INVESTMENT PERFORMANCE IN 2022

Last year, 2022 was the most difficult year in the history of the Easton Episcopal Fund. Our return of -15.85% was absolutely and relatively speaking below our aspirations, and no better than mediocre, as we ranked in the middle third of the comparable universe of balanced mutual funds.

The year started on a sour note as the fund and the market experienced weakness.  The weakness accelerated in the second quarter as we fell another 13%.  Both the 1^st and 2nd quarters experienced a significant decline in technology securities, which spilled over to the total fund.

The Easton Episcopal Fund is an actively managed index fund. Your Board of Managers (BOM) makes measured moves around our various indices, but we limit our deviation from the index weighting as a matter of policy.  During the year, we lowered our stock exposure, but with technology stocks still representing more than 20% of the index, we were facing a fearsome headwind.

In the third quarter, we made important changes in our portfolio by adding a significant weighting to value stocks and substantially shortening the maturity of our bond portfolio. The market continued to decline in the third quarter, but our changes paid off.  The benchmark dropped 4.59%, but we held our decline to just 3.41%, outperforming our benchmark by 118 basis points and placing us in the top 11% of comparable funds.  Our out-performance continued in the 4^th quarter, when we were up 6.41% compared to the benchmarks rebound of 6.22%.

	2022 Performance of the Easton Episcopal Fund
	1Q	2Q	3Q	4Q	YTD
Fund	(5.77)	(13.11)	(3.41)	6.41	(15.85)
B’Mark	(4.97)	(11.43)	(4.59)	6.22	(14.78)
Fd- Bmark	(0.80)	(1.68)	1.18	0.19	(1.07)
Rank	69	94	6	47	64
	1H		2H		YTD
Fund	(18.12)		2.78		(15.70)
B’Mark	(15.83)		1.49		(14.59)
Fd- Bmark	(2.29)		1.29		(1.11)
Rank	91		12		65

The table shown above more finely depicts quarterly and semi-annual performance and supports our statement that, when we see unusual performance, we can and do act decisively, and with good results.

LONG TERM RESULTS

When we started the fund in 2010, we articulated our principal goals:

1. to earn the constant rate of return (CRR) over most three-year periods;
2. to be in the top third of the competitive universe over most three-year periods; and
3. to generate returns close to or better than our benchmark.

We use the rolling three-year concept of evaluation, since this better reflects long-term investment ability and brings balance to our shareholders. Since inception of the fund, there have been 130 three-year-periods. Here is how we did:

GOAL 1 We had three-year returns greater than the recommended CRR 95% of the time (124 times out of 130 observations).

GOAL 2 We were in the top third of the competitive universe 67% of the time (87 times out of 130 observations), but we were in the top third in 83 times out of the last 84 observations. (99% of the time).

GOAL 3 For the last 3, 5, and 10- year periods ended 12/31/2022, our fund had returns that were 4% better than the benchmark (1 year), 2% worse than the benchmark (3 years), and 2% worse than the benchmark (10 years).

When we measure our long-term performance, we are pleased to report that we generated results that were equal to, or better than our aspirations.  We are particularly pleased with our ability to improve our ranking, which was in the lower 20% among comparable funds after our first five years (with outside managers), to a ranking that has been in the top 30% most of the last eight years under self-management by the BOM.

OUR OUTLOOK FOR THE CAPITAL MARKETS.

The economic and political environment in which we find ourselves today is causing a lot of turmoil in the stock and bond markets. The uncertainty around how much rates will rise is causing a lot of confusion in the market, which in turn is creating a lot of volatility.

No one can say with certainty that any one outcome is going to occur. Strong arguments can be made for no recession, just a slowdown in the rate of growth, a mild recession, or a major recession. Some areas of the economy are feeling the full brunt of rising interest rates, i.e. housing, while other areas can simply pass on rising costs.

We do feel comfortable in saying that a major recession is unlikely, and that even a low level of growth is possible. The most likely outcome, according to the professional investment community, is that we will have a mild recession, which could be short lived, after which “animal spirits” will be re-kindled. Since the stock market looks ahead, it is quite possible that the investment community will jump on stocks before the turnaround appears in reported economic data. Because of this uncertainty, and the likelihood of the market moving before the economic results are reported, we believe that maintaining our equity exposure to our benchmark weighting of 65% is both prudent and correct.

 During the market reversal of 2022, we built our cash position mostly by holding dividend and interest receipts in money market funds. We believe that with the end of rate hikes by the Fed, it will soon be appropriate to lengthen the maturity of our fixed income portfolio by deploying cash into intermediate funds. The bond market also anticipates external events, so the buy point may be sooner than the last Fed rate hike.

FUND EXPENSES

Fund expenses moved up modestly last year as expenses of the funds we use increased. Equally, the expenses of laddered corporate bond ETFs is higher than the bond fund we held prior to our laddered investments. Major brokerages, like Fidelity Investments, have virtually eliminated commissions, and they are looking at ways to recover lost revenues.  They have done this in part by raising the fees for some of their mutual funds and pushing some administrative duties back to their investment advisor clients. Even with all of these pressures, our total annual direct and indirect expenses paid to others is 0.0033%of total assets. The annual cost to an account that has $100,000 invested is just $330, a rate lower than 85% of the 665 funds that are in the Morningstar Balanced Fund Universe. The average cost in this Universe is more than twice what is charged to the Easton Episcopal Fund.

USE OF FUNDS FOR PARISH MISSIONS

Shareholders of the fund added $1.163 million in assets and withdrew $1.389 million. The fund received $648,000 in dividends and interest and spent $90,000 for operating expenses. We finished 2022 with 206 accounts, three more than in 2021.  By January 2023 the number of parishes participating had risen to 30.

MANAGEMENT

The fund is managed by the Board of Managers (BOM) of the Diocese of Easton. The Bishop of the Diocese serves as the Chair of the Board. There are six members that are elected at the Diocesan Convention by our parishes. All investment and business decisions are made by the Bishop and the elected members of the BOM. The Board has a Vice Chair who oversees day to day operations. There are another seven individuals who serve as non-voting members. The Diocesan Treasurer and head of the Finance Department serve as ex officio members The Bishop has appointed six others, enabling us to call on their experience and wisdom to assist the voting members in their deliberations.

Elected members generally serve two three-year terms, with two members’ terms ending every year. This year, Ron Geesey from All Hallows, Snow Hill, is ending his second three-year term. Ron has previously served the Diocese in numerous positions.  We are delighted and extremely pleased that Ron has agreed to stay on the Board as a non-voting member and be a member of the Investment Advisory Board. Tom Mendenhall from Christ Church, St. Michaels, is the Board’s nominee to succeed Ron. Tom previously served as an elected member of the BOM and currently is a member of our Investment Advisory Board. Scott Sturgill, from St. Luke’s, Church Hill, served on the Investment Advisory Board, but accepted the Bishop’s request that he participate on the Finance Council. None of the elected or appointed members receive any compensation or remuneration for their services to the Fund.

Thanks for your support.

Chris

W. Christopher Maxwell

Vice Chair, Board of Managers