Less Stocks, More Alternatives Lift Endowments Versus Corporate Funds

November 6, 2002 (PLANSPONSOR.com) - If your pension fund performance is looking a bit bleak, you have lots of company, according to a new survey by Mercer Investment Consulting.

According to Mercer’s Summary Performance of US Institutional Portfolios survey, the median corporate plan had a third-quarter loss of 9.5%, while public plans and foundation/endowment funds had losses of 9.6% and 9.7%, respectively.  

Annual Returns

Year-to-date through September 30 the median corporate plan had a loss of 13.6%, while public plans and foundation/endowment funds lost 13.3% and 13.6%, respectively.

For the 12-month period ending September 30, corporate plans had a loss of 7.4%, under-performing both public plans and foundation/endowment funds by 7 and 43 basis points, respectively.   In fact, over a five-year time frame, foundation/endowment funds continue to outperform both corporate and public plans by 40 to 55 basis points, according to Mercer.

Foundation/endowment funds have been able to outperform their counterparts primarily through a lower equity exposure (both domestic and international) and a higher percentage of alternative investments.

Off Peak?

Mercer’s Pension/Asset Liability Index, which showed that at the peak of the market in early 2000, the average plan had a funding level of 140%, but registered just 80% at the end of the third quarter.   Mercer notes that a comparison of pension plan demographics today versus during the major market decline of 1973-74 underscores two key differences:

  • pension plans have matured as the average active participant is much older and benefits due current retirees represent a much larger percentage of overall plan liabilities
  • the size of assets has grown substantially, even taking into account the recent market decline.  

In some cases the market value of the pension plan now exceeds the market capitalization of the sponsoring corporation, according to Mercer, which notes that the shifts in plan size and participant demographics now have a greatly magnified impact on company financial statements.

Different “Stroke?”

Barry McInerney, who heads Mercer Investment Consulting in the US, notes: “The fundamental question that we must ask ourselves is whether it is different this time.   Are plan sponsors’ risk tolerance levels different as they relate to their pension plans?   Absolutely.   Is the current stock market decline sufficiently different this time to warrant a paradigm shift, to begin thinking in terms of stocks not being able to outperform bonds in the long term?   Absolutely not.”

In comparing large-cap equity managers, Mercer notes that both value and growth styles posted double-digit losses on a year-to-date basis, -23.6% for large-cap value and -30.0% for large-cap growth.   The median large-cap manager returned -16.6% over the last quarter versus -18.7% for the median small-cap manager.

The international asset class, with a return of -19.7%, underperformed its US large-cap counterpart for the quarter by a margin of 2.4%, but was able to outperform US large-cap equities over the recent 12-month period by 5.2%, according to the report.  

With a strong third quarter, the fixed income asset class has produced a year-to-date return of 7.9%, far better than Mercer’s 2002 Fearless Forecast prediction of 5.0%.   The median high-yield manager had a loss of 2.0% for the quarter while outperforming the benchmark by 110 basis points.

The Summary Performance of US Institutional Portfolios is published quarterly by Mercer Investment Consulting.   The Summary Performance of US Institutional Portfolios may be downloaded free of charge from www.mercerIC.com