CIO Commentary: Q4 2011

February 17, 2012

A year-end review of UCF’s fund from Chief Investment Officer Dave Klassen

The Fixed-Income Fund had a return of .88% (net of fees) in the fourth quarter versus 1.18% for the Barclays U.S. Government/Credit Index. The Fed made no changes to its accommodative policy and communicated its intent to keep rates low through mid-2013. Rates closed the quarter generally unchanged at 1.88% although they experienced significant volatility causing the U.S. 10-year to trade in a 65bp range between 1.76% and 2.40%. The Fund lagged slightly during the period due to its shorter duration position and relatively conservative credit risk positioning–a disadvantage as market participants became more comfortable with market volatility and the idea of a possible solution to the European debt crisis.

The Total Equity Fund had a return of 7.97% (net of fees) in the fourth quarter versus 8.07% for the Custom Equity Index. Stocks posted an increase in the quarter as evidence mounted that the U.S. could avoid recession for now, and market sentiment improved markedly off the September 30th lows. Small cap domestic stocks outperformed U.S. large cap stocks, reversing the trend in the prior three months. International markets continued to lag U.S. large cap on continued worries about the European Sovereign debt crisis and economic concerns around the world. Emerging markets performed somewhat better, with investors beginning to look favorably upon fundamentals (growth and valuations) coupled with evidence of easier monetary policy in these regions.

The Domestic Core Equity Fund had a return of 11.48% (net of fees) in the fourth quarter versus 11.82% for the S&P 500 Index. The manager of the fund, QMA, had market-like returns in the quarter as their investments in companies that appeared underpriced relative to their peers did not did not distinguish them as investors continued to favor defensive companies in this period of uncertainty.

The Small Cap Fund had a return of 12.97% (net of fees) in the fourth quarter versus 15.47% for the Russell 2000 Index. Two of our three underlying small cap managers—DFA, and Westfield—outperformed their benchmarks in an environment more hospitable for small caps due to their higher exposure to an improving domestic economy. The Fund was held back during the quarter by our allocation to Friess Associates; however, this allocation was eliminated during the period by the Investment Committee due to recent underperformance.

The International Fund had a return of 3.80% (net of fees) in the fourth quarter versus 3.68% for the Custom International Index. Both of our international developed market managers—LSV and Neuberger Berman—were ahead of their benchmarks for the quarter and the full year, as was our emerging markets manager, Aberdeen. Aberdeen, in particular, preserved capital for the year as their defensive positioning helped during this period in which emerging markets have been subject to large investor outflows.

The Balanced Funds performed roughly in line with their benchmarks in the fourth quarter due to the performance of the underlying Total Equity and Fixed-Income Funds. In addition, the Funds benefitted from timely rebalancing during the quarter. The Conservative Balanced Fund had a 3.62% return versus 3.68% for the 35/65 Custom Benchmark. The Moderate Balance Fund had a 5.36% versus 5.41% for the 60/40 Custom Benchmark. The Aggressive Balanced Fund had a 6.44% return versus 6.42% for the 75/25 Custom Benchmark.

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