Tempered by the stock market sell-off during the second half of the year, the majority of CUIT Funds produced moderate absolute returns in 2007. Small-cap and value results were particularly weak following a sustained period of success. On the other hand, both international and growth investing were quite successful, the former due in part to strong foreign currency gains against the U.S. dollar.
The CUIT Balanced Fund produced a 3.41% return in 2007 versus 6.22% for its weighted benchmark. Within the equity portfolio, stock selection in information technology and industrials produced the greatest relative weakness. Areas of strength included an underweight in financials and stock selection in healthcare. In the bond portfolio, the Fund’s shorter duration and modest exposure to lower quality corporate issues were detrimental, while its yield curve positioning and overall high credit quality (AA+) supported relative results. The 67 basis point decline in ten-year Treasury yields contributed to a superb year for bond investing considering the relatively low absolute interest rate levels at the start of the year.
The CUIT Market Neutral Fund produced weak results in 2007, declining 1.14% compared to the 5.0% return of the 91-Day Treasury Bill. The Fund produced solid results through June and the underperformance was mostly attributable to a weak third quarter, when the majority of quantitative long/short programs posted negative returns caused by liquidation of a number of leveraged hedge and long/short strategies. A lesser cause of the relative weakness was the market’s transition from value to growth, as fundamentals took second stage to momentum traits in stocks. Prospects for 2008 appear to be more favorable than what was presented by 2007’s difficult market environment, as the valuation spread between cheaply and richly priced stocks has widened appreciably and now offers greater apparent opportunity for added value.
Following four consecutive years of strong positive returns, large-cap value stocks retrenched in 2007. The CUIT Value Equity Fund declined 0.80%, approximating the benchmark’s -0.17% return. The Fund produced relative gains in financials and information technology but had a weak showing in the volatile energy, consumer staples and telecom services sectors. Within information technology, an overweight and strong stock selection proved beneficial as growth issues outperformed as the year progressed. To a lesser degree, underweights and stock selection in consumer staples and telecom services, both strong performing sectors, weighed on results.
The CUIT Core Equity Index Fund generated a 5.03% return (Class B, 5.17%) to trail the benchmark by 46 basis points in 2007. The Fund excluded an average of 26 of the benchmark’s 500 stocks. These restricted stocks as a group returned 9.1% and outperformed the benchmark by 3.7 percentage points (370 basis points). Overall, SRI screens in the healthcare sector benefited the Fund’s performance as poor returns by two excluded companies disadvantaged the benchmark. On the other hand, strong returns in the tobacco sector boosted the S&P 500 relative to the Fund.
The CUIT Growth Fund rebounded strongly in 2007 and produced a robust absolute return of 16.95% (Class B, 17.26%) which exceeded the Russell 1000 Growth Index’s 11.81% return. Last year we commented on the atypical market environment experienced during 2006 and its impact on the portfolio, and this year’s strong result was primarily driven by many of the same holdings, selected for their long-term fundamental growth characteristics. Stock selection was additive in nearly all sectors (consumer discretionary and consumer staples were the exceptions) and the portfolio’s strong emphasis on information technology and healthcare issues, both traditional growth areas, was successful. While the equity markets may face a number of headwinds entering 2008, we believe our sub-advisers’ fundamental, disciplined approach to growth investing will benefit participants.
For the year, the CUIT Small-Capitalization Equity Index Fund marginally lagged the Russell 2000 benchmark on a net-of-fee basis, returning -2.30% (Class B, -2.10%) versus the benchmark’s -1.57% return. The difference was mainly attributable to a slight cash drag during the first quarter (due mostly to high M&A activity among Index companies) and the very modest impact of restrictions within the healthcare sector. Although a number of restricted companies in healthcare and aerospace and defense produced strong performance in 2007, the negative impact was largely offset by re-weighting of permitted names in the portfolio.
The CUIT International Equity Fund produced a positive return of 9.50% (Class B, 9.97%) in 2007, although the Fund trailed the MSCI EAFE Index benchmark’s 11.63% return. Negative factors over the course of the year included stock selection in consumer discretionary, financials and information technology. Positive contributions were made by stock selection in healthcare, industrials, telecommunications and utilities. A primary cause of the Fund’s lower relative return was the sector allocation in the terminated sub-adviser’s portfolio during the first quarter. In addition, the Fund’s relatively low exposure to emerging market companies hurt results versus other international managers in 2007, although in the volatile and weak economic environment at the start of 2008 we view this strategy as a constructive one.
|Total Assets Under Management|
|(in millions) 12/31/07||$4,209.0|
|RCT - Fixed-Income||$1,083.5|
|CUIT - Balanced & Equity||$2,232.7|
|Individually Managed Portfolios||$893.2|
On the other hand, both international and growth investing were quite successful, the former due in part to strong foreign currency gains against the U.S. dollar.