Inflation Protection Fund (IPF)

Manager's Quarterly Commentary

• Fund Performance
• Fund Characteristics
• Risk Disclosure

Type of Fund: Fixed-income, inflation-protected securities fund.

Objective: To provide investors with current income and to protect principal from loss of purchasing power due to inflation.

Who Should Invest: Risk-averse investors who wish to attain "long-term" protection from the loss of purchasing power due to inflation but are willing to incur some short-term losses of principal.

Investments: The investment portfolio consists primarily of U.S. and international government-issued inflation protected securities, which are designed to protect investors from inflation and are normally backed by the credit of the issuing government.  IPF’s investment portfolio also includes commodities derivative contracts, cash, and cash equivalents.

Management: Neuberger Investment Management based in Chicago, Illinois manages an index account of U.S. Inflation Protection Bonds.  BlackRock, Inc., based in New York City, manages the Global Inflation Protection Bonds and Capital Guardian Trust Company, based in Los Angeles, California, manages the Emerging Market Inflation Bonds.  Neuberger Investment Management with sub advisor Gresham Investment Management, LLC based in New York, manages the commodity exposure.

Strategy: The Inflation Protection Fund seeks modest current income while preserving capital. The fund holds bonds with an average maturity of 12 years.  The fund also attempts to modestly improve investment returns by investing up to 10% of its assets in commodities.

Performance Benchmark:  Barclays U.S. Government Inflation-Linked Bond Index.

Performance Objective: Outperform the performance benchmark over a market cycle (three to five years) by 0.25%, on average, per year.

For more detailed information regarding the Inflation Protection Fund, please see the Investment Funds Description.

Fund Performance:

Fund Market Value (as of 9/30/08): $1,638,277,720.

Compounded Annual Performance, Net of Fees (periods ending 9/30/08):

Investment results shown here are net of all fees and expenses which include all investment management fees, operating expenses and bank custodial fees.  The fund inception was January 5, 2004.

Fund Characteristics:

Fund Holdings (As of 9/30/08): Download/view fund holdings in PDF format.

Expense Ratio: The General Board will charge participants in the Inflation Protection Fund annual expenses equal to approximately 0.47% of total fund assets.  This cost includes investment management fees, operating expenses, and bank custodial fees.

Inflation Protection Fund Risk Disclosure:

Because U.S. Treasury Inflation Protected Securities (TIPS) are obligations of the U.S. Government, there is no risk of loss due to credit default.  Inflation Protected Securities issued by foreign governments, particularly governments of emerging countries, risk the possibility of loss due to credit risk. 

When the U.S. Treasury issues an inflation protected security, it agrees to make semi-annual interest payments equal to the interest rate stated at the time it issues the security. Additionally, it agrees to adjust the par value of the bond up or down based on the annual change in the Consumer Price Index (however, in no case will par value adjust below the issue price).

There is a risk that investors purchasing TIPS that have already been issued may require higher effective semi-annual interest rates. Typically, this will occur when investors believe funds can be invested in other assets producing more favorable investment returns. For example, during the late 1990s when stocks were highly favored by investors, those purchasing TIPS required higher interest rates than they do today. Generally, an increase in required interest rates will adversely impact the prices of previously issued bonds.

Additionally, should the United States enter a deflationary period (that is, a period in which prices decline), the par value of previously issued TIPS will decline in value.  However, par value of inflation protected securities cannot fall below the original par value which was determined at the time of issuance.

Accordingly, there is some risk of loss of principal for investors in the Inflation Protection Fund. A TIPS Q&A is provided to address various questions you may have about the TIPS market.

In addition, a TIPS Primer is available for a summary of TIPS key characteristics.

Lending of Portfolio Securities: The fund seeks to earn additional income by making loans of its portfolio securities to brokers, dealers and other financial institutions. The loans will be secured at all times by cash and liquid high grade debt obligations. As with any extension of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower fail financially. Additionally, losses could result from the reinvestment of the cash collateral received on loaned securities.