CUIT Fund Performance

Equity results were strong on an absolute basis in 2009. Relative results versus benchmarks were particularly good for the actively managed, fundamentals-based strategies used in the CUIT Value, Growth and Balanced Funds. The one weak subset of equity programs was the quantitative managers, whose holdings emphasize companies with longer-term earnings quality, strong balance sheets and favorable momentum. Such attributes were not rewarded during the market’s strong rally in the second and third quarters. However, investors once again keyed on fundamentals late in the year, and there was a corresponding improvement in the performance of these strategies across the actively managed equity Funds.

The CUIT Balanced Fund returned 26.92% for the year, well ahead of its blended benchmark’s 18.40% return. Credit for the outperformance was shared by the Fund’s bond portfolio (which returned approximately 20% versus 5.9% for the Barclays Aggregate Index) and its equity portfolio (which returned 31% versus the S&P 500 Index’s 26.5% return). The bond portfolio more than recouped the relative shortfall experienced in 2008, when credit conditions deteriorated severely and trading came to a halt following the Lehman bankruptcy, and it was achieved through sizeable positions in financially sound corporate, commercial mortgage-backed and asset-backed issues, which appreciated strongly as credit spreads narrowed from historically wide levels. The equity portfolio likewise recovered the relative ground lost in 2008 on the strength of both stock selection and sector weights. Highlights included the Fund’s energy holdings (Schlumberger, +56%; Occidental Petroleum, +38%) and significant overweight (14% versus the benchmark’s 4%) in the strong-performing information technology sector. Principled Purchasing exclusions had a slight positive impact on the equity portion of the portfolio due to the relative weakness of excluded healthcare and defense companies.

The CUIT Value Equity Fund returned 23.65% (Class B, 24.06%), comfortably outpacing the Russell 1000 Value Index’s 19.69% return. The Fund finished ahead of the benchmark in three of the year’s four quarters, with relative results driven primarily by sector weightings. The Fund’s information technology exposure (both stock selection and sector weighting) was highly beneficial, adding more than two percentage points to relative return, followed by consumer discretionary (about one percentage point) and industrials (about 80 basis points). Top contributors to absolute return included Hewlett-Packard (+43.2%), Schlumberger (+56%), WellPoint (+38.4%) and News Corp. (+53.3%). The impact of Principled Purchasing was mixed by sector but positive overall. Aerospace and defense exposure detracted while exposure in the pharmaceutical sector was additive.

The CUIT Core Equity Index Fund returned 25.02% (Class B, 25.28%), slightly trailing the benchmark S&P 500 Index’s 26.46% return. While the broad stock market return was strongly positive, it was characterized by high volatility and a high level of return dispersion, not only at the sector level (e.g., information technology returned 61.7% while telecom services returned 8.9%) but also at the stock level, as riskier names were bid up substantially. This had negative implications for the portfolio even though restricted names as a group underperformed the benchmark. The process of reweighting allowable names in the Fund produced a negative impact. Holdings such as Genzyme (-26.2%), Gilead Sciences (-15.4%), Procter & Gamble (+1.2%), General Electric (-1.7%), Aflac (+4.4%) and U.S. Bancorp (-9.1%) detracted from results due to modest overweights relative to their weights in the S&P 500. Additionally, in this high-return environment, transactional cash (maintained at less than 50 bps of assets) was also a negative contributor. As market volatility and return dispersion fall to more normal levels, we believe that the Fund’s tracking error will diminish.

The CUIT Growth Fund generated a strong absolute and relative return of 43.19% (Class B, 43.62%), exceeding by a wide margin the Russell 1000 Growth Index’s 37.21% return. The Fund outperformed the benchmark in three of the year’s four quarters and ranked in the top decile of its peer universe for the year. Stock selection and sector weighting each contributed to the excess return. Stock selection in information technology was strong while a meaningful sector overweight was also additive. Notable contributors included NetApp (+146.2%), Apple Computer (+147.1%) and Broadcom (+85.3%). Stock selection was significantly additive in consumer discretionary (Amazon, +162%; TJX, +80.5%), financials (Itau Unibanco Holding SA, +120.8%; Goldman Sachs, +102.5%), energy (National Oilwell Varco, +48.4%; Occidental Petroleum, +38%) and industrials (Joy Global, +130.9%; Cummins Engine, +75.2%). Lower-than-benchmark exposure to the underperforming consumer staples (+17%) and industrials (+26%) sectors added meaningfully during the year. Principled Purchasing restrictions were also modestly additive.

The CUIT Small-Capitalization Equity Index Fund produced a strong absolute return of 26.74% (Class B, 27.12%) in 2009, closely tracking the Russell 2000 Index benchmark’s 27.17% return. The year was characterized by a very wide dispersion of returns among sectors — consumer discretionary, materials and information technology posted returns near 60%, while financials (-1.8%), utilities (+7.9%) and industrials (+13.9%) were much weaker. Restricted companies underperformed as a group. Defense and healthcare were weak, although tobacco issues were relatively strong. Reweighting of unrestricted holdings through optimization supported returns. Notable contributors included Pier 1 Imports (+1,275%), Brunswick (+203%), Jazz Pharmaceuticals (+93%), Quantum (+713%) and KapStone Paper (+313%). Finally, the Fund’s small transactional cash balance produced a marginally negative impact given the year’s rising market.

The CUIT International Equity Fund’s strong absolute return of 30.11% (Class B, 30.63%) modestly trailed the MSCI EAFE Index’s 32.46% return for the year. The most significant negative factor was the Fund’s stock selection in financials, which produced close to four percentage points of negative relative performance. Underexposure or lack of exposure to major benchmark names such as HSBC Holdings (+41%), Banco Santander (+88%) and Commonwealth Bank of Australia (+160%) offset more modest portfolio exposure to BNP Paribas (+100.6%), Standard Chartered (+111.9%) and Oversea-Chinese Banking (+103.4%). An overweight in insurance detracted, as that industry lagged the overall sector. Stock selection was negative in consumer discretionary and marginally negative in healthcare. Stock selection was additive in all other sectors, particularly energy (Technip, +142%; Aker Solutions, +112%), industrials (Vinci, +42%; TNT, +67%), information technology (Tokyo Electron, +86%; ASML Holding, +97%) and materials (Rio Tinto, +217%; AkzoNobel, +71%). The Fund outperformed its benchmark in the first and fourth quarters of 2009, but lagged during the strong rally in the second and third. The major cause of this underperformance was the Fund’s quantitative portfolio, managed by Principal Global Investors. As noted earlier, quantitative approaches had difficulty following the inflection point in market sentiment early in the second quarter. Additionally, Principal emphasizes higher-quality names, which lagged the lower-quality, more speculative issues that led the market’s advance during the second and third quarters. As investors return their focus to company fundamentals, we believe that Principal’s approach will again produce superior results and complement those of Causeway, the Fund’s fundamental value-oriented co-manager.