Fixed-Income Fund The Fixed-Income Fund trailed its benchmark -1.60% vs. -0.55%, which can partially be attributed to significant yield volatility. The UCF investment in bank loans was additive to the overall performance in 2018, although the manager, Voya, underperformed the leveraged loan benchmark 0.29% vs. 0.44%, after fees. The Pension Boards core fixed-income manager detracted 0.58%, net of fees, with the decline occurring mostly in the fourth quarter. Community Capital Management, a core fixed-income manager focused on impact in areas such as affordable housing and enterprise development, beat its respective index at 0.95% vs. 0.51%. Finally, Lazard Asset Management, the emerging markets debt manager, trailed its benchmark due to its overweight to corporate debt securities.
Beyond Fossil Fuels Fund The Beyond Fossil Fuels (BFF) Fund manager, QMA, underperformed its global equity benchmark -13.27% vs. -10.08%, net of fees. The Fund was hurt as the valuation component of its process was not rewarded, nor was the quality component as applied to smaller companies internationally.
Balanced Funds Performance for the UCF Balanced Funds were below their respective benchmarks, net of fees. Returns ranged from -5.53% for the Conservative Balanced Fund to -9.36% for the Aggressive Balanced Fund. Asset allocation decisions were generally favorable as an increased allocation to cash outpaced equities and fixedincome for the year. However, the balanced funds suffered from underlying manager performance in equities and fixed -income.
Alternatives Balanced Fund The Fund performed below its benchmark -7.07% vs. -5.23% net of fees. Heitman, our real estate manager, outperformed its benchmark by 2.16%. Evanston Weatherlow and Magnitude Capital, two UCF hedge fund of funds managers, both contributed positive performance. Conversely, Abbey Capital, although a smaller portion of the Fund, was significantly behind its benchmark -7.78% vs. -3.25%.
Market Outlook Looking forward, we believe that economic worries may be overdone. The U.S. economy has moderated as the benefits of tax stimulus abate, but we do not think a recession is likely now. After the selloff, global equity valuations are favorable, with emerging markets especially attractive. Many emerging markets also have the tailwind of growth stimulus from China and could be set to outperform the U.S., even more so if the dollar weakens. Risks remain due to anticipated Fed rate hikes, but the pace of these hikes may slow. Political uncertainty in Europe and a worsening trade outlook are also on the radar as concerns. As for fixed-income, our interest rate sensitivity (duration) needs to be nimble given these cross-currents. As a result, a focus on diversification should continue to be the best discipline. United Church Funds remains alert to identify and pursue areas of opportunity. We will build on the asset allocation decision capability and tools that helped our Funds in 2018. Selecting skilled managers, with low management fees, is also essential to delivering the returns you expect. Providing these returns proved more difficult in 2018, as only 30% of professional equity managers industry-wide exceeded their benchmarks. We still believe in active security selection for a portion of our Funds, especially if the direction of markets remains uncertain. Finally, we remain committed to incorporating environmental, social and governance criteria, and assessing the impact of UCF investments. Our focus on sustainability not only helps create a just world but is essential for risk management and providing competitive fund performance.
David A. Klassen Chief Investment Strategist
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