1. e20 Years of Investing
eGetting Ready to Retire . . . . . . .2
eSpotlight on the Bond Funds . . .4
eConverting to a Roth IRA . . . . . .5
eFund Performance . . . . . . . . . . .6
in this issue
Horizons
3rd Quarter 2010
for Our Shareholders . . . . . . . . .1
A quarterly newsletter for Homestead Funds’ shareholders
Item number 00075874
20 Years of Investing
for Our Shareholders
Homestead Funds’ essential investment strategy has remained consistent
The story of Homestead Funds’ investments starts with who we are. We were created in 1990
to give NRECA members and their families a convenient way to obtain professional and affordable
money management. We are based in Arlington, VA, and serve shareholders all over the country.
Over the years, we’ve added funds and services, so that today we manage more than $1 billion
in shareholder assets.
While the company was established for NRECA members, the funds are open to the public. You do
not have to be affiliated with NRECA to invest in Homestead Funds.
Our core principles remain the same
Over our two decades of money management, our investment philosophy has remained consis-
tent. We view this as a real strength.
Homestead Funds’ President Peter Morris says, “In a nutshell, the three qualities that describe our
investment management approach are prudence, discipline and value.”
PRUDENCE: Our portfolio managers focus on the core business of investing. They manage your money
with prudence—no differently than they would if it were their own. In fact, in many cases, port-
folio managers are managing their own money as well as yours, since they also invest in the funds.
Each day, our portfolio management and research teams work hard sifting through the thousands
of investment opportunities available to shareholders. We work diligently to identify what we
believe to be the most promising candidates and to balance an investment’s return potential
against the level of expected risk. This is a rigorous ongoing process that blends traditional
fundamental analysis, a thorough evaluation of company financial
statements, a broad awareness of economic and industry
conditions, and continuous monitoring of the fund’s risk level.
continued on page 3
RAT NG 20 YE
EBRATING 20 YEARS
RA
AT EA
CELEB
2. 2
Getting Ready to Retire
The rush is on, with 10,000 Americans a day turning 65 this year. If you are part of the massive wave
of baby boomers in your early to mid-60s, you may be thinking about retiring soon.
To prepare, start by calculating these three outlive your savings. While the average life
numbers: your estimated expenses in retire- expectancy for Americans at birth is 78, those
ment, how long you may need your income who reach age 65 are expected to live to
to last and your projected income. age 84, according to the Centers for Disease
Control.
1 Estimate your expenses in retirement
The general rule of thumb is that you will
need from 70% to 80% of your annual income
But averages don't tell your story. You may
be in better or worse health than the average
American. You can make an educated guess
today to achieve a comfortable lifestyle each year
about your life expectancy by starting with
in retirement. But your expenses will change
the average, then factoring in your family health
once you retire. For example, many work-related
history, and your personal health record.
expenses, such as commuting, work clothing
and retirement plan contributions will decrease.
Other expenses, such as increased travel and
medical, may offset those savings, at least in the
earlier years of retirement. But as retirement pro-
3 Estimate your projected
retirement income
Start by estimating your income from Social
Security and any defined benefit pension plans.
gresses, many retirees reduce their day-to-day
Then, decide how much additional income
expenses just as their health
you’ll need from other investments, such as
care expenses increase.
Find out your stats for life your 401(k) plan, IRAs and any other savings.
As you estimate your
expectancy. The Centers for To learn more about when to begin receiving
expenses, adjust your
Disease Control has it broken down Social Security benefits, go to the Social
budget for inflation and
Security Administration’s (SSA) “Retirement
my age, gender, race and region. Go health care costs. While
Planner” page (start at www.ssa.gov), which
to cdc.gov/nchs/fastats.lifexpect.htm. inflation has increased at
outlines your options, lets you test various
2% to 3% each year over
scenarios and shows you how to apply for
the last 20 years, even
benefits online. If you prefer to use the phone,
that modest rate doubles the cost of living every
call the SSA at 1-800-772-1213. Or you can
28 years. At 2.5% inflation, living expenses of
check the annual benefits statement Social
$50,000 today can become $100,000 at retire-
Security sends to you three months before
ment. And health care costs are rising far faster
your birthday each year.
than the average rate of inflation.
PREPARATION CAN MAKE A BIG DIFFERENCE:
2 Estimate the length of your retirement
Estimating how long your retirement may
last is important, because you do not want to
Taking steps to prepare can pay off with
a more enjoyable retirement lifestyle!
Be sure to talk through your plans with a Homestead Funds
client service associate at 1-800-258-3030, Monday through Friday
from 8:30 a.m. to 5:00 p.m. Eastern Time.
3. £Daily Income Fund
£Short-Term Government
£Short-Term Bond Fund
£Stock Index Fund
£Value Fund
£Growth Fund
£Small-Company Stock Fund
3
£International Value Fund
20 Years of Investing, continued from page 1
DISCIPLINE: “We are disciplined, long-term investors,” in a position listed only as a line-item liability. This
Morris explains. “You see evidence of this in our deeper knowledge, in turn, helps our equity fund
historically low portfolio turnover rate. Plus, we con- managers determine the stock’s true worth more
sistently stick to our fundamental approach to value accurately.
investing and don’t let our investment style
“The bond market derives much of its value from
The drift from this value orientation.”
what goes on in the stock and commodity markets,
”
Homestead VALUE: Value investing means that the managers explains Douglas Kern, fixed-income portfolio man-
Funds are looking at the underlying worth of each ager. “Because I work beside our equity managers,
Lineup investment. The goal is to buy securities that I gain a broader perspective. That can prove to be
FIXED-INCOME FUNDS are selling for bargain prices before the market beneficial to bond fund shareholders.”
recognizes the true value of the investment
In addition to commercially available research and
and the share price adjusts to reflect that value.
Securities Fund information, we use our own in-house analytical
The analysts’ approach to finding “undervalued” resources. We pore over reports, publications and
investment candidates covers a number of company press releases to make our buy and sell
EQUITY FUNDS
disciplines, including fundamental, quantitative decisions.
and economic analysis. They research individual
A long-term outlook
securities by thoroughly analyzing financial
Our duty as your money manager is to focus on
statements, competitive industry and sector
your interests first and foremost. Our portfolio
placement and reviewing the quality of man-
management team applies this principle every day
agement. Analysts also look at cash-flow returns
as we strive to deliver solid performance without
on investment.
exposing our clients to undue risk. Many of our
How you benefit investors are saving for retirement, which is a long-
from our investment process term goal. Accordingly, the funds are managed
Homestead Funds offers you three fixed-income with this long-term orientation—a buy-and-hold
funds—a money market option and two bond funds. strategy of building assets over many years.
On the equity side, we offer five funds—four actively
The managers are dedicated to serving you, and
managed funds and one index fund.
their tenure with Homestead Funds is evidence of
Typically, fund companies offering both stock and their dedication. Each in-house portfolio manager
bond funds separate the management of each has a long history with the firm. For example,
investment type. At Homestead Funds, our equity Homestead Funds’ Peter Morris has been portfolio
and bond fund managers collaborate daily. Each manager for the Value Fund and Small-Company
member of the team contributes his or her individual Stock Fund since their inceptions (1990 and 1998,
perspective to give a broader picture of the oppor- respectively).
tunities and risks. For example, our bond fund man-
This longevity reflects the managers’ interest in
ager’s detailed analysis of a company’s balance
serving you and maintaining the consistency of the
sheet may reveal the true nature of the risk inherent
firm and its investments.
4. 4
THE ABCS OF INVESTING
Spotlight on Doug Kern
the Bond Funds Homestead
Funds Portfolio
Manager
Did you know that Both funds are suitable for Both funds have a low short-term securities.
Homestead Funds offers investors who want investments turnover because the funds Although interest rates are
designed to deliver a potentially generally have a constant currently at all-time lows, it is
two bond funds to share-
higher return than a money mar- source of cash from securities important to remember that
holders? They are called
ket fund, but with fewer ups and maturing, interest payments risk is always a possibility.
the Short-Term Government downs in share price than a and asset-backed/mortgage
The Short-Term Bond Fund
Securities Fund and the longer-term bond fund or stock paydowns.
also carries these two risks as
Short-Term Bond Fund fund would typically experience.
“The need to liquidate securities well as a few others, including
(ticker symbols: HOSGX How the funds invest is very low, says Doug Kern,
” credit risk, the chance that an
and HOSBX). These two bond funds share the portfolio manager for both issuer will be unable or unwill-
many investment characteris- funds. He adds, “It is more of ing to make timely payments
tics. The Short-Term Govern- a challenge to find securities to of interest or principal or to
ment Securities Fund invests buy that fit with the investment otherwise honor its obligations.
at least 80% of its total assets objective. We continuously The degree of risk for a partic-
in fixed-income securities with review potential investments ular security may be reflected
a dollar-weighted average and analyze industry data in its credit rating. Investors
maturity of three years or less to find appropriate securities.” in this fund are also exposed
and whose principal and inter- to mortgage-backed securities
Kern has overseen both funds
est payments are guaranteed risk, the chance that the value
since their creation—1991
by the U.S. government. of the fund’s mortgage-backed
for the Short-Term Bond Fund
securities may be affected by
The principal investments are and 1995 for the Short-Term
changes or perceived changes
typically U.S. Treasury securi- Government Securities Fund.
in interest rates. Finally, inves-
ties and securities issued
Risks tors in this fund may face
by U.S. government agencies.
As with any investment, you foreign risk, since the fund may
and instrumentalities.
may lose money by investing invest overseas.
The Short-Term Bond Fund will in these funds. Specific risks
Outlook
ordinarily invest at least 80% of for investors in the Short-Term
The credit markets have healed
its total assets in debt securi- Government Securities Fund
in recent quarters as a result
ties with a dollar-weighted include income risk, which is
of the federal government’s
average maturity of three years the chance a decline in inter-
massive stimulus into the
Investors should carefully or less and are in the three est rates will cause the fund’s
economy. However, it is likely
consider fund objectives, risks, highest credit categories as yield to decline. Investors also
charges and expenses before that markets will have to come
ranked by a nationally recog- face interest rate risk, the
investing. The prospectus con- to grips with the end of the
nized statistical rating organi- chance a rise in interest rates
tains this and other information Federal Reserve’s near-zero
zation. But its investments are will cause the fund’s price to
and should be read carefully interest rate policy and the
before investing. To obtain a primarily in corporate bonds, decline. In response, the fund
beginning of a monetary tight-
prospectus, call 1-800-258-3030 as well as government and seeks to minimize share price
ening cycle in 201 1or beyond.
or visit homesteadfunds.com. mortgage-backed bonds. fluctuation by investing in
5. 5
Learn More
d Your contribution may be tax-deductible. If neither you nor your spouse con-
R E S P O N D I N G TO YO U
through Shareholders like you call our client service associates with a lot of good questions. In this column,
Multimedia we’ll share our responses to some of those questions with the thought that for every shareholder
who calls to ask, there are a hundred who didn’t! We encourage you to call our helpful associates
If you want to learn more with your questions, as well as to check here each quarter to see if your question is featured.
d Distributions are subject to income tax and, if taken before
about the evolution of
Homestead Funds, we have
a new feature for you. Take
Should I convert my
a look at the multimedia Traditional IRA to a Roth IRA?
d Contributions to a Roth IRA are never tax-deductible.
presentation describing I have a Traditional IRA with Homestead Funds that I contribute to
d You may take income tax-free distributions from a Roth IRA
Homestead Funds' history and each year. I heard that 2010 may be a good time to convert it to a
operations. You can find a link in Roth IRA. Would this move benefit me and is there a downside to it?
the “News & Announcements”
section of our homepage, at First of all, congratulations on saving regularly for retirement in a tax-deferred
homesteadfunds.com, that account—that is one of the most important steps you can take toward saving
will take you to this presenta- for retirement. As you know, there are two types of IRAs—Traditional and
tion. In less than five minutes Roth IRAs. While both offer tax-deferred growth of your investments, each has
you’ll learn some of the follow- different tax consequences.
ing information about us:
4 its startHomestead Funds got
How TRADITIONAL IRA:
4 people at Homestead Funds
tributes to an employer-sponsored plan (like a 401(k) plan), your entire contribution
Some of the faces of the
is deductible. If you do participate, the deductibility depends on your household
annual income and tax filing status.
who manage your money
and answer your phone calls
4 ofSome of the advantages
age 59½, a 10% premature distribution penalty may apply.
investing with Homestead
ROTH IRA:
Funds
So, next time you are on the
Homestead Funds’ website,
if you are at least age 59½ and the account has been open
take a few minutes to learn
for at least five years. You do not have to take Required
about the firm and the
Minimum Distributions from a Roth IRA at age 70½, which
people managing your money.
Beth Napper
allows your account to stay invested. Finally, assets from
We think you’ll find your time
Registered Representative a Roth IRA can be passed on to heirs free of income tax.
well spent!
Transferring assets from your Traditional IRA into a Roth IRA is called a Roth con-
version. Investors making this move must pay income tax on their tax-deductible
contributions and any earnings. Beginning in 2010, income limitations for converting
to a Roth IRA have been removed. Also, if you do a Roth conversion this year,
you may include the taxable portion as 2010 income or split it equally between
2011 and 2012. While we cannot say specifically whether this move is beneficial for
you without knowing your particular financial situation, Roth conversions generally
can be a good choice for investors who think they may be in a high tax bracket at
retirement or want the estate-planning benefits a Roth IRA offers.
Consult a tax professional for your specific situation.
6. 6
Fund Total Returns For Period Ending 6/30/10
Aggregate Average Annual Average Annual Average Annual Average Annual
Year-to-Date 1 Year 5 Year 10 Year Since Inception (date)
Daily Income 0.01% 0.06% 2.57% 2.29% 3.37% (11/90)
Short-Term Govt. Securities 1.88% 3.37% 3.91% 3.84% 4.28% (5/95)
Short-Term Bond 3.84% 10.61% 5.17% 4.78% 5.24% (11/91)
Stock Index -6.80% 13.85% -1.37% -2.23% -1.31% (10/99)
Value -5.94% 16.76% -0.19% 4.84% 8.68% (11/90)
Growth -9.56% 14.07% 1.87% N/A -6.19% (1/01)
Small-Company 2.70% 32.92% 4.38% 9.41% 6.37% (3/98)
International Value* -13.30% 5.60% 2.26% N/A 1.23% (1/01)
For performance data current to the most recent month-end, call Homestead Funds at 1-800-258-3030 or visit homesteadfunds.com.
Fund Annual Operating Expenses
Management Acquired Fund Fees Total Annual Fund Expenses Waived
Fees Other Expenses and Expenses Operating Expenses by RE Advisers Net Expense a
Daily Income 0.50% 0.23% 0.02% 0.75% 0.26% b 0.49%
Short-Term Govt. Securities 0.45% 0.33% 0.01% 0.79% 0.03% c 0.76%
Short-Term Bond 0.60% 0.23% 0.01% 0.84% 0.03% c 0.81%
Stock Index 0.05% d 0.70% 0.00% 0.75% 0.00% 0.75%
Value 0.56% 0.24% 0.00% 0.80% 0.00% 0.80%
Growth 0.65% 1.09% 0.00% 1.74% 0.79% c 0.95%
Small-Company 0.85% 0.38% 0.01% 1.24% 0.00% 1.24%
International Value 0.75% 0.31% 0.01% 1.07% 0.07% c 1.00%
Daily Income Fund: Current Yield
Seven-Day Effective Yield as of 08/01/2010 0.0100%
The total returns shown above represent past possible to lose money by investing in this Fund. c Expenses are waived pursuant to an expense
performance, which does not guarantee future The Daily Income Fund is a money market fund. limitation agreement between RE Advisers and
results. Investment return and principal value For money market funds, the yield quotation the Fund. The contractual waiver is for a one-
of an investment will fluctuate. An investor’s more closely reflects the Fund’s current earnings year period ending April 30, 201 At that time,
1.
shares, when redeemed, may be worth than the total return quotation. RE Advisers may revise, renew or discontinue
more or less than their original cost. Current a Net the waiver.
Expense shown here differs from the ratio
performance may be higher or lower than
of expenses to average net assets shown in d The fees for the Stock Index Fund shown in this
the performance data quoted.
the Financial Highlights section of the prospectus table reflect expenses of both the feeder fund and
Investments are subject to risk and market because the expenses shown on this page the Master Portfolio. The management fee repre-
fluctuation. Losses could occur. Call us at include Acquired Fund Fees and Expenses, sents the total expenses of the Master Portfolio.
1-800-258-3030 to speak with one of our client and amounts shown in the Financial Highlights
service associates and request a prospectus. reflect the operating expenses and do not * The performance information for the International
Value Fund (formerly the International Stock Index
Investors are advised to consider fund objec- include the Acquired Fund Fees and Expenses.
Fund) reflects its investment experience in the
tives, risks, charges and expenses carefully b Expenses are waived pursuant to an expense State Street MSCI® EAFE® Index Portfolio from
before investing. The prospectus contains this
limitation agreement between RE Advisers and its inception through October 16, 2005, and in
and other information. Read the prospectus
the Funds. The contractual waiver is for a one- the Vanguard Developed Markets Index Fund from
carefully before you invest or send money.
year period ending April 30, 201 At that time,
1. October 1, 2005 to June 9, 2006.
An investment in the Daily Income Fund is not RE Advisers may revise, renew or discontinue
Distributor RE Investment Corporation. 9/10
insured or guaranteed by the Federal Deposit the waiver. In addition, effective August 14, 2009,
Insurance Corporation or any other government RE Advisers has voluntarily agreed to waive fees
agency. Although the Fund seeks to preserve the or reimburse expenses to the extent necessary
value of your investment at $1.00 per share, it is to assist the Fund in attempting to maintain
a positive yield. RE Advisers may revise, renew
or discontinue this voluntary waiver at any time.
