According to Mercer Investment Consulting’s Defined Contribution Universe Summary, growth funds outperformed value funds, as the median large-cap growth fund returned 3.3% compared to 2.1% for the median large-cap value fund. Overall, the large-cap core universe was 2.6% better for the quarter, and is now up 14.1%.
Even more impressive was the performance noted among international and small-cap mutual funds. Leading all other mutual fund categories tracked by the Defined Contribution Universe Summary for the third quarter was the emerging market equity universe, up 14.3%, and 31.8% year-to-date. This was followed by other impressive international performances in the 7.7% return for the quarter in the international equity universe and the 5.8% quarterly return in the global equity universe, which is now up 16.8% year-to-date.
Small-cap mutual funds were up 8.2% during the past three months as measure by the core universe. Year-to-date the core universe is now 24.2% higher. As in large-cap funds, growth outperformed value, returning 8.9% during the third quarter, to value’s 7.2%.
By comparison, the S&P 500 Index was up 2.6% during the third quarter, and has now returned 14.7% year-to-date, while the Lehman Aggregate posted a loss of 0.1%, and money market instruments managed to eke out a 0.3% gain. Balanced funds, using a benchmark of 60% S&P 500/40% Lehman Aggregate, posted a gain of 1.6%. However, none of the performances could best the 8.1% gain recorded in the international equity markets.
Looking at the long term, capital markets appear to have weathered the storm quiet well as returns remain solidly positive. Over a 10-year time frame, the S&P 500 Index returned 10.0%, while the Russell 2000 Index returned 8.3%. International equity markets produced a small gain of 2.9% over a 10-year time frame, although the asset class underperformed US equities. Over a 10-year period, the fixed income asset class produced a return of 6.9%, below large-cap equity returns over the same time period but with significantly less risk.
The median core fixed-income fund slightly underperformed the index for the third quarter by 10 basis points, ending down 0.2%. Mercer attributes this decline, which comes on the heels of several years of stellar performance, to the rise in interest rates causing a small loss for the quarter.
Even though the rise in the equities markets has been a welcomed relief to both plan sponsors and participants, Mercer still points to issues plan sponsors face, such as company stock as an investment option.
“As the market clearly continues to focus on plan governance, sponsors are faced with the challenge of developing and implementing a governance structure to properly monitor company stock,” says Jeff Schutes, senior consultant and head of Mercer IC’s south unit. “The challenge is to develop a performance monitoring and evaluation process that meets the fiduciary standards implemented for other asset classes within the plan, yet factors in the unique nature of stock as an investment option.”
This creates a potential conflict of interest, Mercer found, leading some plan fiduciaries to reassess their monitoring and evaluation processes with regard to company stock. In fact, Mercer found a shift of the tradition paradigm, by which the plan sponsor hires, on a directed basis, a trustee whose responsibility is to execute decisions made by the sponsor. The sponsor retains the responsibility for monitoring investments and deciding what actions are necessary.
Rather, Mercer found many sponsors have begun hiring trustees to act on a discretionary basis, which is most common among companies under distress from bankruptcy, regulatory investigations, or proxy battles. In this context, the discretionary trustee will render an objective opinion on the stock investment option based on their performance standards and time frames.
Mercer Investment Consulting publishes the Defined Contribution Universe Summary quarterly. The summary may be downloaded free of charge from www.mercerIC.us .