Dear Shareholder:

    Domestic and foreign stock markets pulled back sharply in the second quarter. The pull back brought an end to a thirteen month rally that saw the S&P 500 rise almost 80% above its March 2009 low. Developments that contributed to the pull back included a stubbornly high unemployment rate and a still struggling real estate market here at home, and, on the foreign front, a European debt crisis and a slowing Chinese economy. For the quarter, the S&P 500 posted a -11.4% return, while the EAFE Index of foreign, developed market stocks turned in a -14% return. For U.S. investors, the decline in European stock prices was magnified by a strengthening of the dollar relative to the EURO.
    Despite its >30% exposure to foreign stocks, the Stock Fund posted a -11.2% quarterly return, outperforming its S&P 500 benchmark by 20 basis points. The Income Fund turned in a 6.5% return vs. 5.3% for its benchmark, the Citigroup Broad Investment Grade Index. Both funds continued to post strong 1-, 3-, 5- and 10- year returns.
    The Trustees of Donations (TOD) would once again remind DIT participants of the importance of keeping their long term investment objectives in mind and of allocating their assets accordingly. The TOD continues to recommend an investment allocation of 45% to the Income Fund and 55% to the Stock Fund. DIT participants are responsible for maintaining the Income Fund / Stock Fund balances of their agency funds.
     As always, the TOD welcomes invitations from EDOM parishes and affiliated organizations to discuss existing or prospective investments in the DIT. A meeting with TOD representatives can be arranged by calling the DIT's Investment Coordinator, Mr. Richard Blakney, at (617) 482-4826 ext. 557 or by emailing him at rblakney@diomass.org.
    The following commentary is by Philadelphia International Advisors, one of the DIT’s foreign stock managers.

    Heightened concern over worsening macro economic headwinds drove global equity markets sharply lower in the second quarter.  Shrugging off better than expected first quarter corporate earnings, the markets focused instead on the possible future implications of Europe’s sovereign credit crisis, the government engineered slowdown in China, and a growing number of less positive economic releases.  With memories of the sudden and severe downturn in late 2008 still fresh, projections of a “double-dip” began to proliferate and equities sold off, ending the quarter at their lowest levels this year.  Every sector of the market fell, although the defensive consumer and healthcare groups kept their losses to single digits.  The worst sector was energy (down 22.7%), which reacted to signs of slowing economic momentum, specifically in China, which has accounted for a significant percentage of demand growth in recent years.  Not surprisingly, BP led the industry lower, as the Gulf disaster knocked off nearly half its market value and accounted for 92 basis points of the overall drop in the MSCI EAFE Index.  Materials stocks also reacted poorly to evidence of slower Chinese growth and declined 18.2%.  Financial stocks dropped 17.2%, and were particularly hard hit in the financially stressed southern European countries.  Currency played an especially large role in regional returns during the quarter.  In local currency terms, European markets were the top performing region, but on a US dollar basis, Europe was the worst, with a 15.8% decline.  Similarly, Japanese stocks declined 14.8% in local terms, but yen appreciation against the dollar made it the region with the smallest decline – down 10.1%.  Overall, the currency effect on EAFE performance during the period was about -2.8%, bringing the return for the EAFE Index to -13.98% for the quarter.

 Your PIA managed portfolio didn’t avoid losses, but declined by a more modest amount over the quarter.  The primary reason for the favorable comparisons was good stock selection in the two largest countries – Japan and the UK.  Our emerging market stocks also added value, and European performance was in line with the regional index.  On a sector basis, we enjoyed good relative returns in most sectors, with the best comparatives coming in energy, industrials, and utilities stocks.

 Concern over the sustainability of the global economic recovery has been reinforced by a recent flurry of negative economic news, emanating from the US, Europe, and China.  Figures suggest global demand is slackening, and manufacturing indicators suggest slowing momentum – especially in the US and China.  On top of these indicators, investors remain concerned over the impact of Europe’s austerity measures on growth in 2011.  Despite its diminished momentum, we think the world economy remains in a sustained recovery.  While activity will decelerate, economists still expect continued economic growth into 2011, with slow growth in Europe, moderate growth in the US, and strong expansion in Asia (with China’s growth “slowing” to 8-9%).  The drop in equity values this year seems to more than discount the downward shift in GDP growth.  Valuations are relatively low in most foreign developed markets, and within select markets interesting opportunities exist for investors willing to look beyond near term uncertainty.  We are finding these largely in select financial and economically sensitive sectors.