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Washington Mutual Mortgage and Stock Price


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									                                  ALA Endowment Trustees
                                     Report to Council
                                  Sunday - January 25, 2009
                                        Denver, CO

This report provides information regarding the performance of the ALA Long
Term Investment Fund (LTI) i.e. the Endowment Fund. It is provided as a
supplement to the oral report given by the Senior Trustee of the Endowment
Trustees. This report also provides information on the general condition of the
financial markets, the performance of the individual portfolio managers and other
issues that impact the Endowment fund that are viewed as important to the
membership. This report will be placed on the Treasurer’s web page after this
Midwinter Meeting.


Attached for your review are charts (Exhibits #1 - 12) detailing the value of the
portfolio, the allocation of the assets by type, investment style and manager. Also
included is a historical review, manager investment style/benchmark comparisons
and other pertinent information related to the management of the Endowment

Financial Year in Review - 2008

As we headed into 2007, volatility was the watch word of the day. Needless to say,
it did not disappoint as 2008 was volatility on steroids. Performance of the general
market for the calendar year 2008 can best be described as abysmal – the worst
since the “Great Depression.” The US stock market lost $6.9 trillion in value, while
over $30.0 trillion was lost globally. The 2008 crash has turned out to be the “Great
Equalizer” among investors of all types as it has democratized the agony of the
nation’s 67 million shareholders, mutual fund holders and untold others involved in
benefit plans. Unless you were a true “Bear investor1” everyone shared in the pain

Wall Street statistics for 2008 provide a quick snapshot of how bad things really

                     1. NYSE was down 40.9%

    An investor who invests with the idea that the market will go down in value vs. up.

              2. Dow Jones Industrial Average was down 33.8% - worse since
              3. Standard & Poor’s 500 was down 38.5%
              4. Between 9/15 and 11/20 the Dow Jones index rose or fell by 100
                 points or more 41 out of 49 days

For those of you that have and or manage your own mutual funds, you were not
spared the fate of the market experts. Diversified domestic equity mutual funds
ended the year with their worse performance since 1959. US diversified stock
funds were down for the year by 37.5% and 10.1% in the fourth quarter alone. This
year’s results have in effect wiped out the gains that the average mutual
accumulated over the last five years.

As we enter into unknown territory in addressing this financial crisis, you have to
ask “how did this all come about or unfold?”

              1. Bank of America buys a distressed Countrywide Financial – 1/08
              2. Bear Stearns forced to sell to JP Morgan Chase for $2 per share,
                 later revised to $10 per share – 3/08
              3. Feds seize Washington Mutual – 9/08
              4. Feds bailout AIG @ $85 billion plus an additional $40 billion
                 two months later – 9/08
              5. Merrill Lynch pushed to sell to Bank of America at distressed
                 price – 9/08
              6. Lehman Brothers allowed to fail – 9/08
              7. Morgan Stanley and Goldman Sachs forced to convert from
                 investment banks to traditional bank holding companies – 9/08
              8. Feds take over Freddie Mac and Fannie Mae as defaults increase
                 to extraordinary levels – 9/08
              9. Investors around the world fall victim to a $50.0 billion “Ponzi”
                 scheme – 10/08

As these events unfolded, the Treasury Department and the Federal Reserve were
forced to request up to $720.0 billion dollars in government funds in order to keep
things from spinning out of control and causing a global meltdown of the world’s
financial system (9/08).

 Let’s not forget that the genesis for the current situation was the issues
surrounding the sub-prime problems that began in March 2007, when creditors for
New Century Financial, a major sub-prime mortgage lender, was forced to stop
making loans amid rising defaults. As mortgage woes began to spill over into the
financial markets through the use of complex collateralized debt obligations

(CDO’s), more problems began to pop up. As each problem popped up, they began
to cascade down on each other causing a domino affect throughout the financial
system, which has left us where we are today – in financial crisis. The unfortunate
thing about the situation is that even if you were invested in good, solid and
fundamentally sound companies with excellent future prospects, you were going to
be thrown out with the bath water.

As we look at the results and where we are now, the market is telling us that over
the last decade the valuations attached to our homes, the stocks that we invested in,
our level of consumption and the amount of debt/leverage that we used and carried
escalated too quickly. As such, each of these segments is now going through a
revaluation phase to more sustainable levels. Unfortunately, it’s all coming due
immediately as compared to the decade long run-up.

Endowment Fund Performance

For the twelve months ended 12-31-08 the value in the ALA Endowment fund
declined by $7.8 million from $31.2 million to $23.4 million - see exhibit #1. This
resulted in a negative return of -24.1% compared to the portfolio’s benchmark,
which was a negative -22.7%. As we can see from exhibit #4, all of the portfolio
managers with the exception of Pimco reported negative results. Additionally,
comparisons to their respective benchmarks were mixed at best. Their results were
as follows:

Alliance Bernstein – Core manager – reported a loss -44.6% compared to its
benchmark of -37.0%. Alliance is the portfolio’s equity stabilizer with holdings in
the growth and value categories, currently 70/30. They make investment decisions
based on long-term secular market themes, along with some catalysts to provide
support and short term economic trends.

Performance this year was hurt by financial holdings in Fannie Mae and Lehman
Brothers, although they benefited from holdings in Bank of America, Charles
Schwab and JPMorgan Chase. The portfolio is still over-weight technology and
consumer discretionary’s, while underweight energy and consumer staples.

Marsico – Large Cap Growth manager – reported a loss of -39.8% compared to its
benchmark of -38.4%. Performace, like Alliance, was hurt by holdings in the
financial sector with Morgan Stanley, Goldman Sachs and Mastercard. However,
they also benefited from similar holdings in Wells Fargo and US Bancorp. Relative
to the index Marsico is overweight industrials and consumer discretionary’s, while
significantly underweight information technology and healthcare. Note: that
Marsico runs a concentrated portfolio with approximately 30-50 securities.

Blackrock – Large Cap Value manager – reported a loss of -34.0% compared to its
benchmark (S&P/Citigroup Value) of -39.2%. Blackrock was on the positive side
of the financial crisis as the portfolio benefited from holdings in JPMorgan chase,
Captial One UNUM Provident and Bank of America. However, they were hurt
badly by the turnaround in the fortunes for energy as Valero energy, Marathon and
Occidental Petroleum all suffered significant losses. Despite the big hit in energy
the portfolio is still overweight energy due to what the managers consider to be
outstanding buying opportunities. The portfolio is also overweight in healthcare
industrials and information technology. Meanwhile, the portfolio is significantly
underweight consumer staples and telecommunications and no holdings in basic
materials or utilities.

NFJ – Small Cap manager – reported a loss of -24.7% compared to its benchmark
(Russell 2000 Value) which lost -28.9%. In view of how small caps perform in
volatile markets such as we’re experiencing now the results are good. Small caps as
a whole did better than the general market and NFJ did 17% better than its own
index. As a value contrarian style investor who concentrates on out of favor, low
multiple small cap companies they provide more downside risk protection. The
portfolio was helped by holdings of regional type banks like Bancorp south,
Susquehanna Banc and Old National Banc. The portfolio was hurt by holdings in
Pilgrims Pride, Commercial Metal and Genco Shipping. Currently the portfolio’s
underweight in financials, consumer discretionaries and information technology
and overweight in energy, utilities and consumer staples.

This asset category typically performs well coming out of a recession. It is also one
of the first categories to be hurt at the onset of a recession. In anticipation of the
rotation back into of small cap stocks as the economy improves, exposure in this
asset category will likely be increased during the year.

Lazard – International manager – reported a loss of -32.2% compared to its
benchmark (MSCI EAFE) of -43.3%, which is a 34.5% gain in performance. There
are 38 stock markets in developed and emerging countries around the world and all
reported losses for the year. Lazard is by nature a defensive manager in a volatile
asset class, which is why they were hired. As such they protect on the down side
but won’t realize as much of the markets rise when things turn positive. Lazard was
helped during the year by an overweighting in the United Kingdom and Canada,
while underweight in the Pacific, particularly Japan.

Heitman – REIT manager – reported a loss of -39.8% compared to its benchmark
(Wilshire Real Estate Securities) which also reported a loss of -39.8%. Despite the
performance this asset category continues to spin off a significant amount of
interest to the benefit of the association. Based on conversations with the managers

a compelling case for expanding our exposure in this area has been presented. Just
like in 2006 when they suggested that we reduce our exposure in this asset category
due to overvaluations, they are now suggesting that valuations have never been
lower and represent an extraordinary buying opportunity.

PIMCO – Fixed Income manager – reported a gain of 2.2% to its benchmark (ML
US Bond Market) which returned 4.5%. Much of the portfolio’s success can be
directly attributed to the decision by the Trustees to build up the holdings in this
asset class beginning in 2006 from the lower end (22.5%) of its range to the
maximum. (37.5%) end. They continue to overweight government and AA
securities with maturities in the 1-5 year range. This is the second year in a row
that fixed income has outperformed equities as an asset class.

Ariel Capital – SRI manager – reported a loss of -41.3% compared to its primary
benchmark (Russell 1000 Midcap Value) of -38.5%. Because of Ariel’s unique
standing in the investment community in that they are an SRI fund that compares
itself to a more industry standard benchmark i.e. non-SRI (Russell 1000 Value), we
have also provided two SRI specific indices, the Domini 400 and the KLD Social
Select. These benchmarks reported declines in performance of -34.9% and -35.5%
respectively. Ariel’s performance was hurt by holdings in CBS Corporation and
CB Richard Ellis Group and other related to the financial services industry.

Note: The Trustees meet on a monthly basis via telephone, with ALA staff and Merrill Lynch – ALA’s
Investment Advisor – to review the Endowments’ investment performance, asset allocation and other
matters. As a result of this practice, asset allocation decisions are made by the Trustees’ during the course
of the year, based on prevailing market conditions.

Outlook in 2009 – Guarded Hope

How ironic is it that exactly one year ago at the last Midwinter meeting in
Philadelphia (January 2008) that the ALA CFO – Gregory Calloway – declared to
the Executive Board and all those who would listen that “We (ALA) are operating
in a recession.” It’s ironic in that it was only just a few short weeks ago (12/1/08)
that his declaration was confirmed with the official announcement from the
National Bureau of Economic Research that the current recession officially started
December 2007. As you can see, there is a significant lag time between when a
recession starts and when one is confirmed – in this case twelve months.

This is the longest recession since the one experienced in 1980. Many pundits are
expecting this to be the longest since WWII. As job losses continue to accelerate,
de-leveraging continues, exports slow, confidence ebbs and consumer net worth
continues its slide, economic growth will continue to shudder. Note that what

happens in the economy is different from what happens in the market. Activity in
the market is generally a precursor or a leading economic indicator on the general
health, growth and stability of the economy. While we are just now acknowledging
a recession, it’s been clear that since July 9, 2008 we’ve been in a “Bear” market2 a
peak to trough decline of 20.5%. Some commonalities of a typical Bear market are:
1) rising interest rates, 2) high historical price/earnings valuations, 3) recession, 4)
low consumer/investor optimism, 5) rising unemployment and 6) some negative
catalyst i.e. credit freeze.

As the Trustees have stated on many occasions in the past, no one can accurately
predict the future. At the last Midwinter Meeting the Trustees reported to the
membership that the year (2008) would likely be a tough one if the following worst
case scenario was realized:

                 “That the price of oil sprints past $100 a barrel. Emerging markets such as China
                 and India overheat and collapse. Housing issues continue to accelerate and
                 exacerbate the decline in home values and increased foreclosures.”

Does this sound familiar to anyone? There is no crystal ball, but in view of the
depth of this recession, the worst is probably not yet over. The markets act very
much like physics in that when you get extremes in one direction i.e. rapidly rising
stock and housing valuations during the 1990’s and 2000’s, you can expect an
equal and opposite reaction the other way. Some solace can be taken from the fact
that since World War II the S&P 500 index has rebounded – in sporadic and
dramatic bursts - an average of 32% during the nine months following a “Bear”
market. Stocks have been beaten down to holiday sales type levels. So much so that
many market pundits view the current environment as a buying opportunity of a
lifetime. If history is any indicator of future performance then there is some hope.
Once the market finds its bottom and the Bear market come to a merciful end,
positive performance should be strong

For 2009 to be positive in terms of market performance a number of things will
have to happen: 1) housing will have to find its bottom - most market pundits don’t
expect that to happen until the third/fourth quarter of 2009 or first quarter 2010, 2)
the Obama stimulus package must be approved, 3) credit, in all its forms, must be
made available – available credit benefits no one if it is not utilized and utilized by
individuals and businesses, 4) future expectation for corporate profitability must be
positive – stock valuation will only go up it there is an expectation of higher future
earnings and 5) a drop in unemployment accompanied by an increase in consumer

    Defined as a 20% decline in market value from its previous peak 10-9-07 (DJIA).

Asset Allocation and Rebalancing

See exhibit #3 for details on the asset allocation strategy and current allocation.
The practice of rebalancing is based on an assessment of the prevailing risks and
opportunities in the market. The Trustees’, in conjunction with its investment
advisor, continually monitor the portfolio and look for new opportunities to boost
performance at appropriate levels of risk.

Based on the prevailing and expected future market conditions the Trustees are in
the beginning stages of reducing exposure in the fixed income category. Many
believe that the foundation has been laid for some significant long-term gains in
equities due to the de-leveraging or revaluation that is taking place in the market.
At their December meeting the Trustees took the action to redistribute $1.0 million
from the fixed income manager. Approximately $500,000 was allocated between
Lord Abbett – convertible bond manager and Invesco – REIT manager. Note that
funding of these managers took place in January. The remaining balance will be
dollar cost averaged to other managers as determined by the Trustees during the
coming months.

New Portfolio Managers

As a result of the current market conditions and the most recent look at
rebalancing, the Trustees added two new managers to the portfolio. They are Lord
Abbett – Convertible Bonds and Invesco – REIT. After numerous discussions with
all of our mangers and our investment advisor it has been determined that both
REIT’s and convertible bonds each present excellent opportunities for positive
upside performance. Valuations for REIT’s have never been better and convertibles
are offering outstanding yields on top rate corporate issuers.

Investment Policy Review

As part of the Trustees’ regular business, an annual review is made of the ALA
investment policy. The policy has been reviewed on an ongoing basis for much of
the spring and summer. As a result of this effort a number of recommendations
were presented to the Executive Board at their fall meeting in October. The most
substantial change was to include language/provisions for the potential use of
“Alternative” investments.

ALA’s Investment Advisor – Merrill Lynch – with input from the ALA
Endowment Trustees presented to the Executive Board the rational for the use of
alternatives. As a result of the presentation, additional discussion, questions and
answers, the Executive Board approved the language for the inclusion of
alternative investments in the portfolio. The Trustees noted that this action was
designed to position the portfolio so that as opportunities developed the Trustees
could move quickly. The Trustees also noted that the use of alternatives was very
appropriate for ALA but will proceed cautiously.


On behalf of the Trustees I would like to thank the ALA Finance staff who assists
the Endowment Trustees in carrying out our duties. We continue to be especially
well served by Greg Calloway, Keith Brown and Elaine Klimek of the ALA
financial staff. They have been very dependable, reliable and thorough in assisting
the Trustees in our financial oversight responsibilities.

Respectfully submitted,

Dan Bradbury – Chair (2009)
John Vitali – Trustee (2010)
Robert Walton – Trustee (2011)
Rod Hersberger – ALA Treasurer, Ex Officio (2010)


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