Institutional Plans See Dip in Returns for Q314

Longer-term performance remains strong, with one-year returns for all plan types averaging 10% or greater.

Institutional plans within the Northern Trust Universe suffered a 0.8% quarterly loss due to negative returns in most investment sectors. Corporate Employee Retirement Income Security Act (ERISA) plans had the best relative performance among all plan types with a return of -0.7%. Foundations & Endowments had the second best relative performance of the quarter with a return of -0.9%. Public Funds showed a net loss of 1.3%.

All plan types were down from the second quarter median gain of nearly 4%. Corporate ERISA plans recorded their first quarterly loss after gaining for four straight quarters. Both Public Funds and Foundations & Endowments suffered their first quarterly losses after generating positive returns for eight consecutive quarters.

Northern Trust noted that historically, the third quarter has been the worst performing quarter on record, with the average third quarter return over the last 15 years coming in at -0.1%.  It is the only quarter in the Northern Trust Universe to average a negative return. 

Despite the median loss for all plans, institutional plan sponsors have still not experienced two consecutive quarters of negative median returns since the fourth quarter of 2008 and the first quarter of 2009.

“During the third quarter, risk assets seemed to be out of favor as small-cap U.S. and international stocks, emerging market debt and high yield debt lagged,” says Bill Frieske, senior performance consultant, Northern Trust Investment Risk and Analytical Services. “Overall, market volatility, Federal Reserve tapering and weak international growth contributed to the first loss for many sponsors in several quarters.”

In the third quarter, asset allocation per segment was as follows:

• Corporate ERISA plans were weighted towards U.S. fixed income (38.4%) and U.S. equity (28%);
• Foundations & Endowments were weighted towards private equity (24.4%) and U.S. equity (19.4%); and
• Public Funds were weighted towards U.S. equity (32.8%) and international equity (23.9%).

The smaller loss for corporate ERISA plans was in part due to a large allocation to U.S. fixed income, which returned 0.15% at the median. The performance of Foundations & Endowments reflected their heavier weighting towards U.S. equities, which experienced a modest decline of -0.8%. Public Funds were impacted by a 23.9% allocation to international equity markets, which performed poorly and led to a bigger loss in the quarter.

Third quarter Northern Trust Universe results showed that weak returns from the riskiest sectors of the market hurt overall plan sponsor results. Small-cap stock, both U.S. and international, lost nearly 8%. Emerging market equity and emerging market debt both lost over 3%. High yield bonds lost almost 2%.

International stock returns were negative across the board. All segments, including developed or emerging markets, large- or small-cap, all lost between 5% and 6%. 

Equity performance was largely dependent upon capitalization; returns got materially worse moving from large-cap to small-cap stocks. Large-cap managers had a median return of 0.2%, while the median return for mid-cap managers was -3.3%, and the median small-cap manager lost nearly 7%. Growth performed better than value across the range.

The Northern Trust Universe tracks the performance of about 300 large U.S. institutional investment plans, with a combined asset value of approximately $899 billion, which subscribe to performance measurement services as part of Northern Trust’s asset servicing offerings.