Individually Managed Portfolios

CBIS administered 39 individually managed portfolios (IMPs) at the end of 2008, with $651 million in total assets, representing a decline from the prior year. A large indexed portfolio was closed during the year and several bond portfolios were converted into the RCT Intermediate Diversified Bond Fund. The majority of IMP assets — about 65% of the total by market value — are fixed-income mandates. Of the remainder, 24% are balanced portfolios and 11% are indexed equity portfolios.

Dodge & Cox manages over 80% of CBIS’ IMP assets and has been managing CBIS separate accounts since 1992. Fixed-income accounts returned from 0.1% to 1.4%, net of fees, depending on specific participant guidelines and cash flows. These results substantially trailed the Barclays Aggregate Index’s 5.24% return due primarily to the portfolios’ lower exposure to government issues and the impact of sharply wider corporate credit spreads. The Federal Reserve dropped the Fed Funds rate steadily throughout the year, to a 0% to 0.25% range by December. This action, coupled with aggressive Treasury liquidity support and credit facilities, was designed to address the year-end liquidity and capital crisis at financial institutions caused by rising subprime defaults and heightened counterparty risk, and to thwart the developing severe global recession. These developments helped produce a 175 basis point decline in the ten-year Treasury yield during the year. IMPs maintained a shorter effective duration than that of the benchmark and this had a negative impact on results, as did Dodge’s underweight in Treasuries. But the performance shortfalls were mostly attributable to significant corporate bond exposure, particularly in the financial and retailing sectors, which were hit hard by expectations of major asset write-downs and a slowdown in consumption. A small exposure to auto finance debt also hurt results, as the government-supported restructuring of the U.S. auto industry proceeded haltingly.

Net-of-fee returns for equity IMPs ranged from -44.6% to -45.5% for the year, lagging the -37.0% return of the S&P 500 Index and the -36.8% performance of the Russell 1000 Value Index. While all sectors declined during the year, the consumer discretionary sector, and in particular media stocks, were very weak on falling ad revenue and declining circulation. Equity returns in 2008 were highly influenced by exposure to specific stocks. Dodge had correctly underweighted the weak financial sector, but its emphasis on several large and prominent financial franchises proved unrewarding following the Lehman bankruptcy and subsequent ad hoc government interventions. Individual holdings such as Wachovia, AIG, Citigroup and FNMA suffered declines of 75% or more. The portfolio also held some strong, positive positions, such as Wal-Mart, which rose on expectations that consumers would economize, and Amgen and Rohm and Haas, which rose on proposed acquisitions.

Balanced portfolios produced returns that ranged from -11.8% to -32%, net of fees, depending on investment restrictions and differences in asset allocation. This compared to -22.1% for a 60% S&P 500 Index / 40% Lehman Aggregate benchmark. As noted above, both equity and bond results trailed benchmark returns for 2008. Bond results were weak due primarily to credit sector exposure and specific credits that experienced sharply wider spreads, while exposure to several particularly weak financial holdings negatively impacted results. Market conditions in 2008 overwhelmed the fundamental strength and solid long-term outlook of many portfolio holdings. We believe that the attractive intrinsic value of these positions will contribute favorably to 2009 results regardless of market conditions.

Jennison Associates managed four separate bond portfolios in 2008, totaling $111 million at year-end. Returns ranged from 4.18% to 4.93%, net of fees. Results modestly trailed the 5.24% return of the Barclays Aggregate Index due primarily to the portfolios’ low government sector exposure. Supported by sharply falling Treasury yields, Treasury and Agency issues produced the only positive results in 2008. While credit exposure negatively impacted results, Jennison’s high-quality focus avoided many of the weakest bond issues, and its astute trading capitalized on the numerous opportunities in the corporate and mortgage sectors during the volatile environment after mid-September. Jennison had a modest yield advantage over the benchmark, but also added value through yield curve positioning as the yield curve steepened on sharply falling short rates. As the year ended, Jennison found opportunities in new corporate offerings with attractive concessions, and found that short asset-backed issues offered compelling values.

RhumbLine Advisers managed one indexed portfolio at year-end, benchmarked against the S&P 500 Index. The portfolio returned -36.7% for the year, slightly outperforming the S&P 500 Index’s -37.0% return. Large pharmaceuticals excluded by Principled Purchasing performed relatively well, as did tobacco stocks; both benefited from their defensive characteristics in a weak stock market. However, reweighting the portfolio among remaining sectors, particularly within information technology and consumer staples, was additive enough to offset the impact of the exclusions.