Strategic Review of the Asset Allocation Policy of the UUA General Investment Fund (GIF)

Undertaken by the Investment Committee 2002-2003.

During the past year, the Committee engaged the services of New England Pension Consultants (NEPC) to undertake to study a wide range of asset classes that are appropriately considered for an endowment such as the General Investment Fund, with its attendant goals, objectives and constraints. The study included a number of asset classes that had not previously been represented in the asset allocation policy of the GIF. The asset allocation policy of the GIF has, for many years, targeted a 60% investment in equity securities and a 40% allocation to fixed income securities. In recent years, this overall policy has been achieved through the use of "balanced managers" each of whom manages a blend of both stocks and bonds. Rebalancing has been the responsibility of individual manager, without knowledge of the allocation or rebalancing of other responsible managers.

The Investment Committee unanimously voted to maintain the overall asset allocation, but to revise the UUA policy to include additional fixed income and equity asset classes in the GIF. The Committee also voted unanimously to revise target asset class allocations to accommodate new asset classes, to set permissible ranges for each asset class and to create a revised rebalancing policy driven by the position of the asset class within the range established. The Committee recognized that the implementation of such changes warranted the review, search and selection of investment advisors who are specialist managers, with particular expertise in a particular asset class. In undertaking its review, the committee set a goal to complete its implementation of such revisions within a period of 12-18 months. It was determined that the funding of new asset classes would either occur through a change in management of a component (equity or fixed income) presently managed by a balanced manager, as appropriate, or, as appropriate, the elimination of one or more managers.

The table below outlines the targets and ranges established:

Due to the cyclical nature of securities markets, the investment management business itself is cyclical. The strain of several years of poor market results has had the effect of driving change and consolidation in the investment management business. Such changes do not always benefit clients or their portfolios and resulted in numerous changes within the operating structures of several of the investment advisers who had managed GIF assets.

In September 2002, the UUA Investment Committee voted to liquidate the global fixed income assets managed by Lazard Asset Management, due to significant under-performance relative to the appropriate benchmark, and to continue to provide diversification through its global equity investing. The proceeds were combined with other core fixed income funds managed by Pimco and known as the SIT Total Return Trust II, under the aegis of Oppenheimer Capital.

In the November 2002, the Committee voted to terminate the services of Beacon Asset Management for both the equity and fixed income portion of the portfolio, as well as the equity funds managed by Oppenheimer Capital. Both terminations resulted from protracted relative underperformance in conjunction with significant organizational, structural and portfolio management changes. The proceeds from the equities liquidated were invested in Domini Social Funds Index (core domestic equity) and the SSGA Russell 2000 SRI Index (small cap equity). A portion of the proceeds were used to increase the allocation to international equities through the existing investment in the Templeton Foreign Equities Series.

More recently, in February 2003 the Committee voted to terminate Regent Investment Advisors for both equity and fixed income management. The Committee had been studying high yield and global bond managers and selected two specialty managers to assist with a broader diversification through the reinvestment of fixed income assets. The fixed income proceeds were invested in Seix Investment Advisors Hi-Yield Investment Strategy and the GMO (Grantham, Mayo, Van Otterloo & Co.) Global Bonds Fund. Additional equity proceeds were placed in the Domini Social Funds Index.

The committee begins analysis of alternatives for the placement of core equity assets at its next meeting in May, 2003. In its analysis, the committee considers not only the history, structure and strategy of the investment firms considered, but also their investment philosophy and practice, their professional staff, and their fee structure, but also the firms' ability to assist the UUA with implementation of its socially responsible investment strategy.

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