RCT Fund Performance

Considering the shocks to credit spreads, market liquidity and the litany of bad financial news in late 2008, the RCT fixed-income programs produced reasonably good results during the year. The Federal Reserve’s aggressive lowering of short-term rates, combined with the Treasury’s efforts to shore up market liquidity and counterparty confidence, drove Treasury yields to very low levels, particularly in the cash markets. While it was a difficult environment for any bond manager, our focus on high credit quality and avoidance of some of the most toxic areas of the market — such as collateralized debt obligations (CDOs), structured investment vehicles (SIVs) and credit default swaps (CDSs) — proved beneficial.

The RCT Flex Cash Fund produced a 2.18% total return for the calendar year, exceeding the Merrill Lynch 91-Day Treasury Bill’s 2.06% return. The Fund was able to exceed its benchmark by maintaining a relative yield advantage of over 100 basis points for most of the year. Benefitting from strong credit analysis, the Fund experienced none of the myriad of problems that confronted bond investors as credit conditions deteriorated, such as exposure to SIVs and variable rate notes, the Lehman Brothers bankruptcy, and the severe price weakness that hit many lower-quality mortgage- and asset-backed holdings. Nevertheless, as with all money market funds, the Flex Cash Fund faces the problem of the low absolute yields probable throughout 2009.

For the calendar year 2008, the RCT Short Bond Fund returned 1.95%, well behind the 6.61% return of the Merrill Lynch 1-3 Year Treasury Index. This resulted from Treasuries’ unusually strong return as the yield on the two-year Treasury declined by over 225 basis points, as well as from the unprecedented spread widening that affected all non-government sectors. Improved liquidity in the bond market resulting from substantial government intervention offers the potential to reverse these extremes in 2009. And we believe that the Fund offers an attractive opportunity for participants to augment what will likely be negligible yields in the cash market in 2009.

The RCT Intermediate Diversified Bond Fund returned -2.03% (Class B, -1.80%) in 2008, well behind the Barclays Aggregate Index’s positive 5.24% return. Non-government exposure, particularly to corporates and commercial mortgage-backed issues, negatively impacted results as spreads reached all-time highs. Specific credits in the retailing and banking sectors, as well as auto finance issues, contributed to the shortfall, as did a modest short duration exposure during the first quarter of 2008 as Treasury rates fell. The year produced the greatest performance dispersion between Treasury and non-Treasury debt since the Great Depression. Long Treasury securities returned +24% while long corporates returned -4%. Much of the Fund’s negative return resulted from the illiquidity and a near-breakdown in bond market trading at the close of the year. We believe that the Fund’s substantial yield advantage relative to the benchmark, coupled with the strong intrinsic value of portfolio holdings, can produce strong relative returns in 2009 if bond market conditions improve.