Q104 No Great Shakes for Institutional Investors

May 7, 2004 (PLANSPONSOR.com) - For most institutional investors, the first quarter of 2004 did not stand for strong performance, according to the latest plan sponsor performance survey by Mercer Investment Consulting, Inc.

Mercer IC’s Summary Performance of US Institutional Portfolios found that the median corporate, public, and foundation/endowment plan experienced low single-digit fund returns during the January to March 2004 period, according to a Mercer IC news release.

According to the survey, the median corporate plan had a first-quarter gain of 3.1% while both public plans and foundation/endowment funds enjoyed 3.4% advances.   On a one-year basis, corporate plans had average gains of 28.8%, while public plans and foundation/endowment plans earned 30.8% and 29.4%, respectively. Over a 10-year basis, all three plan types have averaged between 9.8% and 10.7% annually.

Both value and growth managers produced positive first-quarter results, with value managers besting their growth-oriented counterparts by 150 basis points. Based on Mercer’s Fearless Forecast, large-cap equities are forecast to return 9.1% for the year, as the asset class is off to a slow start for the year. The small-cap asset class returned 6.3% for the quarter, a strong start versus a forecast of 8.7%. 

The median large-cap manager outperformed the S&P 500 Index for the first quarter by 40 basis points, and was ahead of the index by 70 basis points on an annualized basis over the last 10 years. Small-cap managers continued to beat out their large-cap counterparts, surpassing them by 400 basis points over the current quarter; the median small-cap manager returned 6.1% and the median large-cap manager came back with a 2.1% performance.

Focusing on investment styles, value managers (both large-cap and small-cap) outperformed their growth counterparts during the first quarter.

“Sponsors need to consistently review their balance between style mandates to avoid passively overweighting one style versus another due to capital market changes. Asset-allocation strategies can become susceptible to quick reversals in market sentiment if regular re-balancing strategies are not undertaken,” Barry McInerney, who leads Mercer IC in the U.S., said in the news release.

Meanwhile, the international equity asset class, with a return of 4.4%, outperformed its U.S. large-cap counterpart for the quarter by a margin of 270 basis points, and outperformed US large-cap equities over the recent 12-month period by 23%. Currency was a neutral factor for the quarter as the positive returns from the asset class were driven by strong return in local markets. In the international area, the value style outperformed growth by 170 basis points for the quarter and by 990 basis points for the 12-month period. Mercer said international equities are expected to earn 9.6% for 2004, yet the asset class returned only 4.4% for the first quarter.

Turning to the fixed income arena, the median core fixed income manager equaled the index in the first quarter and bested it over a 12-month horizon by 70 basis points. Over a 10-year period, the median manager has outperformed the index by 20 basis points. 

Mercer predicted an annual return of only 2.5% for the core fixed income asset class. Yet the asset class returned 2.7% for the quarter, although investors are concerned about potential interest rate hikes.   Core opportunistic managers equaled the performance of the index but out-performed the index by 200 basis points over the last year. The median high-yield manager had a gain of 2.2% for the quarter, and equaled the benchmark over the last quarter.

In assessing international fixed income performance, the median manager had a return of 1.9% for both non-US and global mandates. Both mandates produced solid 10-year results, 6.7% and 7%, respectively. “The fixed income asset class continues to offer sponsors the stability they require in a volatile market even with the prospect of rising interest rates,” McInerney asserted. “The greater challenge for sponsors is to understand that while the fixed income allocation acts as a stabilizing force, the
  mismatch between asset and liability duration is a source of risk that caught many sponsors unaware,” McInerney said.

McInerney points out that in adapting to the current capital markets environment, plan sponsors are focusing on strategies to reach conflicting goals: to better match assets to the plan’s underlying liability stream while also providing growth opportunities.