Equities and fixed income securities rose for the fourth straight quarter since the market rally began in early March 2009. U.S. equities, as measured by the Wilshire 5000, rose 6.3% for the winter quarter. Fear that the Greek government would default on its bonds ignited a steep sell off in global equity markets in mid-January. However, by early-February investors were sufficiently encouraged by signs that the U.S. economy would sustain its recovery to again demand riskier assets. U.S. bonds provided solid returns for the quarter, but foreign bonds fell.

Equities Review

Most equity styles posted solid gains in U.S. markets during the first quarter with value stocks outperforming growth stocks. The Russell 3000 Value Index returned 7.1% while the Russell 3000 Growth Index returned 4.9% for the quarter. Consistent with return patterns following prior recessions, small-cap stocks outperformed large-cap stocks. The Russell 2000 (small cap) and Russell 1000 (large-cap) indexes returned 8.9% and 5.7%, respectively. Economically sensitive sectors such as consumer discretionary, industrials, and financials were the best performers, gaining 12.0%, 11.7%, and 11.4%, respectively. Sectors less dependent on economic conditions, such as utilities, declined during the quarter.

International stocks substantially underperformed their domestic counterparts after providing strong absolute and relative gains in 2009. International markets, especially those in Europe, stumbled in late January on concerns over Greece’s debt troubles, which led to additional worries about sovereign debt of other struggling, peripheral countries in the region: Portugal, Ireland, Greece and Spain. Non-U.S. equities rebounded to some extent later in the quarter as a bailout agreement for Greece was reached. Stocks in developed countries, as represented by the MSCI EAFE Index, gained 0.9% for the quarter. Emerging market stocks finished the quarter strongly after being weighed down earlier by concerns about the possibility of a slowdown in Chinese growth. For the quarter, the MSCI Emerging Markets Index rose 2.4%. The dollar was unchanged versus 19 currencies tracked by the J.P. Morgan Dollar Index during the period but rose 4.1% versus the 6 currencies (Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc) tracked by the U.S. Dollar Index. Currency losses by unhedged U.S. investors in these major stock markets cut into foreign returns for the quarter.

Fixed Income Review

Fixed income performance varied considerably, but unlike last quarter, the dispersion of returns was not solely a function of quality. Municipal bonds, high-yield bonds, and agency mortgage-backed securities (MBS), which benefited from the federal MBS purchase program, had good returns and outperformed high-grade corporate bonds and U.S. Treasuries. The Fed Funds rate remained at an extremely low level: a range of 0-.25%. Interest rates generally rose across the yield curve, particularly on the longer end of the curve, and thereby decreased returns. Spreads on asset-backed securities and high-yield bonds narrowed substantially while spreads on high-grade corporate bonds widened slightly. The Barclays Capital U.S. Aggregate Bond Index returned 0.1% for the quar¬ter. Foreign bonds lagged their domestic counterparts mainly because of U.S. Dollar appreciation. The Barclays Global Aggregate ex-U.S. Bond Index fell -5.4% for the quarter. Nonetheless, the average emerging markets bond fund bounced after huge losses in the latter part of 2008 and returned 1.5% in U.S. dollars for the period.