The performance of an investment in stock depends on the performance of the company and the overall market, both domestically and internationally. International stocks carry added risks associated with exchange rate fluctuation and political instability. Stocks are considered high risk, but have been one of the few investments that historically have beaten inflation. As a result, stock investments can play an important role in your investment strategy. Understanding how a stock fund invests can help you determine if that fund fits into your overall investment strategy. It is important to note that no one style or approach consistently performs better than another—how you choose to invest is a matter of personal circumstances and philosophy.

Investment Management Style

Stock funds can be grouped into two general categories on the basis of their investment management style:

·    Passively Managed Funds. Passively managed funds seek to match the returns of a given market index or benchmark. (One common stock market index is the S&P 500.) With passively managed funds, often called index funds, the fund managers “copy” a particular index by buying many of the same securities that make up the index. Proponents of passive management believe that, over the long term, it is difficult to “beat the market,” so instead they seek to match it while incurring less cost than they would with an active strategy.

·    Actively Managed Funds. Actively managed funds—such as those offered under the Savings Plan—seek to exceed the returns of a particular index or benchmark. Most proponents of active management believe that it is worthwhile to try to beat the market’s return (as represented by an index) by picking particular securities they believe are best suited to meeting the fund’s investment objectives. To select investments for an actively managed fund, fund managers typically watch the market and the economic and political environment, as well as monitor company-specific factors. Then, they carefully consider when to buy and sell investments in pursuit of the fund’s objectives.

Investment Approach

Most stock funds fall into one of the following categories based on their approach to investing:

·    Value Funds. Managers of value funds look for fundamentally strong companies that they believe are temporarily undervalued. They buy these companies’ stocks hoping their prices will go up when the rest of the market recognizes them as solid investments.

·    Growth Funds. Managers of growth funds look for companies that have shown rapid earnings growth and are expected to sustain that growth (although such growth cannot be guaranteed). Growth funds have the potential for higher returns; but, because much of that potential is based on future earnings expectations, they also tend to be riskier investments.

·    Blend Funds. A blend fund’s manager buys some value stocks and some growth stocks.

Market Capitalization

Stock funds can also be defined by the size of the companies they invest in—the company’s market capitalization, or “market cap” for short. Companies can be classified as small-cap, mid-cap or large-cap. Small-cap stock funds, such as the Small Cap Fund in the Savings Plan, invest primarily in smaller, more volatile companies, but the tradeoff for increased risk is the potential for greater return. Mid-cap stock funds invest primarily in medium-size companies, which can be volatile, but again, the tradeoff for increased risk is the potential for greater return. Large-cap stock funds invest primarily in larger, more established companies. The risk is not as great as with small-cap or mid-cap stocks, but neither is the return potential. The U.S. Equity Fund in the Savings Plan primarily invests in stocks of large and medium-size U.S. companies, and the International Equity Fund invests in stocks of large and medium-size companies primarily in developed countries outside the U.S.