The Pulse

Equity Market Downturn Weighs on Institutional Asset Owners

Q3 returns hit an all-time low

November 04, 2015 — CHICAGO–(BUSINESS WIRE)–In the third quarter of 2015, institutional asset owners lost 4.6 percent at the median, according to Northern Trust Universe data. This marked a noteworthy drop from the 0.2 percent median gain recorded in the second quarter.

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.

Since 1998, the third quarter has averaged a -0.25 percent return. The most recent third quarter return of -4.6% ranks in the bottom quartile all-time of third quarter returns as measured by Northern Trust Universe data.

ERISA rising

Corporate ERISA plans were the relative best performer among plan types last quarter, losing 3.9 percent at the median, while Foundations & Endowments lost 4.7 percent and Public Funds lost 4.9 percent. Corporate ERISA plans returned to having the highest relative return after being the worst-returning plan type in the second quarter. All plan types had a median decline of at least 2 percentage points compared to the prior quarter.

“Weak equity returns significantly impacted institutional asset owners. The S&P 500 lost 6.4 percent in the third quarter while the MSCI EAFE index lost 10.2 percent. Having the smallest exposure to equities was a key factor behind the relative outperformance of corporate ERISA plans,” said Bill Frieske, senior investment performance consultant, Northern Trust Investment Risk & Analytical Services. “Another factor helping corporate ERISA plans was the longer duration of their fixed income programs. Corporate pension plans generally have been lengthening the duration of their fixed income programs while at the same time adding dollars to the allocation relative to Public Funds and Foundations & Endowments. The third quarter saw interest rates decline pushing up returns for long duration bonds.”

Positives: Private equity, real estate & fixed income

Private equity, real estate and fixed income programs all generated positive results in the third quarter while U.S. equity and international equity were significantly negative. Private equity was the best returning asset class in the third quarter with the median private equity program up 3 percent. Real estate was up about 2.3 percent, and the median bond program was up only 0.4 percent. International equity was down more than 10 percent, and the median U.S. equity program was down -7.6 percent.

Northern Trust’s findings generally showed:

Weak equity returns significantly impacted institutional asset owners. The S&P 500 lost 6.4 percent in the third quarter while the MSCI EAFE index lost 10.2 percent. Having the smallest exposure to equities was a key factor behind the relative outperformance of corporate ERISA plans

  • Corporate ERISA plan returns were helped by a large allocation to U.S. fixed income (39 percent at the median), in addition to private equity (7.5 percent at the median)
  • Public Fund returns were dampened by a large exposure to U.S. equity (31.2 percent at the median) and international equity (21 percent at the median)
  • Foundation & Endowment plan returns were supported by a large allocation towards private equity (25 percent at the median), but negatively impacted by exposure to domestic equity (19.2 percent at the median) and international equity (11.2 percent at the median)

Looking at asset allocation in the third quarter, corporate pension plans continued to move on a path of de-risking by moving from equity to fixed income investments. Public Funds continued to move money into private equity and international equity. The median allocation to private equity for Public Funds went from 1.6 percent last December to 5.8 percent currently. Foundations & Endowments reduced their allocation to fixed income from 16 percent to 11 percent while continuing to allocate to hedge funds and private equity.

Longer-term returns as of September 30, 2015 are as follows:

3rd Qtr    1 Yr     3 Yr     5 Yr

  • ERISA –               3.9%     -0.5%    6.9%  8.2%
  • Public Funds       -4.9%     -0.6%   7.4%  8.3%
  • Foundations
    & Endowments    -4.7%     -1.1%  6.9%   7.2%

 

 

 

 

About Northern Trust
Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 20 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2015, Northern Trust had assets under custody of US$6 trillion, and assets under management of US$887 billion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at http://www.northerntrust.com/disclosures.