Editor’s Note: Because of production deadlines, this perspective reflects events up to the first week of October.

As we enter the fourth and final quarter of 2008, Did you know that 62% of our funds are rated 4 and 5 stars by Morningstar? Click here for more fund details...it would be no understatement to say this has been a challenging year for investors worldwide. One year ago, as the scope of the global credit market crisis began to be understood, the questions on the minds of many investors as they looked ahead were “How bad, how widespread, and how long?” We’ve seen the U.S. Treasury take unprecedented steps just in September—taking over Fannie Mae, Freddie Mac, and AIG while allowing Lehman Brothers to fall into bankruptcy.

In addition, major commercial banks such as Washington Mutual and Wachovia have been forced to sell themselves to larger rivals. Today, it’s clear that the major consequence of the credit mess is a prolonged period of economic sluggishness with a weak outlook for GDP growth in the third and especially the fourth quarters, likely resulting in negative overall growth for all of 2008.

Because of this assessment and outlook, our position remains cautious and conservative with respect to our asset allocations. Like last quarter, we are underweight stocks in general. We are also continuing to maintain a slight tilt toward growth versus value stocks in our equity holdings based on the belief that an economic recovery is in the future—although we’re not forecasting how soon and how rapid. In addition, we have an overweight position in high-quality bonds. And given recent substantial equity market underperformance and volatility, we have rebalanced our portfolios to maintain our targets.

The risk designations are relative to the three Strategic Allocation Funds and do not represent comparisons with any other investment. 

Financial Sector Challenges Will Continue

Two of the financial institutions to come under scrutiny amidst the global credit crunch were Fannie Mae and Freddie Mac. For more information on our Strategic Allocation Funds - download a copy of this retail-approved brochure.And on September 7, the U.S. Treasury announced a takeover of both institutions, placing them in conservatorship to be run by the Federal Housing Finance Agency. These financial institutions have been dysfunctional for a number of years now, in the sense their profits are privatized but their risks are ultimately socialized (borne by the government and hence taxpayers). Both Fannie Mae and Freddie Mac have strayed well beyond their original mission of ensuring liquidity in the mortgage markets.

The good news is that markets, regulators, investors, and even politicians have come to a shared sense of urgency—meaning we are reaching an inflection point not unlike going from watching a train wreck unfold in slow motion, to assessing the damage, beginning the rescue and deciding how not to let this happen again. The $700 billion Congressional rescue plan marks a substantial change in mindset from reacting to this financial crisis as it unfolds on a case by case base (Bear Stearns, Fannie Mae and Freddie Mac, AIG, Lehman Brothers) to a more proactive and systematic response to the crisis overall. But it will take time. And as is always the case with these kinds of massive rescue plans, its success will ultimately be determined by how it is implemented.

Some Bright Spots Outside the Financial Sector

For better or worse, the media tend to focus nearly exclusively on negative news and that includes what gets reported by the business and financial press. So it’s important to keep in mind that not all companies in the economy are in as bad shape as the worst of the “walking wounded” within the financial sector. That’s especially true in sectors and industries where technology and innovation are the foundations of creating sustainable value-added for customers and profit growth for investors.

As a result (and spite of the general discouraging performance of equity markets year-to-date and likely into the fourth quarter), there is a positive outlook for companies with strong track records for delivering innovative new products and services. The breadth of companies meeting this definition today is certainly narrower than it was five years ago (and much narrower than the late 1990s when any company with a “dot-com” in its name was expected to outperform). But where we find them we also find companies focused on solid, tangible, and meaningful innovations for society with substantial market and earnings growth potential.

Inflationary Pressures Are Subsiding

As global economic growth slows, we are also beginning to see some easing of inflationary pressures especially in the food and energy components of most price indexes. For example, oil prices are well off their mid-July peak of $145 per barrel. Oil briefly spiked again in September when the magnitude of the financial rescue package was announced. But that peak was brief as market participants began to understand that the $700 billion package was intended to get ahead of the growing crisis and restore some sense of confidence in financial institutions and order in the markets.

In fact, the kind of price-pull inflation we’ve experienced since early 2007 is nearly impossible to sustain when global economic demand softens as it has in the past year. Nearly all the increases we’ve seen in inflation at the consumer level (as measured by the Consumer Price Index or CPI) have been driven by energy and food related effects while “core inflation” (those aspects of a household’s consumption outside food and energy) have shown little to no inflationary trends.

Uncertain Times for the Markets

There are numerous measures of market uncertainty, one of which is the spread (or interest rate differential) between the 3 month Eurodollar borrowing rate and the 3 month U.S. Treasury bill yield. As the chart illustrates, this spread (called the “TED Spread” where TED is an acronym for “Treasury Euro-Dollar”) widened dramatically as we entered September. These are clearly not simply “interesting times,” but extraordinary ones in terms of the financial markets and financial sector specifically.

However, extraordinary times also plant the seeds for longer-term extraordinary opportunities such as reform of government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac that have diverged well beyond their original intent and mission. One thing to watch for is when value investors with a proven track record begin to make investments in well-run companies that have been beaten down in value.

Looking Ahead

In summary, because of our near-term outlook for sluggish economic growth both in the U.S. and worldwide, we remain underweight on stocks generally and overweight on high-quality bonds.  But our bias in stocks is toward growth because, as explained earlier, we believe we are at or near an inflection point in the global credit crisis where investor focus will shift from anticipating and reacting solely to bad news to beginning to see a viable path out of the current credit market problems. Our forecast for U.S. GDP growth for the second half of 2008 is extremely weak with a belief that we will see negative growth in the fourth quarter. The U.S. dollar will remain weak, not simply because of a dismal economic outlook, but due to the continued massive current account deficits the U.S. will continue to run with the remainder of the world for the foreseeable future.

But economically, we are tempering our conservative outlook with some optimism. High quality companies with impressive long-term growth prospects are trading at attractive valuation multiples due to the financial crisis. These are truly extraordinary times in the global equity and fixed income markets—unprecedented in terms of the structural changes and short-term volatility that is occurring. But extraordinary times also create extraordinary long-term investment opportunities. We remain poised to capitalize on those attractive investment opportunities in stocks and bonds that are being punished for no other reason than overall negative market sentiment and panic.

A WORD ABOUT RISK

The funds’ performance depends on the investment managers’ skill in determining the strategic asset class allocations, the mix of underlying American Century funds, as well as the performance of those underlying funds. The underlying funds’ performance may be lower than the performance of the asset class they were selected to represent. Stocks and bonds can decline due to adverse issuer, market, regulatory, or economic developments. International markets may be less liquid and can be more volatile than U.S. markets. These risk factors, including those associated with currency exchange rates, also apply to investments in international markets, all of which make international markets more volatile and less liquid than investments in domestic markets. Some of the underlying funds can invest in either high-yield securities or small/emerging growth companies. Investments in these types of securities generally are subject to greater volatility than either higher-grade securities or more-established companies, respectively. Before making an investment in any fund, you should consider all the risks associated with it.

Funds (Conservative, Moderate and Aggressive). The risk designations are relative only to the three Strategic Allocation funds and do not represent comparisons with any other investment. The three diversified portfolios invest in varying levels of stocks, bonds and cash and account for over $3.2 billion (as of 09/30/08) in assets. Jeff Tyler, Senior Vice President and Senior Portfolio Manager, is the senior investment officer assigned to American Century’s Asset Allocation Funds (Conservative, Moderate and Aggressive).

The opinions expressed are those of the contributors from the portfolio investment team. The opinions are no guarantee of the future performance of any American Century portfolio. Material presented has been derived from industry sources considered to be reliable, but their accuracy and completeness cannot be guaranteed.

You should consider the funds’ investment objectives, risks, charges and expenses carefully before you invest. The funds’ prospectus, which can be obtained by calling 1-800-345-6488 or by visiting www.americancentury.com, contains this and other information about the fund and should be read carefully before investing.

American Century Investment Services, Inc., Distributor
©2008 American Century Proprietary Holdings, Inc. All rights reserved.
American Century Investments | P.O. Box 419385 | Kansas City, Missouri 64141-6385 | 1-800-345-6488 | www.americancentury.com/ipro

IN-BRO-63084 0810
Non-FDIC Insured • May Lose Value • No Bank Guarantee

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