Letter to GuideStone Participants from CIO Rodric E. Cummins

Financial Crisis and Market Conditions

For 90 years, GuideStone has stood for stability and weathered all financial storms that have come our way. During these uncertain times, we understand many questions and concerns may exist with regard to the performance and safety of your investments. Investors often review the status of their portfolios at quarter-end, and as of Sept. 30, your accounting statements will no doubt reflect the reality of an extraordinarily challenging investment climate. For that reason, we would like to address GuideStone’s position on several common issues that may be on the minds of our participants as a result of the financial crisis and the current market environment.

The market environment
The final weeks of the third quarter can easily be characterized as one of the most tumultuous times in the history of the U. S. financial system. An unprecedented level of risk aversion, a sharp rise in volatility and the forced selling of securities that evolved during the past year escalated into an emotionally charged frenzy in September. Never before has this generation of investors seen the combined quantity, magnitude and velocity of events unfold over such a short period of time.

Much has been previously written about the impact of high-risk, sub-prime mortgages, so we will dispense with that history. The reality of sub-prime mortgages is that instead of diminishing with time and space, the ripples from these securities have grown larger and larger as their effects have expanded deeper into the global financial system. For well over a year, there have simply been more sellers than buyers due to the deleveraging within the financial system and the forced selling of securities by banks, brokerage firms, hedge funds and others. The selling pressure created serious liquidity problems with regard to the market’s existing inventory of securities, but it has now had far more important ramifications. The ripple effect of sub-prime mortgages has now essentially halted the historically well-oiled process of loan securitization from the originator to the secondary market for all lending activities. Additionally, unprecedented risk aversion has led to a tightening of credit availability so severe that the formation of capital and the flow of capital are disrupted. The crisis has now progressed into a system problem that has resulted in a downward spiral of confidence and emotion that if not addressed will likely lead to worsening conditions throughout the financial system.

As of the writing of this letter, activity regarding a government relief package continues in Congress. While the resolution is unknown, we believe the passing of such legislation is critically important to stabilize the financial system, restore investor confidence, and unlock the creation and flow of capital necessary to promote an economic recovery.

Money market funds
As you may know, the constant $1 Net Asset Value has been broken by several prominent funds causing concerns throughout the industry as to the health of money market funds. The GuideStone Money Market Fund has remained invested in very high quality, short-maturity instruments. There have been no asset performance problems within the portfolio that would threaten the Fund’s ability to maintain a constant $1 Net Asset Value.

Cash flow and liquidity
While fund exchange activity has increased over the past two weeks, it has been orderly and disciplined. We have been able to maintain sufficient liquidity positions within all 24 GuideStone Funds, and the operational functions related to your account have in no way been impeded.

Investment philosophy
GuideStone maintains an unwavering commitment to structuring investment strategies that create long-term value for our investors. Our focused investment discipline toward value-creation, risk management and diversification is consistently applied across all investment portfolios on a global scale. We continue to implement our strategies through a manager-of-managers approach which results in world-class institutional fund managers overseeing your portfolios on a daily basis.

Market impact
Stress within global financial systems reached a critical point on Sept. 15 with the announced bankruptcy of Lehman Brothers. Since that time, events have transpired that are far too numerous to list but that can generally be categorized as nationalization, consolidation, and government intervention and rescues. These events have resulted in wide swings in market levels. For example:

• The S&P 500 Index was down 6.75% Sept. 15 to Sept. 30, with more than 50% of the trading days yielding market movements +/- 3.8%.
• The near-term U.S. Treasury Bill yields .21% as of the close on Sept. 30. Over the past two weeks there have been instances when the Treasury Bill sold at a premium, meaning investors were willing to accept a negative return for the security of a U.S. government obligation.

Final thoughts
Today’s investment climate is historical by any measure. It is a reflection of challenging, yet very repairable problems facing the world’s financial system. We understand the difficulty in watching the impact of this market environment and extreme volatility on investment balances. Understandably, these conditions can cause concerns among investors. Such concerns can lead to emotional decisions that result in untimely ad hoc changes to investment portfolios that may not be consistent with meeting long-term investment objectives. We maintain that a consistent investment discipline, diversification and persistence will be the key to investors’ ability to weather this and other storms. For more information on this matter, please refer to the article posted on our Web site entitled “Updated: Market swings shouldn't panic long-term investors”.

Market volatility and indiscriminate selling of assets by others often create investment opportunities that can be captured by insightful investors whose long-term financial objectives are properly tuned to long-term investment strategies. Investors in GuideStone Funds have the advantage of collectively having 31 world-class institutional investment management firms navigating these difficult waters and taking advantage of opportunities as they surface.

We will, of course, remain keenly focused on the management of your assets and the developments within the global financial markets.

Thank you for your continued confidence and trust in GuideStone.

Rodric E. Cummins, CFA
Chief Investment Officer

Shares of GuideStone Funds are distributed by PFPC Distributors, Inc., a registered broker-dealer and underwriter of the funds, 760 Moore Road, King of Prussia, PA 19406. GuideStone Capital Management, a controlled affiliate of GuideStone Financial Resources, provides investment advisory services for the Funds.

Word Version - Letter to GuideStone Participants from CIO Rodric E. Cummins