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Fourth Quarter Commentary
January 13, 2011
Dear DIT Participant:
With Greece tottering on the brink
of insolvency, concern about the
viability of the Euro zone helped
precipitate a flight to quality in
the second half on 2011. The flight,
which began in the third quarter and
extended into the fourth, favored
U.S. Treasuries over other forms of
domestic and international debt,
defensive over cyclical stocks,
large cap over mid and small cap
stocks, and U.S. stocks over foreign
and especially emerging market
stocks.
For the quarter ended December 31,
2011, the DIT Income Fund posted a
1.1% total return compared to 1.1%
for its benchmark, the Citicorp
Broad Investment Grade Index, while
the DIT’s Stock Fund, with its mid
cap, small cap and foreign stock
exposures, produced a 9.4% return
versus 11.8% for its benchmark, the
large cap S&P 500 Index. For the
year, the Income Fund posted a 7.0%
total return compared to 7.9% for
the Citicorp Broad Investment Grade
Index, while the Stock Fund produced
a -4.9% return versus 2.1% for
the S&P 500 Index. Although in the
aggregate the Stock Fund’s managers
underperformed the Stock Fund’s S&P
500 benchmark in 2011, they matched
their allocation index for the year;
an identically allocated portfolio
of index funds would have returned
-4.8%. (A weak performance by the
Stock Fund’s domestic, large cap
growth manager was the chief cause
of the DIT’s slight 0.1%
underperformance vs. the allocation
index.)
The Stock Fund's substantial
international exposure in 2011
dampened the Fund’s overall results
despite a strong performance by the DIT's principal international equity
manager. Nevertheless, the Trustees
of Donations (TOD) continue to
believe that in the long run DIT
participants will benefit from a
diversified and globally oriented
asset class mix, one that we will
continue to refine in 2012. In
November we hired a new investment
advisor, Prime, Buchholz &
Associates. The advisory firm’s
recently completed analysis of the
DIT’s Stock and Income Fund
portfolios will provide a fresh
perspective on the TOD’s asset
allocation strategy and a new point
of departure for ongoing efforts to
adjust the strategy to long-term,
global economic trends.
The TOD continues to recommend a 40%
Income Fund / 60% Stock Fund
allocation for investments in the
DIT. Management fees remain at 0.50%
annually for the Income Fund and
0.95% annually for the Stock Fund.
There are no additional fees imposed
on shareholder assets.
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 has been
provided by DIT’s Income Fund
manager, Standish Mellon Asset
Management Company:
Market Environment -
Although 2011 began with optimism,
it quickly evaporated. Starting with
the unrest in the Middle East and
North Africa which pushed oil prices
much higher, and then coupled with a
tragic earthquake and tsunami in
Japan which pushed growth
expectations lower, the economic
outlook darkened. Later in the
second quarter, Europe became the
market’s focus as a Greek default
became a high probability event and
the European peripheral countries’
borrowing rates, including Italy,
started to move much wider. In late
July, the debt ceiling extension in
the US took center stage, when the
political picture darkened as
Congress showed signs of complete
dysfunction and there was a
resultant downgrade by S&P of the US
credit rating. Fears of a Euro
currency break down and banking
crisis rose and markets became even
more volatile in the third and
fourth quarter. Above all this year,
concerns rose about the
effectiveness of policy makers in
the developed world.
Against this backdrop, US rates
gapped lower in July and August, and
remained low with the ten-year
Treasury ending the year more than
100 bps lower than it began. The
Federal Reserve debated more
stimuli, but held off as US growth
showed signs of picking up in the
second half of the year. US equity
markets sold off sharply in the
third quarter, but made up some of
that ground and finished the year up
2.09%.
The sentiment of bond investors
shifted over the closing quarter of
2011 as positive signs of US
economic activity helped offset the
ongoing worries that persisted
regarding the European debt crisis.
Spread product outperformed over the
quarter despite coming under
pressure in November, as investors
again became cautious. As measured
by the Citigroup BIG Index, the US
bond market returned 1.09 % over the
quarter and 7.85% for the year.
Sector Performance -
For all of 2011, Treasury and
agencies outperformed along with the
higher rated CMBS and ABS sectors,
both perceived as insulated from
Europe. Interest rates were
meaningfully lower for the year, the
ten-year Treasury ending December at
1.88% down 141bps. The yield curve
flattened over 100 bps from 2-10
years with no room to move lower in
short maturities. High quality,
short duration ABS was the
outperformer of the year, besting
Treasuries with 0.52% of excess
return in contrast to Corporates
which lagged Treasuries by -3.67 %,
as the financial sector came under
renewed selling pressure, and long
corporates trailed Treasuries by a
large margin.
However, in the final quarter,
spread sectors proved to be the main
focus of investors as risk aversion
diminished allowing credit spreads
to narrow over the fourth quarter.
CMBS was the top performer by a wide
margin, posting an excess return of
2.5% as investors again favored the
sector as fundamentals continued to
improve and new supply was low.
Corporate bonds benefitted from the
improved economic outlook despite
sizeable issuance as borrowers
looked to lock-in low yields and
returned 0.82% versus Treasuries.
Agency MBS also beat Treasuries,
with an excess return of 0.24%,
helped by low origination volumes.
Outside of the index, high yield
bonds returned 6.5% for the quarter
and emerging market debt had a total
return of 5.1%.
For the quarter and year end, the
Trustees of Donation portfolio
finished relatively flat to the
Citigroup BIG Index returning 1.03%
and 7.84%, respectively. For most
of the year, we were shorter than
the index duration position which
detracted modestly to performance
while exposure to ABS and CMBS
contributed positively.
Outlook -
Markets remain tough to navigate as
politics and policy rule the day in
the US and Europe. A rational
solution in Europe remains possible,
but very complicated. The US
economy continues to move along at a
reasonable rate and consumers have
been somewhat constructive in spite
of low confidence numbers earlier in
the year. Any market perception of
a solution in Europe would be very
positive for risk assets and
negative for US rates, but the path
remains a rocky one.
From a portfolio perspective, while
there are pockets of cheap valuation
and rates certainly are low in the
Treasury markets, we remain
defensive in posture as volatility
reigns and policy errors are highly
likely.
Nonetheless, in this environment we
expect fixed income portfolios
overall to perform well and expect
to find opportunities to take
advantage of value in the market to
add return.
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