3000 Index
30%MSCI ACWIexU.S (All Country World Index except U.S.).- a free float- adjusted market-capitalization weighted index that is designed to measure the equity performance of developed and emerging markets outside of the United States. The MSCI ACWIex U.S. consists of 45 country indices comprising 24 developed and 21 emerging market country indices.
5%3 Month Treasury Bill
FIXED INCOME FUND85%Barclays U. S. Capital Aggregate Index-a broad based, market capitalization-weighted index, maintained by Barclays Capital, of U.S. traded investment grade bonds with an intermediate term index. Municipal bonds and U.S. Treasury TIPS are excluded from the index.
10% Merrill Lynch High Yield Master II Index-a broad based index of high yield corporate bonds administered by Merrill Lynch.
5%3 month Treasury Bill
CERTIFICATES OF PARTICIPATION
Certificates of Participation can be purchased by members and participants of UnitedMethodistChurches in Kansas, as well as UnitedMethodistChurches and related organizations. Certificates of Participation purchased or renewed in August of 2013 are currently paying a fixed rate of 1.0% for one-year maturitiesand 1.4% for two-year maturities. A minimum of $1,000 is required to invest ina Certificate of Participation. Current interest rates can be obtained from the Foundation’s website at
This statement is not an offer of sale for Certificates of Participation. Please contact the Foundation’s office to obtain an Offering Circular and an application for an investment in a Certificate of Participation, or these documents can be downloaded from the Foundation’s website at The Certificates of Participation fund the Foundation’s Church Development Loan Fund, which makes loans to UnitedMethodistChurches and church agencies in the state of Kansas for the purchase of real estate, building new buildings, renovating existing buildings, large maintenance projects, operating needs and re-financing existing indebtedness.
The Foundation’s Investment Committee meets quarterly with our investment advisers to review our investment policy and asset allocations, continue to carefully monitor the performance of our investment funds, and make adjustments when necessary to meet changing economic indicators. I would be glad to visit with you by phone or in person regarding your accounts with the Foundation.
Blessings,
Steven P. Childs, J.D.
President/Executive Director
Kansas Area United Methodist Foundation
100 East First Avenue, P O Box 605
Hutchinson, Kansas67504-0605
888-453-8405 (toll free)
620-662-8597 (fax)
(general e-mail address)
(website)
KAUMF STAFF
Lee Sankey, Director of Stewardship Services,
Michele Ellis, CPA, Chief Financial Officer,
Gloria Markus, Administrative Assistant,
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