Inflation Protection Fund (IPF)

Manager's Quarterly Commentary

• Fund Performance
• Fund Characteristics
• Risk Disclosure

Type of Fund: Fixed-income, inflation-protected securities fund.

Objectives: To provide investors with current income and protect principal from loss of purchasing power due to inflation.

Who Should Invest: Risk-averse investors who wish to attain "long-term" protection from the loss of purchasing power due to inflation but are willing to incur some short-term losses of principal.

Investments: The investment portfolio consists primarily of U.S. and international government-issued inflation-protected securities, which are designed to protect investors from inflation and are normally backed by the credit of the issuing government. IPF’s investment portfolio also includes commodities derivative contracts, cash and cash equivalents.

Management: Neuberger Investment Management, based in Chicago, Illinois, manages an index account of U.S. inflation protection bonds. BlackRock, Inc., based in New York City, manages the global inflation protection bonds, Capital Guardian Trust Company, based in Los Angeles, California, manages the emerging-market inflation-linked bonds and Gresham Investment Management, LLC, based in New York City, manages the commodity exposure.

Strategy: The fund seeks modest current income while preserving capital. The fund holds bonds with an average maturity of 10 years. The fund also attempts to modestly improve investment returns by investing up to 10% of its assets in commodities.

Performance Benchmark:  Barclays Capital U.S. Government Inflation-Linked Bond Index.

Performance Objective: To produce a return that exceeds that of the performance benchmark by 25 basis points on average per year over a market cycle (three to five years and net of management and fund administration expenses).

Please see the Investment Funds Description for more detailed information regarding IPF.

Fund Performance

Fund Market Value (as of 03/31/13): $2,178,081,388.

Compounded Annual Performance, Net of Fees (Periods Ending 03/31/13):

* The comparison universe is derived from Wilshire’s Lipper predefined “Objectives” of “TIPS Funds.”

Investment results shown here are net of all fees and expenses, which include all investment management fees, operating expenses and bank custodial fees. The fund inception was January 5, 2004.

Fund Characteristics (03/31/13)

Expense Ratio: All expenses of the fund are deducted from the fund’s net asset value. The expenses include investment management fees, operating expenses, bank custodial fees and miscellaneous fund administration expenses. These expenses are paid directly by IPF, and are reflected in the unit price calculated for the fund. The unit price is multiplied by the number of units held in each participant’s account to determine the total value of the participant’s holdings in the fund. IPF’s expenses in 2011 were equal to approximately 0.44% of the fund’s total assets.

Risk Disclosures

Because U.S. Treasury Inflation Protected Securities (TIPS) are obligations of the U.S. Government, there is no risk of loss due to credit default. Inflation Protected Securities issued by foreign governments, particularly governments of emerging countries, risk the possibility of loss due to credit risk. 

When the U.S. Treasury issues an inflation protected security, it agrees to make semi-annual interest payments equal to the interest rate stated at the time it issues the security. Additionally, it agrees to adjust the par value of the bond up or down based on the annual change in the Consumer Price Index (however, in no case will par value adjust below the issue price).

There is a risk that investors purchasing TIPS that have already been issued may require higher effective semi-annual interest rates. Typically, this will occur when investors believe funds can be invested in other assets producing more favorable investment returns. For example, during the late 1990s, when stocks were highly favored by investors, those purchasing TIPS required higher interest rates than they do today. Generally, an increase in required interest rates will adversely impact the prices of previously issued bonds.

Additionally, should the United States enter a deflationary period (that is, a period in which prices decline), the par value of previously issued TIPS will decline in value. However, par value of U.S. TIPS cannot fall below the original par value that was determined at the time of issuance.

Accordingly, there is some risk of loss of principal for investors in IPF. A TIPS Q&A is provided to address various questions you may have about the TIPS market.

In addition, a TIPS Primer is available for a summary of TIPS key characteristics.

Lending of Portfolio Securities: The fund seeks to earn additional income by making loans of its portfolio securities to brokers, dealers and other financial institutions. The loans will be secured at all times by cash and liquid high-grade debt obligations. As with any extension of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower fail financially. Additionally, losses could result from the reinvestment of the cash collateral received on loaned securities.