Fund Return Mediocre in Q3

Corporate and foundation/endowment plans returned a meager 0.2% from July to September, only slightly below the 0.5% returns seen in public plans. These figures represent a small portion of the 12.5%, 13.1%, and 13.3% returns seen in corporate, public, and endowment/foundation plans respectively. The year-to-date figures are higher than the ten-year running average, with the annualized returns for all three coming in between 9.5% and 10.4%.

Value managers outperformed growth managers significantly in the third quarter. While value managers gained value for their funds, growth managers lost, with a difference of 670 basis points being seen between the two styles.

The median large-cap manager outperformed the S&P 500 by 10 basis points in the third quarter. Small-cap managers outperformed their larger counterparts by 30 basis points from July to September. Both were losers however, with small-cap managers losing an average of 1.5%, only marginally better than the 1.8% losses seen by the large-cap managers.

Based on Mercer IC’s Fearless Forecast, an survey of investment managers regarding their 2004 market expectations, large-cap equities are forecast to return 9.1%, while small-cap assets are expected to return 8.7%. Both sectors, however, have returned well below these expected results, with large-cap equities producing returns of only 1.5% so far and small-cap equities returning only 3.7%.

International equities outperformed their domestic counterparts in the third quarter by 170 basis points; both, however, lost value overall. Within international equities, value outperformed growth by 30 basis points in the third quarter.

Fixed-income returns were slightly more positive, with bonds outperforming the 2004 Fearless Forecast by 0.9% over the year on the back of a positive third quarter result. The median high-yield manager had returns of 4.6% on the quarter, while the average international fixed-income manager had gains of 3.2% in the same time-frame.

Mercer Investment Consulting ( www.merceric.com ) is unit of Mercer Human Resource Consulting LLC. The survey, as well as the 2004 Fearless Forecast, is available online at the company’s Web site.