MPSIF Fixed Income November 3, 2003

October in Review October 1 October 31 Change Dow Jones 9469.20 9801.12 +3.5% S&P 1018.22 1050.71 +3.2% Nasdaq 1832.25 1932.21 +5.5% 10 Year Note 3.94 4.30 +36bp $ / Euro 1.172 1.159 +1.1% Yen / $ 110.67 109.96 +0.1% Fed Fund Fut (Apr) 0.96 1.135 +70%

Jobless No Longer? October Payrolls Reinforced by Claims November extrapolation? Reinforced by Claims 4 weeks now at roughly 390,000 Below critical 400,000 level

This Week ISM to reinforce Chicago PMI? Claims: Do we hear 5? Payrolls, payrolls, payrolls!

Yield Curve 2003

Outlook for Rates Accommodative Fed Asset Reallocation Supply Risks once again focus on deflation Asset Reallocation Economic engine ‘Primed’ Supply Geopolitical Wild-Card Flight to quality, Consumer confidence “Tethered” short end, steeper curve

Concerns One month aberration in payrolls Continued jobless recovery Productivity Geopolitical Which “V” word?

Fixed Income Overview 10 year was 3.97% at our 4/21 meeting. Current 4.30% level represents a 33bp widening. After a turbulent summer, 10 yr has continued trend upward in yield. Mortgages no longer as attractive, as summer events showed risks of being ‘short vol’. Yield not as easy to come by High Yield, Corporates have tightened significantly throughout 2003.

Performance of Funds 6 months, 4/21 – 10/21

Current Holdings and trade ideas Symbol Value Current weights Target Weights Target $ amts Buy/Sell Duration Duration weight Old Duration (compare) CMHYX $54,160 10.4% 0.0% $0 ($54,160) 4.15 0.00 0.43 IEF $48,335 9.3% ($48,335) 6.47 0.60 SHY 1.65 0.15 LQD $225,004 43.3% 46.3% $240,597 $15,594 6.49 3.00 2.81 MGIDX $173,282 33.3% ($173,282) 2.10 0.70 CASH $19,011 3.7% VSGBX 5.7% $29,730 1.70 0.10 PTMDX 35.0% $182,119 0.74 TOTAL $536,038 100.0%   3.99 4.54 VBMFX 4.40 Long/Short Duration -0.41 CMHYX: High Yield Corporates LQD: Investment Grade Corporates IEF: Treasuries, 7-10 year SHY: Treasuries, 1-3 year MGDIX: Manager’s Mortgage Fund PTMDX: PIMCO Mortgage Fund VSGBX: Vanguard Agency Fund

Sector Weights vs. Index $ % Index % (VBMFX) Over/ Under Wt Governments $78,064 15.0% 26.4% -11.4%   Treasuries $48,335 9.3% 15.2% -5.9% Agencies $29,730 5.7% 11.2% -5.5% Corporates $240,597 46.3% 27.4% 18.9% Investment Grade  27.2% 19.1% High Yield $ 0 0.0% 0.2% -0.2% Mortgages $182,119 35.0% 41.9% -6.9% Cash $ 19,011 3.7% Foreign $ 0 4.4% -4.4% TOTAL $519,791 100.0% Our allocations vs index (Vanguard Total Bond Index) IF WE INCORPORATE THOSE TRADES. We are overweight Corporate Bonds and Underweight in Government Bonds (Treasuries and Agys). We currently have no allocation to foreign fixed income instruments, as we have just chosen this index. Something that will be researched for next semester (not pressing as it is less than 3% of index)

Actions taken to date: Actions to be taken: Agreed to move to a short duration position versus index Agreed to liquidate High Yield holdings, as they do not comply with our investment guidelines. Actions to be taken: Research allocating money to a foreign bond fund. More research into purchasing individual bonds ($5000/30?) Better alternative funds Research minimum risk portfolio using mutual fund return regressions