Fall 2006 Summer 2004

Transcription

1 Fall 2006 Summer 2004 Feature Stories Halliburton Stock Scheduled to Close 1 KBR Master Trust to be Established 3 Investment Know-How Diversification Key to a Healthy Portfolio 4 Lifestyles Who Knew Investing was Like Golf? 6 Focus on s Index and Equity Index 7 Risk Assessment Should Interest Rates Interest You? 8 Newsstand Market Update 9 Retiree Corner 10 Performance Update 11 Current news concerning your Savings Plan

2 The Halliburton Trust Investments Department Seated, left to right: Brinda Maxwell, Nat Duffield. Back row, left to right: Wendy Wang, Sharon Parkes, Maria Bacaling. Trust Talk is published quarterly by the Halliburton Trust Investments Department. It is designed to provide Savings Plan members with conventional wisdom on saving and investing. The information included in Trust Talk is not intended as investment advice. You may want to consult a financial advisor before making any investment decisions. 2 Suggestions or comments about Trust Talk can be sent to Nat Duffield or Sharon Parkes, Trust Investments Department, Bellaire Blvd., Houston, Texas

3 Feature Halliburton Stock Scheduled to Close Changes Coming to the Savings Plan Beginning January 1, 2007, there will be some changes in the Savings Plan. This issue of Trust Talk will explain those changes and what impact they may have on your investments. Please read the feature stories carefully. If you have any questions, contact your Benefits Service Center. As of January 1, 2007, the Halliburton Stock (HSF) will be closed to new investments. That means participants in the Savings Plan will not be allowed to make new contributions, transfers or loan repayments into the HSF as of that date. If you currently allocate part of your contribution to the HSF, you must select a new fund within the Savings Plan to receive those contributions by December 27, If you don t select a new fund by the deadline, any contributions still allocated toward the HSF will be redirected to the Moderate Premixed Portfolio. You can make this change at the Your Benefits Resources Web site or by calling the Benefits Service Center. The Case for Change The Company understands that many employees will rely on the Savings Plan for the majority of their retirement income and is taking steps to improve the diversification and lessen the risks within the fund options. Investing in singlecompany stock funds exposes retirement savings to extreme shifts in a single stock price. Many factors outside a company s control can affect its stock price. And even the healthiest and strongest companies can experience downturns in their stock price. Removal of the HSF makes sense for the following reasons: Removes a non-diversified fund from the Savings Plan; Removes the highest risk investment option; and Encourages diversification for all plan participants. This decision supports the Savings Plan s objectives and investment strategies to provide stable, long-term retirement savings growth. Removing the HSF investment option does not reflect a lack of confidence in the current or future performance of the Company. The Importance of Diversification Being heavily invested in single-company stock funds (regardless of the stock involved) within a retirement plan is not generally recommended by financial advisors. That s because singlecompany stock funds are vulnerable to extreme shifts in a single stock 1

4 price. To protect against individual stock fluctuations, financial advisors recommend diversification within a retirement savings plan. Successful investing is generally built on the principle of diversification and is a feature of all the remaining Savings Plan s investment funds. (See Investment Know-How in this issue for more information on diversification.) Transfer Balance to Other s The Company is providing a three-year sunset period beginning January 1, 2007, so that participants can transition their funds out of the Halliburton Stock over time thereby making the most of dollar cost averaging. (For more information on dollar cost averaging, see the Investment Know-How section of Trust Talk Spring 2006.) Any balance in the HSF at the end of the sunset period will be transferred to an investment fund chosen by the Company. The Company will monitor the overall move out of the HSF during the sunset period and, if necessary, may implement periodic transfers and/or change the sunset period to gradually decrease the HSF balance. In the meantime, you are encouraged to begin planning an exit strategy from the HSF. Rebalancing Requirement Lifted Currently, if you rebalance your Savings Plan account by moving funds into or out of the HSF, the percentage of your Savings Plan account balance invested in the HSF is automatically reduced to 15% of your total account. Effective January 1, 2007, this rebalancing requirement will be eliminated to allow participants more flexibility in moving out of the HSF. Thus, rebalancing your Savings Plan account on or after January 1, 2007, will no longer trigger the automatic reduction of your HSF balance to 15% of your total portfolio. This change will allow you to gradually move your money out of the Halliburton Stock and into other investment options. Investing in the Future Although the HSF will no longer be available as an investment option in the Savings Plan, you can still invest in the Company through the Employee Stock Purchase Plan and through the open market. You may want to consult a financial advisor before making any investment decisions. Dates to Remember December 27, 2006 Future contributions to the HSF must be redirected to a new fund or funds by December 27, If you do not make a new selection, your future contributions will be invested in the Moderate Premixed Portfolio. You can change your future contributions at the Your Benefits Resources Web site or by calling the Benefits Service Center. January 1, 2007 The Halliburton Stock will be frozen. Plan participants will not be allowed to make new contributions, transfers or loan repayments into the HSF. Three years beginning January 1, 2007 You must transfer your HSF balance into other funds within the Savings Plan during this sunset period. Any balance remaining in the HSF after this time will be transferred to an investment fund chosen by the Company. You can make transfers at the Your Benefits Resources Web site or by calling the Benefits Service Center. 2

5 Feature KBR Master Trust to be Established In anticipation of KBR s full and complete separation, KBR assets will be separated from the Halliburton Master Trust in the near future. The KBR Savings Plan assets will be used to establish a dedicated KBR Master Trust. The KBR Master Trust will collect and invest all employer and employee funds contributed to the KBR and Brown & Root Savings Plans. These assets will be held by trustee and custodian, State Street Bank and Trust Company. By law, the KBR Master Trust assets must be used solely for the benefit of its plan participants or their beneficiaries and are not subject to the claims of any KBR or Halliburton creditor. It is intended that the KBR Master Trust will offer KBR participants with the Premixed Portfolios and Single Focus investment options currently offered under the Halliburton Master Trust with no substantial change to how the funds are managed. As fund managers will now be overseeing two accounts, each with a smaller asset pool (as compared to the joint assets), there will be a slight increase in fees and expenses to the investment options under both the Halliburton and KBR Master Trusts. However, even with the increase in fees and expenses, both the Halliburton and KBR plans will continue to offer investment options with fee structures below what are typically found in mutual funds that are available to the general public. 3

6 Investment Know-How Diversification Key to a Healthy Portfolio Whoever said variety is the spice of life knew what he was talking about. He probably wasn t thinking about investing when coining the phrase, but in fact, variety may be the single most important concept investors need to understand. In the world of stocks, bonds and other investments, variety means diversification. Diversification is the practice of spreading your investments across different asset classes, in order to minimize your risk of suffering a major loss. To use another popular idiom, diversification means don t put all your eggs in one basket. Why is diversification so important? The simplest answer is that it provides protection from market risk. With any investment, you re taking a risk that it may decline in value; generally, the more risk you take, the more potential you have to be rewarded with higher returns. A well-diversified portfolio is one that balances investments with higher and lower risk/reward profiles, so that a downturn in one asset class won t devastate the entire portfolio. (For more information on the different types of risks, see the Fall 2004 issue of Trust Talk.) Avoid the Ups and Downs The chart on page 5 illustrates the need for diversification. It tracks the performance of the Single Focus s in the Savings Plan over the last 10 years. As you can see, the performance of each fund varies from year to year. For example, small-cap stocks topped the charts in 1996, took a downturn in 1998, hit bottom in 2002, and skyrocketed in 2003! If you had invested only in small-cap stocks over the last decade, your retirement savings would have taken several harrowing turns. And it s a risky game to bet that the fund will be up when you need to withdraw the money. Mix and Match Selecting from the Savings Plan s Single Focus s puts the power of diversification in your hands. Your fund choices should be based on a combination of factors, including how many years you have until retirement, your investment objectives, your risk tolerance, and what other investments you have outside of the plan. Young adults typically have a higher tolerance for risk and can allocate more money to higher risk (e.g., stock) funds, and a smaller percentage to income-producing (e.g., bond or cash alternative) funds, because they have many years to ride out the volatility of the stock market in hopes of achieving higher returns. An investor nearing retirement age or with a lower tolerance for risk may choose just the opposite strategy, putting most of his/her assets in stable, income-producing investments, and a smaller percentage in stock funds. Let the Plan Diversify for You The Savings Plan s four Premixed Portfolios are designed to take the guesswork out of diversification for participants who don t want to create their own portfolios. Often called lifestyle funds, the Premixed Portfolios let you select your investments according to targeted risk and return profiles: Stable Value, Conservative, Moderate and Aggressive. Each Portfolio is professionally managed, self-balancing and well diversified. Any one of them can be used as a complete investment strategy. 4

7 Single Focus s 10-Year Performance* RETURN Strongest 36.3% 24.7% 24.2% 22.9% 19.3% 36.5% 33.3% 33.1% 32.4% 32.2% 31.1% 28.5% 19.2% 16.4% 12.4% 24.6% 20.9% 16.8% 14.8% 8.5% 17.7% 16.6% 10.7% 10.6% 10.2% 8.2% 4.1% 2.5% -0.5% -1.8% 10.3% -6.9% -13.7% -14.1% -14.5% 40.0% 35.6% 33.1% 28.6% 28.4% 18.5% 16.5% 15.9% 14.2% 11.3% 19.8% 12.5% 8.0% 6.9% 6.4% 16.2% 23.2% 12.1% 4.3% -6.7% -12.0% -22.2% 27.3% 10.8% 4.8% 15.8% 9.6% 8.3% -0.7% -9.2% -18.2% -23.3% 20.8% 7.9% 2.3% Weakest 3.7% 8.0% -7.7% -6.0% -11.8% -18.8% -27.6% 4.0% 4.2% 1.6% * None of the funds were in existence until 1999 or later. To provide comparative historical data, we used the managers returns of their Halliburton Trust account and/or the returns from the firms composite accounts. Refer to the Highlights Brochure for more information on each fund. 5

8 Lifestyles Who Knew Investing was Like Golf? Trust Talk asked several employees about how they save for retirement. Fortunately, these employees had a lot to share. Trust Talk will feature additional employee comments in future issues. Shawn Skobel, account representative sand controlpumping, likens investing to golf. He says that similar to needing a variety of clubs in your bag to complete a game of golf, you need multiple investment vehicles in your retirement portfolio to help you reach your savings goals. Here s what he had to say about how he is doing on reaching his savings goals. Shawn, how far are you from retirement? 30 years on paper...but ideally I would like to retire 10 years sooner. How well are you doing on saving for your retirement goal? I believe that I am moving in the right direction. I have been maxing out all of my options and putting away as much as possible in the Savings Plan, Roth IRAs and other voluntary accounts for over 10 years now. I still have a long way to go but can now see the light at the end of the tunnel...there is hope. How do you make your investment decisions? I make a lot of my own decisions...but I do like to pick the brains of a couple of advisors that are close to the family. I also take some time out each week to read up on the markets worldwide and follow up on multiple indexes. How often do you review your investment choices? I review my portfolio once a quarter. I like to make sure that my entire portfolio is diversified and not tied to one sector or index. I find that if you look at your portfolio each and every day you can get caught up in the hype and lose your overall focus. This is long-term planning. Take a step back and see if you can visualize the big picture. How would you describe your investment style? Moderate aggressive. I feel like I have the risk tolerance and time to invest in funds with higher risk vs. reward profiles at this point of my life. This will change as I get older and closer to retirement. What one piece of advice would you give someone regarding saving for retirement? Educate yourself and understand what you are doing with your money...understand all of your options. What one piece of advice do you wish someone had given you earlier? The sooner you start the better...and max out all of your options. You will thank yourself in the long run. 6

9 Focus on s Index and Equity Index In this issue of Trust Talk, we will compare the Index with the Equity Index. Both of these Single Focus s are located in the mid- to upper-end of the risk/return spectrum. The comparison chart below highlights the objectives of each fund. Conservative Premixed Aggressive Premixed Premixed Portfolios Single Focus s Lower Risk/ Lower Return Stable Value Premixed Index Moderate Premixed Large Cap Growth Equity Equity Index Equity Index Higher Risk/ Higher Return Large Cap Value Equity Non-U.S. Equity Halliburton Stock Now, let s look at the details of this portfolio as of September 30, Index The Index is passively managed. It seeks long-term growth that approximates the risk and return of the Index. The Index invests in 500 U.S. large cap companies, covering a large percentage of the shares that trade in the marketplace, even though the number of companies represented is relatively small compared to the total number of companies within the market. Investment Objective How Are They Different? Composition Equity Index The Equity Index is passively managed. It seeks long-term growth that approximates the risk and return of the S&P MidCap 400 Index. The Equity Index covers 400 U.S. mid cap companies with market capitalization of $1 - $4 billion, or 7% of the U.S. stock market. 100% 100% U.S. Stocks U.S. Stocks Long-Term Potential Risk & Return Market Risk Inflation Risk Potential Return Low Med High Market Risk Inflation Risk Potential Return Low Med High 7

10 Risk Assessment Should Interest Rates Interest You? Every so often, we see it in the headlines of the business section: the Federal Reserve is expected to raise (or lower) interest rates by a quarter of a percentage point. And unless you re about to take out a mortgage, the news of changing rates probably doesn t grab your attention. But maybe it should. Interest rates can have a more significant impact on your personal financial situation than you may think, especially when it comes to your investment portfolio. Understanding how interest rates impact the economy can give you a clearer picture of why your investments rise and fall, and may even help guide your future investing decisions. How Interest Rates Work When we hear that interest rates are changing, it means the Federal Reserve System the ( Fed ) is taking action in an effort to regulate the growth of the economy and control inflation. (See How the Federal Reserve System Affects You in the Winter 2006 issue of Trust Talk.) Rising interest rates tend to hurt bond prices because bonds bought in the past at lower interest rates become less attractive. Yet, higher interest rates can also result in higher returns when bond income is reinvested. The general rule of thumb in understanding how bonds work is that as interest rates rise, bond returns are expected to fall. As interest rates fall, bond returns tend to go up. Impact of Interest Rates on the Savings Plan When interest rates rise, the total return from bonds is likely to decline and vice versa. There are several funds in the Savings Plan that are generally more susceptible to fluctuations caused by interest rate changes. The Index is most sensitive to changes in interest rates because it holds 100% bonds. To some extent, the Stable Value and Conservative Premixed Portfolios are too. These Premixed Portfolios hold investment contracts which by nature will encounter a lagging effect to changes in interest rates. To a lesser extent, the and Moderate Premixed Portfolio are affected by interest rates because they hold some bonds as well. While the remaining funds in the Savings Plan may show some response to changing interest rates, their broad diversification and management strategies make them less vulnerable. What Should You Do? Does the effect of interest rate changes on the Index, Stable Value and Conservative Premixed Portfolios mean you should completely avoid them in favor of other choices? Not necessarily. s and other income-producing investments are still an important part of any well-diversified portfolio, as they help to balance out the risk of stocks losing value from other market-related factors. After two years of increasing interest rates, most experts agree that the Fed will leave them alone for the near future, or at least for the balance of So how should that affect your investment decisions? If history repeats itself (of which there is no guarantee), stable rates suggest that total return of bond funds will rise again. If you re nearing retirement and hold a large percentage of bond funds, this could be especially good news. But be warned that attempting to predict the future is risky business. The interest rate environment should not be the only factor you use to decide how you invest your money. More importantly, your investment time frame, risk tolerance, and long-term investment goals should weigh most heavily in your asset allocation. In the end, crafting a well diversified portfolio and making regular contributions over many years is the most effective way to build a financially secure retirement. 8

11 Newsstand Market Update The third quarter proved positive across much of the U.S. and foreign stock markets and bond rates were favorable. Despite a small dip early on, the U.S. markets rallied driven by a calm inflation outlook from the Federal Reserve Board (Fed) along with a drop in oil prices. Both stocks and bonds performed well for the quarter because of the Fed s decision to hold interest rates steady. After 17 straight increases in the Fed s fund rate over the past two years, prime interest rates held steady at 5.25%. While the Fed held off on raising rates due to the slowing growth in the economy and the slowing housing market, a drop in gas prices at the pump helped fuel the markets. Most of the U.S. stock markets started the quarter with negative returns in July. As oil prices dropped in August, the U.S. stock markets began their rally. The markets ended the quarter with positive results in both the U.S. stock and bond markets as well as in the foreign stock market. The Dow Jones Industrial Average (Dow) briefly climbed above its all-time closing high in the last days of the quarter. Large cap stocks and value style holdings led the way in the U.S. markets outperforming small cap and growth style investments. There was a wide dispersion in performance among the major sectors of the market, with telecommunications up 10.5% and energy down 3.0%. The Russell 1000 Value Index of large cap stocks gained 6.2% and the Russell 2000 Index of small cap stocks produced a modest 0.4% return for the quarter. In the foreign markets, value style investments also outperformed growth investments with Europe leading the region in performance for the quarter. The MSCI All Country World Index (ACWI) ex. U.S. gained 3.9% in the third quarter with consistent returns each month. Emerging markets rallied during the quarter after negative results during the second quarter. This was primarily due to strong results in the Far East. The Japanese market struggled during the third quarter losing 0.7%. Moderating inflation helped the bond market. Both short-term rates and long-term rates fell in September as the Fed held rates steady for two consecutive meetings, saying they are pausing to let the effects of previous rate increases filter through the economy. As a result, the markets interpreted this to mean that the Fed s next move would probably be to start cutting interest rates. For the quarter, the broad Lehman Brothers Aggregate Index returned 3.8%. The major segments of the U.S. bond market produced positive returns with longer maturity bonds being the best performers. High yield and Treasury Inflation Protected Securities (TIPS) also posted gains for the quarter. 9

12 Newsstand Retiree Corner Top Costs in Retirement A common rule of thumb is that you ll need 70-80% of your pre-retirement income per year during your retirement years. To help you think about how much you ll spend during retirement, and how much you need to save now, here are the most typical big-ticket costs you can expect during retirement. 1. Healthcare: It s a fact of life for most retirees. As we age, we require more trips to the doctor and more regular prescriptions, which continue to get more expensive every year with the increase in the availability of breakthrough treatments and the fact that people are living longer lives. Of course, Medicare doesn t cover it all. 2. Travel and entertainment: Since you ll no longer spend your days at a job, you may actually increase your spending in other areas. Taking trips around the world, maintaining a regular golf habit, eating out, and making road trips aren t cheap. 3. Housing: You ll still need a roof over your head and food on the table. With inflation, those things will cost more years from now than they do today. And these days, fewer Americans are staying put long enough to pay off their homes. In fact, many increase their housing costs in retirement by buying that dream home or waterfront property. 4. Living assistance: At some point, a large percentage of people have to pay for some type of assisted living arrangement, such as a nursing home or home health care. In your early retirement years, you may help your aging parents with the expense; later, you may need the care yourself. 5. Savings: That s right, even after you re retired, you ll probably need to continue socking away and/or continuing to invest money for the long road of retirement. With life expectancies getting longer, you could be looking at 30 years or more with no job. Even if you ve been a dedicated saver, you may not have enough to last throughout retirement by the time you reach retirement age. 10

13 Performance Update Halliburton Company Employee Benefit Master Trust for the period ended September 30, 2006 General investment policy Aggressive Moderate Conservative U.S. stocks 65.0% 70.0% 43.0% 26.0% Russell 3000 Index Non-U.S. stocks 22.5% 14.0% 9.0% MSCI EAFE Index Emerging market stocks 7.5% 5.0% 3.0% MSCI Emerging Market Free Index U.S. broad market bonds 35.0% 33.0% 20.0% Lehman Aggregate Index U.S. high yield bonds 5.0% 4.0% Merrill Lynch High Yield Index imoneynet Money Market Average 38.0% Performance 10 Years* 5 Years* 3 Years* 1 Year 3rd Quarter PREMIXED PORTFOLIOS Stable Value Premixed Portfolio (SVPP) 6.1% 5.1% 5.0% 5.2% 1.3% imoneynet Money Market Average 3.4% 1.8% 2.3% 4.2% 1.2% Conservative Premixed Portfolio (CPP) 7.2% 7.5% 8.6% 6.3% 2.7% CPP Index Composite 6.3% 6.3% 8.0% 7.5% 3.1% Moderate Premixed Portfolio (MPP) 8.3% 9.5% 12.2% 9.2% 3.6% MPP Index Composite 7.9% 9.1% 11.7% 9.7% 4.3% Aggressive Premixed Portfolio (APP) 8.6% 10.6% 16.1% 11.7% 3.2% APP Index Composite 8.4% 11.0% 16.4% 13.1% 4.5% SINGLE FOCUS FUNDS Index 6.2% 4.7% 3.3% 3.7% 3.8% Lehman Aggregate Index 6.4% 4.8% 3.4% 3.7% 3.8% 9.9% 9.3% 12.4% 10.4% 5.1% Index Composite 8.2% 7.2% 9.6% 7.9% 4.4% Large Cap Value Equity 10.6% 10.0% 15.9% 11.2% 4.1% Russell 1000 Value Index 11.2% 10.7% 17.2% 14.6% 6.2% Index 8.5% 6.9% 12.2% 10.7% 5.7% Index 8.6% 7.0% 12.3% 10.8% 5.7% Large Cap Growth Equity 5.8% 3.5% 9.4% 6.9% 3.4% Russell 1000 Growth Index 5.5% 4.4% 8.4% 6.0% 3.9% Non-U.S. Equity 8.3% 15.0% 23.3% 18.9% 3.2% MSCI ACWI ex. U.S.** 7.1% 14.8% 23.2% 18.9% 3.9% Equity Index 13.3% 12.9% 15.1% 6.5% -1.0% S&P MidCap 400 Index 13.4% 13.1% 15.2% 6.6% -1.1% Equity 8.3% 10.2% 12.5% 6.8% -0.9% Russell 2000 Index 9.1% 13.8% 15.5% 9.9% 0.4% Halliburton Stock 9.5% 21.3% 33.3% -16.0% -22.6% *Annualized. **Returns prior to January 1, 2005, include MSCI EAFE Index, the previous benchmark. 11

14 Performance Notes The Index,, Large Cap Value Equity, Index, Large Cap Growth Equity, Non-U.S. Equity, and Equity s were not in existence until April 1, The Equity Index was not in existence until January 1, The Conservative Premixed Portfolio was introduced January 1, In order to provide comparative historical returns, the managers return of their Halliburton Trust account is shown. If the Halliburton Trust had not employed a manager for the periods presented, the firm s composite account return was added. All rates of return are net of expenses. Your rate of return may vary depending on your account activity (e.g., contributions, withdrawals, transfers, loans, etc.) and your plan s administration expenses. To help you better understand how your funds are performing, the funds are compared with composite returns or with appropriate indexes. The composites are created by blending together index returns in proportion to the investment policy of each fund (see chart). Because there are no indexes comparable to the Stable Value Premixed Portfolio s investments, we compare its return with money market funds tracked by imoneynet. Performance data represents past performance; no assurance can be made regarding future results. Index Definitions* imoneynet Money Market Average is an index of over 700 money market funds. Lehman Aggregate Index is an index of U.S. bonds, including government, corporate, mortgagebacked, and asset-backed securities. Merrill Lynch High Yield Index is an index of U.S. corporate bonds that are rated less than investment grade but are not in default. MSCI (Morgan Stanley Capital International) All Country World Index (ACWI) ex. U.S. is an index of non-u.s. equity securities listed on the stock exchanges of developed and emerging markets. MSCI EAFE Index is an index of non-u.s. equity securities listed on the stock exchanges of Europe, Australasia, and the Far East. MSCI Emerging Market Free Index is an index of non- U.S. equities traded in emerging markets. Russell 1000 Growth Index focuses on the 1,000 largest companies in the Russell 3000 Index that have lower dividend yields and above-average growth rates. Russell 1000 Value Index focuses on the 1,000 largest companies in the Russell 3000 Index that have higher dividend yields and below-average growth rates. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. It is used as a general measure of U.S. stock market performance. Standard & Poor s 500 Index is a popular standard for measuring large-cap U.S. stock market performance. The index includes a representative sample of 500 leading companies in prominent industries. Standard & Poor s MidCap 400 Index is a popular standard for measuring mid-cap U.S. stock market performance. The index includes a representative sample of 400 leading companies in prominent industries with a market capitalization of approximately $1 - $4 billion. *You cannot invest in any of these indexes. holdings will differ from index holdings. 12

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16 10200 Bellaire Blvd. Houston, TX We encourage you to call the Trust Investments Department with any suggestions or comments regarding Trust Talk. You can expect the next issue in February H /06 PRSRT STD US POSTAGE PAID DALLAS, TX PERMIT 2650