S&P: Equity Down in First Quarter 2003 While Bonds Strong

May 8, 2003 (PLANSPONSOR.com) - Equity markets declined during the first quarter of 2003, with the S&P 500 Index down 3.2% while fixed income funds remained positive, according to a new analysis from Mercer Investment Consulting.

According to the 2003 Defined Contribution Universe Summary, the Lehman Aggregate posted a 1.4% quarterly return, followed by money market instruments at 0.3%. Balanced funds continued be hurt by their equity exposure, as a benchmark of 60% S&P 500/40% Lehman Aggregate posted a loss of 1.3% for the quarter.   Reversing last year’s trend, international equity markets underperformed domestic equities by 5% while losing   8.2% for the January to March period, Mercer said.

According to the study, defined contribution participants as a group are usually trend followers and are more apt to chase past performance than to analyze future expectations.   Institutional investors, on the other hand, have developed a more structured long-term approach to investing so they may be more able to take advantage of a market turnaround. Therefore, while many participants are rebalancing into fixed income assets based upon past performance and not asset allocation strategy, institutional investors have rebalanced into equities in order to maintain their asset allocation targets, Mercer said.

Growth a Better Value?

During the first quarter, growth funds outperformed value funds, as the median large-cap growth fund gave up 1.4% versus a 5.0% loss for the median large-cap value fund.   This style trend is a reversal of 2002, during which value significantly outperformed growth by a wide margin. Similar to the large-cap asset class, the median small-cap growth fund bested the median small-cap value fund in the first quarter by a margin of 1.5%.

The median large-cap fund slightly underperformed the S&P 500 Index for the first quarter of 2003 by 10 basis points while also underperforming the index by 10 basis points over the last year.   Reversing a trend with the US domestic market, small-cap funds underperformed their large-cap counterparts, although both styles posted single-digit losses for the quarter.   The median small-cap fund lost 4.9% for the quarter versus a negative 3.3% return for the median large-cap fund.

The international asset class, with a loss of 8.2% for the quarter, significantly underperformed its US large-cap counterpart by a margin of 500 basis points for the year. Global equities fell 5.1% for the quarter, primarily hurt by their exposure to non-US equities.

The median core fixed income fund slightly outperformed the index fort the first quarter by 10 basis points.   Fixed income returns remain positive and continue to offer investors a safe haven as the equity market struggles.

Out of “Step”

The effectiveness of introducing life-cycle funds into a plan’s fund line-up relies on participants investing a majority, if not all of, of their assets within one life-cycle fund. The life-cycle funds typically have preset asset allocations, which grow more conservative as an investor draws nearer to retirement.   Based on data derived from plan sponsors and vendors, however, a majority of participants still use life-cycle funds as just one option within their entire portfolio, which minimizes the impact of this approach.

Plan sponsors will find that an effective communications program outlining the objectives and benefits of a life-cycle approach is key to reaping the benefits of continued market innovations, Mercer said.