Mercer: Default Option Use Could Hurt Retirement Goals

July 31, 2003 ( - Participants in defined contribution plans who came to the equity market's party with its second-quarter rebound reaped the benefits while those with a small equity position or a chunk of money in a default option pretty much missed the festivities.

Investors who have maintained an asset allocation policy based on long-term objectives rather than short-term market movements have had their patience rewarded with a rebound in the equity markets. While one quarter of rising equity returns does not necessarily set the tone for a continued upward market trend, it nevertheless highlights the notion that investors rarely are able to correctly anticipate a change in market perception. Reacting to historical pricing trends has not proved to be a successful investment strategy, as evidenced by investors who recently
moved into the fixed income asset class, Mercer researchers maintained.

Meanwhile, turning to mutual funds, value funds outperformed growth in the second quarter as the median large-cap value fund returned a boffo16.6% compared to 13.7% for the median large-cap growth fund. The quarterly results continue the 2002 trend that was briefly disrupted during the first quarter of 2003, with value style continuing to outperform growth. However, within the small-cap asset class, the median small-cap growth fund outperformed the median small-cap value fund by a margin of 1.1%.

While all equity styles performed well during the second quarter, there continues to be underlying volatility within styles due to the uncertainty of equity investor perceptions. The median large-cap fund slightly underperformed the S&P 500 Index for the second quarter of 2003 by 40 basis points while also underperforming the index by 80 basis points over the last year.

Continuing a 2002 trend within the US domestic equity market, small-cap funds outperformed their large-cap counterparts, although both styles posted double-digit gains for the quarter. The median small-cap fund returned 21% for the quarter versus 15% for the median large-cap fund. The international asset class outperformed US equities for the quarter with a 19.3% -return but underperformed its US large-cap counterpart by a margin of 670 basis points over the last year. Global equities gained 17% for the quarter, a strong absolute return but slightly below non-US    equities by a margin of 230 basis points, according to the Mercer study.

The median core fixed income fund slightly outperformed the index for the second quarter by 20 basis points. Even as the equity market rebounded during the quarter, the fixed income asset class offers investors the stability they require to maintain proper portfolio diversification, Mercer said.