STABLE VALUE: A SAFE HARBOR IN THE STORM
Robert J. McEvitt, Sr. Vice President and Portfolio Manager

The third quarter of 2008 was an extremely tumultuous period within both the equity and the fixed income markets as the credit crisis that began one year ago with the meltdown of the subprime mortgage market mushroomed into a global liquidity event. During September the crisis intensified with the collapse and/or bailout of some of the world's largest financial institutions. Widespread media coverage of events coupled with the mailing of third quarter participant asset statements, reflecting significant negative returns in many investment options, has resulted in widespread risk aversion. Fear has overcome greed in many quarters. Though stable value funds are not immune to the downward pressures of the day, FCM believes that its stable value investing principles remain sound. The following is representative of our style.

Stable Value Fund Objectives

The stable value fund seeks to provide a low-risk, high quality investment for participants that preserves principal and provides a stable rate of return.

The rate of return of the fund will change over time and will follow changes in interest rates. Although the stable value fund may provide a lower potential for long-term appreciation than some other investment options, the fund also provides a lower level of risk and return fluctuations.

Stable value may be appropriate for investors who require investments with the yield potential of fixed-income securities and who seek to protect their principal. The stable value fund may also be appropriate for investors wishing to diversify their retirement portfolio between lower and higher-risk investments. The stable value fund is a conservative investment option.

Strategy

Due to the persistent yield premium that GICs have offered over time, FCM's stable value assets are primarily invested in multiple guaranteed investment contracts (GICs) issued by high quality insurance companies,. In order to diversify the credit risk of the fund and to limit exposure to any one company, GICs are purchased from up to 14 different insurance companies. Each GIC pays a fixed interest rate for a predetermined amount of time and provides for repayment of principal and interest over the life of the contract at stated maturity dates.

To enhance the fund's industry diversification, the stable value fund also invests in two or more diversified portfolios of bonds managed by different sub-advisors, employing distinct investment styles that are likely to react differently at various points in the fixed income market cycle. Each diversified portfolio of bonds is covered by a stable value "wrap" contract issued by an insurance company or bank that smoothes the market volatility of the bond portfolio.

Liquidity

An FCM managed stable value fund contains a small cash component for the purpose of satisfying participant transfers and withdrawals. Each GIC and the wrap contracts also provide for the book value payment of participant transfers and withdrawals.

Security

Under almost all circumstances, it is reasonable to expect preservation of principal with the principal amount consistently increasing by investment earnings; however principal and interest of the stable value fund's investments are not guaranteed by the federal government. The stable value fund's security is based on the financial strength of the insurance companies, the diversified pool of bonds, the cash account, and lastly the wrap contract.

Current Market Volatility

Every segment of the financial markets has been touched by the events of the day. FCM is constantly monitoring each of the GIC issuing insurance companies as well as the bonds in the diversified portfolio. The Fund Manager will continue to follow the normal investment process where decisions are based on the credit quality and the relative investment value offered by available stable value investments. FCM continues to identify investments that it believes are appropriate to continue to provide the stability and safety of the stable value fund even in the current environment.

It is helpful to remember that the insurance industry is one of the most highly regulated financial industries in the world. The insurance companies that issued the GICs to the fund continue to demonstrate strength and resilience in the face of these major market events. And GICs are policyholder obligations and therefore senior to all general creditors. Recent events have shown that there are no perfect guarantees anywhere, but FCM remains comfortable with our positions and vigilant in our analysis of the financial landscape.

Fixed Income Fund Returns

The diversified pools of bonds have been under pressure from recent market events and therefore have experienced some reduction in market value. Fluctuation of bond valuations is normal in response to changes in market conditions. The crediting rate of the wrap contract will change in the normal course of quarterly rate resets in response to the changes in the bond valuations. Since bond valuations are down and liquidity hampered, we expect synthetic returns to decline for the foreseeable future. But most GIC contract rates do not change in response to market rate levels or credit levels. Therefore, the segment of existing GICs in the fund will not see any principal or yield changes as a result of recent events, although purchases of new GICs currently are at significantly higher rate levels. The cash portion of the fund is invested in a money market type fund whose rates change daily, but the overall levels have not changed dramatically.

In short, participants who invest in stable value may be rocked a little by the heavy seas outside of their safe harbor, but they won't be capsized.