Value Funds Predominate in Q2

August 3, 2004 ( - While US equity markets were ahead during the second quarter and modestly positive year to date, investors are still trying to cope with conflicting signals: a stronger economy of profit growth, but with higher interest rates at the same time.

Looking at the mutual fund level, in its second-quarter 2004 Defined Contribution Universe Summary, Mercer Investment Consulting, Inc. found that value funds slightly outpaced growth funds, as the median large-cap value fund returned 1.2% compared to 1.1% for the median large-cap growth fund. However, the Russell 1000 Growth Index outperformed the value index, the Russell 1000 Value for the quarter (1.9% vs. 0.9%), the opposite of actively managed funds.

Meanwhile, the small-cap segment of the market followed the same trend as large-cap stocks, as the median small-cap value fund outperformed the median small-cap growth fund by a margin of 2%. Small-cap indices followed form as value outperformed growth, the same style difference as manager performance.

The median large-cap fund lagged the S&P 500 Index in the April to June time frame by 50 basis points, while lagging the index by 80 basis points compared to the preceding year. Reversing a trend within the US domestic equity market, small-cap funds underperformed their large-cap counterparts for the quarter. The median small-cap fund returned 1% for the quarter versus 1.2% for the median large-cap fund.

“We seem to be entering a sustained period where all major equity segments — growth vs. value, small vs. large cap, and domestic vs. international — appear to be reasonably valued, with no discernible advantage of one over the other, except for inevitable short-term divergence,” says Barry McInerney, who leads Mercer Investment Consulting in the US, said in a news release.

In the broader markets, Mercer said the second quarter saw a small rise in equities with the S&P 500 Index up 1.7%. Meanwhile, fixed income funds floundered in negative territory as the Lehman Aggregate posted a 2.4% giveback. Money market instruments gained 0.3% while balanced funds, using a benchmark of 60% S&P 500/40% Lehman Aggregate, were flat. International equity markets underperformed domestic equities by 1.5% while returning only 0.2% for the quarter.

Capital market returns remain solidly positive over the long term, aided by positive one-year results in all equity asset classes. Over a 10-year time frame, the S&P 500 Index returned 11.8%, while the Russell 2000 Index returned 10.9%. International equity markets produced a small advance of 4.1% over a 10-year time frame, lagging their domestic counterparts. Over a 10-year period, the fixed income asset class produced a return of 7.4%, below US equity returns over the same time period but with significantly less risk.

The international asset class underperformed US equities for the quarter with a return of 0.2%, but outperformed its US large-cap counterpart by a margin of 13.2% over the last year. Global equities gained 0.9% for the quarter and outperformed international equities by 70 basis points.The weak performance of international equities for the quarter is attributable to the rebound of the US dollar, especially versus the Yen, due to strong US economic growth and the prospects for higher interest rates.


The Defined Contribution Universe Summary may be downloaded free of charge from . A free registration is required.