Most Asset Classes Negative for Separate Account/Collective Trusts

A Morningstar news release said the median domestic equity strategy in the database lost 9.5% for the first quarter – a substantial improvement over fourth quarter 2008’s dramatic 20.3% loss.   Even though equity market givebacks were reduced, there were still losses, resulting in an average one-year decline of 37.1%, and a 10-year return of only 2.2%.

Alternative categories that use various short-selling techniques focused on the domestic equity markets, such as Long-Short, Leveraged Net Long, and Market Neutral, performed somewhat better, losing 3% for first quarter and 9.8% for the year, but posting a 10-year annualized return of 5.1%, Morningstar said.

International stocks landed in between domestic equity and alternative strategies, with 10-year average returns of 3.9% but three-month and one-year declines of 10% and 45%, respectively.

Fixed income strategies fared better than equity strategies; the median domestic, taxable bond strategy returned 0.8% in first quarter 2009 – the only asset class with a positive three-month return – lost 1.4% for the year, and had a 10-year annualized return of 5.2%.   International bonds declined 1.3% for first quarter 2009 and 9.2% for the year, but their 10-year return of 7.8% was the highest of all asset classes evaluated.

Meanwhile, according to the data, separate accounts and collective trusts had significantly better long-term returns but significantly worse short-term returns.   Of the 44 categories that overlap between both investment universes and include at least 20 products each, mutual funds outperformed separate accounts and CITs in 68% of categories in March and 59% of categories during the quarter, with average outperformance of 0.77% and 1.09%, respectively.  

However, Morningstar said this trend reversed when evaluating the vehicles over longer time periods; separate accounts and CITs outperformed mutual funds in 70%, 73%, and 68% of categories for the one-, three-, and five-year periods, respectively, with average outperformance of 2.52%, 1.12%, and 0.78%.  

One possible explanation is that separate account and CIT managers have more flexibility than mutual fund managers because of their lack of registration with the SEC.   Their mandates tend to allow for more manager discretion; for example, many domestic equity separate account and CIT managers may be allowed to use derivatives or short a significant percentage of their portfolios, where mutual funds often have stricter provisions in prospectuses, Morningstar said.