Mutual Fund Research

Summer 2008 Mutual Funds Investor Ideas for a Sound Financial Future Planning Your Retirement Distribution Strategy For Americans who are nearing retirement, perhaps two of the most pressing questions they are asking themselves are: 1) Can I afford to retire? and 2) How should I best finance my retirement? Undoubtedly, those in the baby-boomer generation have worked hard to build and grow their retirement nest eggs. And while the investing part wasn’t always easy, this group is now confronted with the daunting challenge of planning how and when to spend down their retirement assets. Traditionally, retirement planning advice has focused on the “accumulation phase” of retirement. That is, what is the amount that one must save for retirement in order to have enough wealth to stop working and live on the accumulated assets? Whether based on replacing a percentage of current income, a multiple of the amount earned in the later work years or some other rule of thumb, the financial planning mantra has been to determine the amount that must be accumulated at the launch point for retirement. However, less attention has been given to the period after retirement when the individual must manage both the investment and distribution of the accumulated assets. In several respects, the same basic investment principles apply in both situations. In the “asset decumulation” or draw-down phase, similar to the “asset accumulation” phase, one still needs to consider the following: asset diversification, time horizon, risk tolerance, and tax consequences1. It is important to note that diversification does not assure a profit or protect against loss in a declining market. But in the draw-down phase, the retiree needs to add a few other factors into the model: the risk of outliving one’s money; liquidating assets and withdrawing funds at the wrong time (i.e. when markets are down); the rising cost of health care; the risks of unanticipated events (e.g. illness or longterm care); and finally, the desire to pass along wealth. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal. Individual risk assessment and scenario analysis is crucial in the decumulation phase and makes each case unique. However, there are some general steps that everyone can take that will help in the process. First, take inventory of all sources of retirement income you will have to fund your retirement, such as Social Security, company pension, 401(k), IRAs, and/or other investments. Second, estimate the amount of retirement income you will need on an annual basis. Third, consider alternatives for meeting your income needs and goals, such as continuing to work full- or part-time in retirement or downsizing your home. Next comes how best to sequence the drawdown of your retirement nest egg. Again, while there is no one-size-fits-all answer, there are some basic guidelines to consider. First, financial experts typically advise that you draw from taxable investments first (e.g. pensions, Social Security, and non-tax qualified accounts), then capital investments (e.g. real estate), and finally from tax-deferred assets (e.g. 401(k) and IRA). This traditional theory seeks to maximize tax deferral for as long as possible, until the retiree reaches 70½ when he/she is required to start taking minimum distributions from a qualified plan. In This Issue: • lanning Your Retirement P Distribution Strategy • aking a Balanced Approach T to Investing • Pay Yourself First with the Automatic Investment Plan • State Farm LifePath 2050® Fund Available July 14, 2008 • Did You Know ... Get Connected with E-Delivery! As an alternative to receiving bulky paper copies, have your prospectus and financial reports delivered to you electronically! Just go to: www.statefarm.com /mutual/mutual.htm continued on page 2 541922 Taking a Balanced Approach to Investing In times of volatile market movements, it is a challenge for some investors to keep their emotions in check. When markets are in a strong rally, our herd instinct compels us to join the crowd and ride with the upside. But when markets correct, we are prone to sell out in panic. Yet, the wisest thing for investors to do at such times may be to remain calm and maintain a focused approach for their investments. Keeping an investment portfolio that is invested across different asset classes can be a sound and effective strategy to ride through periods of adverse market movements. Stock markets are volatile by nature, as illustrated in the first quarter of 2008 by the -9.5% total return of the S&P 500 Index. In such times, investors with moderate risk profiles should consider holding a balanced fund that is invested in both equities and bonds1 in near equal proportions. For comparison, in the first quarter of 2008, the average balanced fund, according to Morningstar, generated a total return of -5.8%, considerably better than the total return of the S&P 500 Index shown above. Balanced funds aim to provide income and capital growth over the medium- to long-term time horizon by adopting a balanced asset allocation approach with approximately 40% to 60% of the fund’s Net Asset Value (NAV)2 invested in equities while the remainder is invested in debt securities and liquid assets. In comparison, equity-only funds generally have asset allocations of 85% or more in equities and the remainder in debt securities and liquid assets. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal. Trying to figure out what to do in a bull market is easy when almost everything is going up. But decision-making gets a lot more complicated when Wall Street turns red. Financial planners say it becomes even more important for investors to stay diversified—and calm—when returns plunge. It is important to note that diversification does not assure a profit or protect against loss in a declining market. The main benefits of investing in balanced funds are: 2 3 Rebalancing: Another benefit of balanced funds is that in times of rising equity markets these funds generally rebalance the portfolio by taking profits on equity investments that have appreciated and rebalancing the portfolio to its original equity-to-bond asset allocation (e.g. 60% equity/40% bond). Capital growth: A balanced fund may allow the investor to participate in the potential long-term capital growth of equity markets because a sizable portion of the fund is invested in equities. In conclusion, balanced funds are generally suitable for medium- to long-term investors with conservative to moderate risk profiles with a preference for receiving income and a respectable measure of capital growth. Investing in a balanced fund can help investors stay focused on achieving their long-term investment goals without requiring them to evaluate the prevailing market cycle. Investment return and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. State Farm Agents do not provide tax, legal or investment advice. 1 More stable returns: The overall portfolio risk of a balanced fund may be reduced because the returns of equity and bond investments are generally not positively correlated. The potentially higher but more volatile returns from equity investments are moderated by the fund’s investment in bonds. As a result, the returns of a balanced fund should be less volatile than a conventional equity fund. continued from page 1 Ultimately, the strategy you develop should be tailored as much as possible to your specific circumstances—how much income you need, how long you think you will need it, the amount of savings and other resources at your disposal and how much risk you are willing to take that you could outlive those resources. If outliving your money is a primary concern, you may want to consider taking a portion of your nest egg and purchasing an annuity that pays a set amount2 for the rest of your life and/or the life of your spouse or dependent(s). When it comes to retirement planning, to be successful, all workers—whether young or old—need to “begin with the end in mind.” State Farm agents do not provide tax, legal or investment advice. 1 1 A 10 percent tax penalty may apply for withdrawals from tax-qualified products and/or non tax-qualified annuities before age 59½. Subject to the claims paying ability of the issuing insurance company. It is important to note all bonds are subject to interest rate risk, including those issued by the U.S. Government. There is risk that the bonds a fund holds may decline in value due to an increase in interest rates. Net Asset Value (NAV) is calculated by adding all of the assets of a Fund, subtracting the Fund’s liabilities, then dividing by the number of outstanding shares. A separate NAV is calculated for each class of each Fund. 2 2 2 Pay Yourself First with the Automatic Investment Plan We are all busy—managing a career, running the kids to baseball or soccer practice, maintaining the home—it seems like there is no slowing down. So it’s easy to understand why sending in a check to fund your IRAs or college savings accounts throughout the year is not a top of mind activity. But being disciplined and saving for important goals, such as retirement or a child’s education, should be a priority. Why not make your life easier, while at the same time making a commitment to your savings goals, by establishing an Automatic Investment Plan (AIP) for your State Farm Mutual Fund accounts? At no additional cost, an AIP allows you to make regular investments into your account(s) through an electronic transfer of funds from your bank account. Your purchase amount will be deducted from your bank account on the day(s) and frequency you specify and a purchase will be made into your mutual fund account on the same business day. An automatic investment plan does not assure a profit and does not protect against loss in declining markets. An automatic investment plan involves continuous investment in securities regardless of fluctuating prices. You should consider your financial ability to continue purchases through periods of high or low price levels. of a volatile market environment. When you invest a fixed amount regularly, over a long period of time, you may purchase more shares when prices are low and fewer shares when prices are high. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal. If you are already enjoying the benefits of the AIP, you may want to think about boosting your investments. You may request an increase at any time. If you are interested in establishing an AIP or increasing your contributions, please visit your registered State Farm agent, visit statefarm.com, or contact a Securities Response Center representative at 1.800.447.4930. Your banking institution may charge a fee for Electronic Funds Transfers (EFT). It is important to remember that the value of shares will fluctuate. Fund shares, when redeemed, may be worth less than original cost. Hypothetical Illustration Regular Monthly Investment for 20 Years Could Grow to … $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 $58,902 $29,451 $50 $100 $150 $250 $500 $88,353 $147,255 $294,510 It’s simple and automatic Setting up your AIP is quick and easy. And if you choose to make annual contributions to an IRA or a college education savings account, you can set up your plan so that the maximum allowable contribution is made automatically. Small amounts add up over time Make paying yourself first automatic. With a disciplined schedule of investing, even small amounts may go a long way when compounding has a chance to work for you over a long period of time. Plus, using an AIP means you have one less thing to remember each month. Ride out volatile markets Use an AIP to dollar-cost average—an excellent way to help dampen the effects Source: State Farm Actuarial. The above illustration is intended to show a hypothetical example of the principle of compounding. This example assumes varying monthly investments growing at an 8 percent annual rate of return compounded annually over a 20-year period. This example does not include the impact of any expenses or taxes that would be associated with actual investment. If such costs had been taken into account, the results shown would have been lower. This hypothetical illustration is not intended to represent any specific type of investment. It is important to note that any investment involves risks that may result in the loss of principal, and there is no guarantee that the strategies illustrated will produce positive investment results. 3 State Farm Market Update as of N 31, 2008 May Equities Recap • U.S. equities markets rose during the month of May as energy, materials, and technology stocks performed well. During May, the small-cap Russell 2000® Index led all domestic equity markets higher with a gain of 4.59%, followed closely by the Russell MidCap® Index which gained 4.53%. The large cap S&P 500 Index posted a more modest gain of 1.30% for the month. From a style perspective, Growth stocks significantly outperformed Value stocks during May. • International stocks (as measured by the MSCI EAFE® Free Index) advanced slightly during the month, gaining 0.97%. Emerging market stocks (as measured by the MSCI Emerging Market Index) also posted a moderate gain, rising 1.86% during May. Equities Market Performance 20% 15% 10% 5% 0% -5% -10% -15% -3.80% 0.46% -1.81% -2.64% Total Returns for Periods Ended May 31, 2008 19.76% 15.20% 9.77% 12.47% -2.02% -6.70% -5.65% -10.53% YTD 1 Yr. 5 Yrs. n S&P 500 Index (Large Cap) n Russell Midcap® Index (Mid Cap) n Russell 2000 ® Index (Small Cap) n MSCI EAFE ® Free Index (International) U.S. Stocks • The S&P 500 Index rose during the month as investors shrugged off continued weak economic forecasts and focused on positive sales data from information technology companies and the effects of rising commodity prices on energy and materials stocks. • For the month, the Information Technology sector surged 5.45% on the strength of Apple’s higher expectations of iPhone sales and better-than expected first-quarter profits reported by computermanufacturer Dell. Materials stocks climbed 4.61% as demand for metals and agricultural products rose and Energy stocks advanced 3.16% as oil futures passed the $130 per barrel mark during May. • Financial stocks remained very weak as several banks and brokers struggled to raise additional capital and fears reappeared concerning the extent of their credit exposure. For the month, the Financials sector lost -6.37%. Performance of S&P 500® Index SECTOR WEIGHTINGS Information Technology ..................... 16.6% .......... Energy .................................................... 14.3% .......... Industrials ............................................. 11.7% .......... Health Care ........................................... 11.5% .......... Consumer Staples ............................... 10.5% .......... Consumer Discretionary..................... Materials ............................................... Utilities ................................................... Telecommunication Services ............ 8.5% .......... 3.7% .......... 3.7% .......... 3.5% .......... Total Returns for Periods Ended May 31, 2008 -35% -25% -15% -5% 5% 15% 25% n 1YR. / n YTD 1.80% / (4.59%) 22.47% / 5.76% (2.56%) / (2.41%) (12.29%) / (9.17%) 3.21% / (1.91%) (19.35%) / (1.83%) 9.52% / 6.28% (1.10%) / (3.31%) (14.76%) / (8.28%) Financials .............................................. 15.9% .......... (34.29%) / (15.04%) Ranked by highest to lowest index weighting Global Equities • European equities posted small gains, trailing other developed markets as investors remained concerned over banks’ financial strength, signs of continued economic weakness, and rising inflationary pressures. Both the euro and British pound sterling fell slightly against the U.S. dollar. For the month, the MSCI Europe Index gained 0.70% (in U.S. dollar terms). • Japan led Pacific equities higher and advanced 2.52% (in U.S. dollar terms), supported by some positive economic data and a weakening yen, which boosted shares of exporters. Performance of MSCI EAFE® Index COUNTRY WEIGHTINGS United Kingdom ................................... 21.5% .......... Japan ..................................................... 21.0% .......... France ................................................... 10.8% .......... Germany................................................ Switzerland........................................... Australia ................................................ Spain ...................................................... Italy ........................................................ Netherlands.......................................... Sweden ................................................. 9.0% .......... 6.9% .......... 6.8% .......... 4.2% .......... 3.8% .......... 2.8% .......... 2.4% .......... Total Returns for Periods Ended May 31, 2008 Returns are in U.S. $ terms with gross dividends reinvested -10% -5% 0% 5% 10% n 1YR. / n YTD (6.18%) / (5.29%) (5.78%) / 1.45% (1.67%) / (1.61%) 4.57% / (5.81%) (4.35%) / (1.52%) 8.34% / (1.53%) 7.68% / (3.24%) (6.00%) / (5.42%) 1.42% / (1.86%) (8.53%) / 3.87% Ranked by highest to lowest index weighting Fixed Income Recap • The Federal Reserve cut the Fed Funds Rate by 25 basis points during its scheduled meeting on April 30, lowering the rate to 2.00%. The Fed’s post-meeting statement, however, seemed to indicate that they are leaning toward leaving rates steady at their next meeting in June. • The yield curve continued to flatten somewhat in May as yields increased more on short- and intermediate-term issues. The spread between 10-year and 2-year Treasuries has narrowed the last few months from 183 basis points at the end of March, 148 basis points at the end of April, and down to 140 basis points at the end of May. • Bond markets produced mixed results during May as investors’ appetite for risk returned with U.S. Treasuries declining and higher-risk bonds posting gains. In May, the Lehman Brothers U.S. Aggregate Bond Index dropped -0.73% while the Lehman Brothers High Yield Index gained 0.40%. Municipal bonds continued to recover from their steep sell off in February with the Lehman Brothers Municipal Bond Index climbing 0.61% during May. U.S. Bond Market Performance 10% 8% 6% 4% 2% 0% Total Returns for Periods Ended May 31, 2008 8.41% 6.90% 3.88% 3.29% 3.83% 3.68% 1.79% 1.21% 1.16% YTD 1 Yr. 5 Yrs. n Lehman Brothers 1–5 Year Treasury Index n Lehman Brothers U.S. Aggregate Bond Index n Lehman Brothers Municipal Bond Index U.S. Treasury Yield Curves 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 1 Mo. 4.78% 2.76% 1.98% 3 Mo. 4.73% 3.36% 1.89% 1 Yr. 4.95% 3.34% 2.22% 2 Yrs. 4.92% 3.05% 2.66% 5 Yrs. 4.86% 3.45% 3.41% 10 Yrs. 4.90% 4.04% 4.06% 20 Yrs. 5.10% 4.50% 4.74% 30 Yrs. 5.01% 4.45% 4.72% 5/31/2007 12/31/2007 5/31/2008 4 Market Commentary - May 2008 Patience is not only a virtue, but in investment parlance – it’s a necessary discipline. Patience is one of the keys to long-term investment success. Why? Because studies have shown that too much activity by us as individual investors, is a bad thing. For perspective, gross sales in the mutual fund industry reached $2.2 trillion in 2007, according to the Investment Company Institute (ICI). However, the ratio of redemptions and exchanges to gross sales, which measures the amount of money on the move within long-term mutual funds (excluding money market funds) reached nearly 90% in 2007. In other words, for every $10 of gross investment in mutual funds, investors redeemed and/or exchanged $9, therefore leaving just a $1 gain in net new assets. Looking at just stock funds, the picture is even worse, where net new sales equaled just $1 for every $20 of gross sales. An independent mutual fund research firm known as Dalbar, Inc. has been conducting research for the last decade studying the returns of buyand-hold fund investors versus active investors over rolling 20-year periods. What they’ve found is that active investors who move in and out of the market (a.k.a. redemptions) or in and out of mutual funds chasing what they believe to be better performance (a.k.a. exchanges) – lose. Over the long-term, the active investor’s returns were just a fraction of the buy-and-hold investor’s: 4.3% versus 11.3% respectively for the 20-year period ending 2006. State Farm Investment Management Corporation (SFIMC) is the Investment Advisor for the State Farm Mutual Funds. The discipline that SFIMC applies is to know what we do well and then stick to it, regardless of the short-term market environment. The consequence of that approach is that there have been and will be times when what we do, in the short-term, doesn’t appear to work. But just like the active mutual fund investors studied above, the mistake would be to change – to step away from your circle of competence and allow your investment strategy to be swayed by “what’s working” in the marketplace at any given point in time. Markets have, and always will be, cyclical – what’s working today at some point won’t work in the future and vice versa. Adopting the discipline of patience and having the fortitude to stick to your investment strategy and approach during times of uncertainty and confusion, is the long-term winning strategy. 1 Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (July 2007) and Lipper. The performance data quoted represents past performance and does not guarantee future results. It is not possible to invest directly in an index. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal. The Dow Jones Industrial Average is an unmanaged average of 30 actively traded stocks (primarily industrial) and assumes reinvestment of dividends. The NASDAQ Composite is an unmanaged market capitalization-weighted index that is designed to represent the performance of the National Market System, which includes over 5,000 stocks traded only over-the-counter and not on an exchange. Its return is based on price change only and does not include income. The S&P 500® Index tracks the common stock performance of large U.S. companies among various industries. In total, the S&P 500 is comprised of 500 common stocks. The Russell 2000® Index tracks the common stock performance of the 2,000 smallest U.S. companies in the Russell 3000® Index, which represents approximately 10% of the total capitalization of the Russell 3000® Index. The Morgan Stanley Capital International Europe, Australasia and Far East Free (EAFE® Free) Index currently measures the performance of stock markets of Europe, Australia, New Zealand, and the Far East and takes into account local market restrictions on share ownership by foreigners. EAFE® Free is meant to reflect actual opportunities for foreign investors in a local market. Returns are measured in U.S. dollars. The Lehman Brothers 1-5 Year U.S. Treasury Index measures the performance of short-term U.S. Treasury Securities maturing within one to five years. Returns of the Lehman Brothers 1-5 Year U.S. Treasury Index do not reflect any deductions for taxes. The Lehman Brothers U.S. Aggregate Bond Index represents debt securities in the U.S. investment grade fixed rate bond market, including government and corporate debt securities, mortgage pass-through debt securities and asset-backed debt securities with maturities greater than one year. The Lehman Brothers Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market and is made up of investment grade municipal bonds issued after December 31, 1990, having a remaining maturity of at least one year. An automatic investment plan does not assure a profit and does not protect against loss in declining markets. An automatic investment plan involves continuous investment in securities regardless of fluctuating prices. You should consider your financial ability to continue purchases through periods of high or low price levels. It is important to note all bonds are subject to interest rate risk, including those issued by the U.S. Government. There is risk that the bonds a fund holds may decline in value due to an increase in interest rates. State Farm Mutual Funds are available through prospectus by registered representatives of State Farm VP Management Corp., One State Farm Plaza, Bloomington, Illinois 61710, 1-800-447-4930. Please read the prospectus and consider the investment objectives, risks, charges and expenses and other information it contains about State Farm Mutual Funds carefully before investing. State Farm VP Management Corp., One State Farm Plaza, Bloomington, IL 61710-0001, 1-800-447-4930 5 How To Contact Us Visit your registered State Farm® agent: If you don’t have an agent, you may call our Securities Response Center at 1.800.447.4930 during the hours listed below, or visit our Web site at statefarm.com® to locate a registered State Farm agent in your area. Speak to a representative from our Securities Response Center: A representative can be reached by calling 1.800.447.4930 during our regular business hours: 8 a.m. to 6 p.m. CDT Monday through Friday. Let Technology Work For You State Farm LifePath 2050 Fund Available July 14, 2008 ® State Farm Mutual Funds is pleased to announce the addition of the LifePath 2050® Fund to our fund lineup effective July 14, 2008. The May 1, 2008 State Farm Mutual Funds Prospectus provides more details concerning the Fund. In general, if your target year of retirement is on or near the year 2050, then the State Farm LifePath 2050 Fund may be well-suited to your investment needs. For more information concerning the State Farm LifePath Funds, please contact your Registered State Farm agent, visit statefarm.com or speak with one of our Securities Response Center representatives by calling 1-800-447-4930. LifePath 2050 is a registered trademark of Barclays Global Investors, N.A. Call 1.800.447.4930 and access our 24-hour Interactive Voice Response (IVR) system: • • • • Obtain account balances. Purchase, exchange, or redeem* shares. Inquire about fund prices and performance. Obtain investment objectives. *Applies to Non-Tax Qualified, Coverdell ESA, and Archer MSA accounts only. Visit statefarm.com to: • • • • • View your personal portfolio. Obtain current values. View transaction history. View and print statements. Purchase, exchange, or redeem* shares. *Applies to Non-Tax Qualified, Coverdell ESA, and Archer MSA accounts only. Did You Know ... • distributions from your retirement account can be reinvested into a non-tax qualified State Farm Mutual Funds account? If you would like to begin or continue investing your distributions with State Farm Mutual Funds in a non-tax qualified account, please contact your registered State Farm agent. Write to us at: State Farm Mutual Funds P.O. Box 219548 Kansas City, MO 64121-9548 Reach us by fax at: 1.816.471.4832. Not FDIC Insured No Bank Guarantee May Lose Value • the S&P 500 Index was created in 1957. It first crossed the 100-point mark 40 years ago on June 4, 1968 (ending the day at 100.38). As of April 30, 2008, it stood at 1385.59. An electronic version of the Mutual Funds Investor newsletter can be accessed on statefarm.com at: www.statefarm.com /mutual/mutual.htm For more complete information about State Farm Mutual Funds, call State Farm VP Management Corp. at 1.800.447.4930 between 8 a.m. and 6 p.m. CDT Monday through Friday, or write to State Farm Mutual Funds at P.O. Box 219548, Kansas City, MO 64121-9548 for a prospectus. Please read the prospectus and consider the investment objectives, risks, charges and expenses, and other information it contains about State Farm Mutual Funds carefully before investing. State Farm Mutual Funds are not insurance products and are offered by State Farm VP Management Corp. (Underwriter and Distributor of Securities Products), One State Farm Plaza, Bloomington, IL 61710-0001. If you have a complaint regarding your account, you may call our Securities Response Center at 1.800.447.4930 during the hours listed, or you may write to us at: State Farm VP Management Corp. Attn: Securities Products Department – Complaints, One State Farm Plaza, N-2, Bloomington, IL 61710-0001. AP2008/04/0339 6 FS-40436 KS 0208 Printed in U.S.A. 06-2008