Despite a fourth-quarter rally, equity funds suffered mightily overall during the year, even harming balanced funds to the extent of their equity position, a Mercer summary said. International equity funds also finished 2002 in the red – however, doing better than domestic equities.
Over a longer-term time frame, capital market returns remain positive, even with the inclusion of negative returns over the last three years, and are close to historical norms. Over a 10-year time frame, the S&P 500 Index returned 9.3%, while the Russell 2000 Index returned 7.2%. International equity markets produced a small gain of 4.0% over a 10-year time frame, although the asset class underperformed US equities. Due to an accommodating interest rate environment, the fixed income asset class produced a 7.5% return over a 10-year time frame, much higher than normal, Mercer analysts said.
Value Over Growth in Fourth Quarter
During the fourth quarter, value funds outperformed growth funds, as the median large-cap value fund returned 8.2% versus a 5.2% return for the median large-cap growth fund. This style trend was evident throughout the year, with value significantly outperforming growth by a margin of 12.4%. Within the small-cap group, the disparity between growth and value styles was even more pronounced, as value outperformed growth by a margin of 18.9%.
The median large-cap fund underperformed the S&P 500 Index for the fourth quarter of 2002 by 100 basis points while also underperforming the index by 20 basis points during the previous year. Continuing a trend with the US domestic market, small-cap funds outperformed their large-cap counterparts, although both styles posted double-digit losses for the year. The median small-cap fund returned a loss of 15.4% over the last year versus a loss of 22.3% for the median large-cap fund.
The international asset class, with a loss of 15.9% for the year, outperformed its US large-cap counterpart by a margin of 620 basis points for the year. Global equities fell 19.9% for the year, hurt by their exposure to US equities.
The median core fixed income fund equaled the index for the fourth quarter but underperformed the Lehman Aggregate over the last year by 190 basis points, primarily hurt by their exposure to corporate securities. With a beneficial interest rate environment, the fixed income asset class produced a yearly return of 10.3%, far exceeding Mercer’s 2002 Fearless Forecast prediction of 5%.