Public Plans Lead Q3 Institutional Performance

November 10, 2003 ( - Institutional investors were in the black during the third quarter with public plans slightly edging out foundation/endowment funds for the July to September period.

According to Mercer Investment Consulting’s Summary Performance of US Institutional Portfolios survey, the median public plan turned in a 3.5% gain, while foundation/endowment funds were right on the heels of public plans at 3.4%. The trailer of the trio were corporate plans, which reported a 3.1% advance during the period.

For the year, corporate plans had average gains of 12.6%, while public plans and foundation/endowment plans earned 13.5% and 12.9%, respectively. Over 10 years, all three plan types have averaged between 8.3% and 9.3% on an annualized basis, according to Mercer.

Growth Topped Value in Equities

According to Mercer, both value and growth managers produced positive third-quarter results, with growth managers outperforming their value-oriented counterparts by 80 basis points. Based on Mercer’s Fearless Forecast, an annual survey of investment managers regarding their 2003 capital market expectations, large-cap equities are forecast to return 9.3% for the year, yet this asset class is above that with a 14.7% return. In similar fashion, the small-cap asset class has already returned 28.6% for the year versus a forecast of 11.2%. 

The median large-cap manager underperformed the S&P 500 Index for the third quarter by 30 basis points, and outperformed the index by 70 basis points on an annualized basis over the last 10 years, Mercer said. Small-cap managers continue to outperform their large-cap counterparts, surpassing them by 520 basis points over the third quarter; the median small-cap manager returned 8.1% and the median large-cap manager returned 2.9%.

It paid for some to look overseas with the international equity asset class, with a return of 8.2%, outperforming its US large-cap counterpart for the quarter by a margin of 560 basis points, and US large-cap equities over the recent 12-month period by 2.1%. Currency was a positive factor to third quarter returns as the local index, MSCI EAFE, earned 5.4% while currency gains contributed 2.6% to the overall return of the asset class.

Within the international asset class, the value style outperformed growth by 240 basis points for the quarter and by 230 basis points for the 12-month period. Based on Mercer’s annual investment forecast, international equities are expected to earn 10.4% for 2003, yet the asset class already has returned 18.8% on a year-to-date basis.

Fixed Income Outperforming Expectations Through Q3

Within the fixed income asset class, the median core fixed income manager equaled the index for the third quarter and exceeded the index over a 12-month horizon by 60 basis points. Over a 10-year period, the median manager has outperformed the index by 20 basis points. 

Mercer’s investment forecast predicted an annual return of only 3% for the core fixed income asset class, which has outperformed expectations by 80 basis points through the third quarter of 2003.

In assessing international fixed income performance, the median manager had returns of 2.4% and 2.1% for non-US and global mandates, respectively. Both mandates produced solid 10-year results of 7% and 7.1%, respectively.

Barry McInerney, US head of Mercer Investment Consulting, predicted that fixed income would continue to occupy a sizable part of plan sponsors’ asset allocation judgments.

“As sponsors focus on their asset allocation decision, in terms of both assets and liabilities, fixed income will play a greater role in their risk management process because of its higher correlation to the underlying liabilities relative to equities,” McInerney said. “Some plan sponsors have already shifted assets to longer duration strategies to increase the linkage between pension asset and liability growth.”