CIO Commentary: Q2 2011
United Church Funds’ investment division offers a commentary on fund performance in the second quarter —
Fixed Income Fund
The Fixed Income Fund saw a return of 1.78% (net of fees) in the second quarter versus 2.32% for the Barclays US Government/Credit Index. Interest rates declined in the period, with the 10-Treasury yield ending June at 3.16%, down from 3.47% in March. The fund, which outperformed the Index in the first quarter, lagged in the second quarter due to its lower duration position amid an environment of falling interest rates. As rates trend up in the future, the fund will benefit from this lower duration position. The fund did benefit from favorable selection of corporate bonds, but an overweight in the sector detracted as corporate bonds lagged Treasuries, consistent with a “flight to safety” mindset of investors.
Total Equity Fund
Net of fees, the Total Equity Fund neither gained nor lost return in the second quarter versus -0.01% for the Policy Index (55% S&P 500 Index, 20% Russell 2000 Index, 20% MSCI EAFE Index, 5% MSCI Emerging Markets Net Index). Stocks delivered mixed performance in the period amid signs that economic growth had hit a soft patch. Also contributing to investor nervousness was the resurfacing of sovereign debt default concerns in Europe and political bickering over the US budget deficit and federal government’s debt ceiling. Contributors to the fund’s performance included benchmark-beating returns of our domestic core equity, international value and emerging markets managers, while our small cap value and one of our small cap growth managers detracted.
Domestic Core Equity Fund
The Domestic Core Equity Fund gained 0.22% (net of fees) in the second quarter versus 0.10% for the S&P 500 Index. Quantitative Management Associates (QMA — UCF’s large-cap enhanced index manager — added value over the Index with their focus on high quality earnings, which helped in a period characterized by macro-economic uncertainty.
Small Cap Equity Fund
The Small Cap Equity Fund lost 2.96% (net of fees) in the second quarter versus -1.61% for the Russell 2000 Index. Westfield, UCF’s newest small-cap growth manager, provided a return approximately in line with the Russell 2000 Growth Index, while UCF’s other small-cap growth manager, Friess Associates, lagged due to stock selection. Small-cap value stocks continued to underperform small-cap growth stocks, with investors favoring higher growth companies since overall economic growth remains modest. Our small-cap value manager, Dimensional Fund Advisors (DFA), underperformed the Russell 2000 Value Index due to their focus on the smallest, most value-oriented stocks, which had a difficult second quarter.
International Equity Fund
With a return of 1.68% (net of fees) in the second quarter, the International Equity Fund slightly outperformed the 1.56% return for the MSCI EAFE Index. Neuberger Berman, UCF’s developed markets growth manager, performed in line with the MSCI EAFE Index, while our developed markets value manager LSV outperformed. Adding to the manager’s return was an overweight position in Japanese stocks, which experienced strong performance in the second quarter following a sell-off in the first quarter in the aftermath of the tsunami and nuclear power plant accident. Aberdeen, UCF’s emerging markets manager, posted a positive return for the quarter, beating the MSCI Emerging Markets Index’s negative return. Inflationary concerns in emerging markets have led to interest rate hikes in a number of countries such as China, causing investors to question future growth prospects. Aberdeen benefitted from its focus on companies with stable, secular growth prospects as opposed to those more dependent on cyclical growth factors.