Letter from the Chief Investment Officer: Impact of the World Financial Crisis

Although the presidential election is just weeks away, the nation is transfixed by the daily movements in the U.S. and world stock markets. Headlines are filled with the names of failed financial institutions and policy responses to the crisis by regulators in the U.S. and around the world.

General Board of Pension and Health Benefits (General Board) participants have seen the impact the crisis has had on their account balances. They want to know what action the General Board has taken or will take to protect their retirement security.

Many years ago, the General Board adopted a consistent, long-term and disciplined strategy for managing a diversified investment program. We have followed this strategy in both up markets and down markets, and it has successfully stood the test of time. We are confident that it will continue to prudently serve our participants’ retirement needs.

An important element of this strategy is maintaining a long-term view. We avoid making hasty investment decisions in response to short-term market volatility. No one—not even the most skilled financial experts—can accurately predict the future direction of the U.S. and world stock markets. And past performance is no guarantee of future performance. However, history provides numerous examples of time periods when the markets experienced steep declines only to sharply rebound soon afterward.

For example, as recently as September 2000 through July 2002, the U.S. stock market declined by nearly 50%, only to increase by 78% over the next 3½ years. From 1973 to 1974, the market lost 45% of its value, but rebounded to gain 63% over the next two years. And in the fall of 1987, the stock market decreased by 36% (including a one-day loss of 20%) in less than two months, yet rose by nearly 60% over the next two years.

The General Board’s investment strategy has been designed to weather the ups and downs of the markets. Despite the recent market losses, we continue to believe that this strategy is the right one for our participants—including those receiving monthly benefit payments, which we will be making for many years to come.

Although active participants nearing retirement have seen a decline in the value of their accounts, they should consider that they may have several sources of retirement income. These sources may include benefits from the Ministerial Pension Plan (MPP), the Pre-82 Plan, the Clergy Retirement Security Program, employer and personal contributions to the United Methodist Personal Investment Plan or the Horizon 401(k) Plan and, in most cases, Social Security.

Likewise, active participants who are many years away from retirement also may have various sources of retirement income. In addition, these participants have many years ahead of them to ride out the inevitable ups and downs of the markets.

One of the tools the General Board uses to help manage the participants' assets is the LifeStage Investment Management Service (LifeStage). This automated tool selects and manages a combination of investment funds based on several factors unique to each participant. These factors include age, risk tolerance, the value of future General Board benefits, expected Social Security benefits and, for clergy participants, expected age at which monthly MPP retirement benefits will begin. LifeStage is designed to prudently balance risk and return. The General Board continually monitors the investment mix selected by LifeStage. For more information about LifeStage, please visit www.gbophb.org/sri_funds/lifestage.asp.

The General Board encourages participants to consult with a professional financial planner, such as those with Ernst & Young Financial Planning Services. Ernst & Young’s financial planners can provide objective, confidential, expert guidance not only about investing, but also retirement planning, tax issues, saving and many other financial matters. This valuable resource is available at no cost to:

• active participants with an account balance,
• retired and terminated participants with an account balance of at least $10,000, and
• surviving spouses with an account balance.

For more information about Ernst & Young Financial Planning Services, please visit www.gbophb.org/sri_funds/planning.asp.

The General Board understands that times like these are a source of stress and anxiety for participants who have seen their account balances decline and/or worry about the reliability of future benefit payments. Participants should take comfort that we will maintain our disciplined strategy of managing diversified investments.

We have faith that the right solutions to address the current crisis will be implemented and that economic growth will resume. It will take time, but over the last several decades, the U.S. and world economies have endured several crises and have proven their resilience.

In the coming days and weeks, we will be providing you with additional information about the causes of the current crisis, the impact this crisis may have on the economy, the effect of policy decisions by U.S. and world regulators and the performance of the General Board’s funds.

If you haven't already done so, please read the letter from General Secretary Barbara Boigegrain and my monthly market commentary.

Sincerely,

Dave Zellner
Chief Investment Officer
General Board of Pension and Health Benefits