Mercer: Institutional Investors Turn in Respectable Q4 '04

February 23, 2005 ( - The median corporate, public, and foundation/endowment plan was in the black during the fourth quarter of 2004, according to Mercer Investment Consulting, Inc. (Mercer IC).

A Mercer IC news release said the median corporate plan had a fourth-quarter gain of 8.1%. Public plans were ahead 8.4% while foundation/endowment funds had a gain of 8.2%. On a one-year basis, corporate plans had average gains of 11.7%, while public plans and foundation/endowment plans earned 12.5% and 12.2%, respectively. Over a 10-year time frame, all three plan types have averaged between 10.4% and 11.3% on an annualized basis, according to Mercer.

According to Mercer IC’s analysis, both value and growth managers produced positive fourth-quarter results, with value managers outstripping their growth-oriented counterparts by 20 basis points. Based on Mercer IC’s Fearless Forecast, an annual survey of investment managers regarding their 2004 capital market expectations, large-cap equities were forecast to jump ahead 9.1% for the year and the asset class met expectations with a return of 10.9%. Meanwhile, the small-cap asset class returned 18.3% for the year, easily exceeding a forecast of 8.7%.

Mercer said the median large-cap manager outperformed the S&P 500 Index for the fourth quarter by 50 basis points, and outperformed the index by 110 basis points on an annualized basis.

Small-cap managers continued to outpace their large-cap counterparts, surpassing them by 430 basis points over the current quarter. The median small-cap manager returned 14% and the median large-cap manager had returned 9.7%. The international equity asset class, with a return of 15.3%, outpaced its US large-cap counterpart for the quarter by a margin of 610 basis points, and outperformed US large-cap equities over the recent 12-month period by 9.3%.

Mercer said currency gains aided non-US securities throughout 2004 as the dollar weakened versus most foreign currencies, as both the federal and trade deficits continued to affect the strength of the dollar. Within the international asset class, the value style outperformed growth by 240 basis points for the quarter and by 580 basis points for the year. Based on Mercer IC’s survey, international equities were expected to earn 9.6% for 2004, and the asset class easily exceeded expectations with a return of 15.3%.

Focusing on the fixed income arena, the median core fixed income manager slightly outperformed the index by 10 basis points in the fourth quarter and bested the index over a 12-month horizon by 50 basis points. Over a 10-year period, the median manager has outperformed the index by 20 basis points. Mercer’s 2004 survey predicted an annual return of only 2.5% for the core fixed income asset class, while, in fact, the asset class returned 4.3% in 2004 on a year-to-date basis, as the size and timing of interest rate increases was less significant than anticipated.

Core opportunistic managers outperformed the index by 50 basis points and outperformed the index by 100 basis points over the last year. The median high-yield manager had a strong return of 4.2% for the quarter with double-digit returns over the 12 months. In assessing international fixed income performance, the median manager had gains of 10.6% and 8.5% for non-US and global mandates, respectively. Both mandates produced solid 10-year results of 7.3% and 7.6%, respectively.

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