Institutional Funds Rack Up Red Ink in Q1

May 19, 2003 ( - The median corporate, public, and foundation/endowment plan was in the red for the January to March 2003 period, according to a study.

According to Mercer’s quarterly Summary Performance of US Institutional Portfolios survey, the median corporate plan had a first-quarter loss of 1.7%, while public plans and foundation/endowment funds gave back 1.9% and 1.6%, respectively.

For the 12-month period ending March 31, corporate plans had average losses of 11.9%, outperforming public plans by 10 basis points, but underperforming foundation/endowment funds by 40 basis points, according to Mercer. Over 10 years, foundation/endowment funds continued to beat both corporate and public plans by 60 to 120 basis points – primarily through a lower equity exposure (both domestic and international) and a higher percentage of alternative investments.

According to Mercer’s analysis, both value and growth managers produced negative first-quarter results, with growth managers besting their value-oriented counterparts by 380 basis points. Based on Mercer’s Fearless Forecast, an annual investment managers survey, large-cap growth equities are predicted to outperform their value counterparts by a margin of 50 basis points (9.8% vs. 9.3%). Small-cap managers were forecast to return 11.2% versus 9.3% for large-cap core managers, a significant margin for the upcoming year.

The median large-cap manager outperformed the S&P 500 Index for the first quarter of 2003 by 40 basis points, and outperformed the index by 90 basis points on an annualized basis over the last 10 years. In a continuation of market capitalization performance, large-cap managers outperformed their small-cap counterparts by 140 basis points over the previous quarter (see  Plans Show Nearly 5% Fourth Quarter Gains ), as the median large-cap manager lost 2.7% while the median small-cap manager gave up 4.1%.

International Equity

The international equity asset class, with a return of -8.1%, significantly underperformed its US large-cap counterpart for the quarter by a margin of 500 basis points, but outperformed US large-cap equities over the recent 12-month period by 1.8%. Within the international asset class, the value style outperformed growth by 60 basis points for the quarter and by 360 basis points for the 12-month period. Based on Mercer’s forecast, international equities are forecast to outperform domestic equities for the year with a forecasted return of 10.4%.

Within the fixed income asset class, the median core fixed income manager outperformed the index for the first quarter by 20 basis points but trailed the index over a 12-month horizon by 10 basis points. Over a 10-year period the median manager has outperformed the index by 20 basis points. Mercer’s latest forecast predicted an annual return of only 3% for the core fixed income asset class primarily due to the historically low interest rates.

In assessing international fixed income performance, a weak US dollar had a positive impact on non-US mandates, a continuation from last quarter’s trend. For the recent quarter, the median manager had returns of 4.2% and 3.4% for non-US and global mandates, respectively. Both mandates produced solid 10-year results, 7.2% and 7%, respectively, according to the Mercer study.