Pension funds suffered through the worst quarter in more than 10 years as assets dropped about 8.7% in the third quarter, putting many plans solidly into negative numbers year to date.
Callan Associates Inc., San Francisco, reports an average plan sponsor return of -7.1% for the third quarter of 2001. Top decile returns were -4.5% and higher, while bottom decile returns for the quarter started at -9.9%.
Year-to-date through Sept. 30, the average return is -9.2%. Top decile returns are -4.9% and above, while bottom decile returns for the same period start at -13.3%, according to Callan data.
For the 12-month period ended Sept. 30, the average plan posted a return of -10.6%, with top decile returns at -3.5% and bottom decile returns at -16.3%.
Over the five-year period ended Sept. 30, returns remain in the black, according to Callan: the average plan posted a return of 8.7% for the five-year period.
Susan McDermott, consultant with Stratford Advisory Group, Chicago, said for the 12-month period ended Sept. 30, pension funds are looking at the worst-case scenario, a 95th percentile event (where the equity returns for that period rank in the bottom 5%, compared with other periods).
While all the numbers aren't in yet, consultants say the third quarter brought overall returns for pension funds well into negative territory so far this year, almost across the board. The majority of returns range from flat to -10% on average, and in double-digit negatives for pension funds with equity allocations higher than 60%.
Average fund down
Pensions & Investments data show that assets of the average pension fund dropped approximately 8.7% in the third quarter. For the year, the average pension fund is down about 12.5% through Sept. 30, based on benchmark returns and the average asset allocation of the top 200 pensions funds, according to P&I's survey of the largest pension funds.
"There was no place to hide," whether it was growth or value, small-cap or large-cap, international or domestic stock, said Ted Disabato, president of consultant Disabato Associates, Chicago.
Jeff Schutes, consultant at William M. Mercer Investment Consulting, Atlanta, said pension funds with more than 50% of assets in equities are looking at negative overall returns for the first nine months of the year.
"Everyone took a serious hit in September," said Mr. Schutes; all major equity benchmarks posted negative returns. The Russell 2000 value index, the best-performing index (with a return of -2.3% year to date), returned -11% in the month of September and was down 13.4% for the quarter.
"It was really difficult in September to outperform the benchmarks, no matter how good a stock selector you are. It appears that very few stocks missed the downturn in the marketplace," Mr. Schutes said.
Mike Smith, senior consultant with Frank Russell Cos., Tacoma, Wash., said even portfolios with a higher-than-average weighting in fixed income still would have been off 6% to 8% in the third quarter. Those with higher equity allocations were off 9% to 11%, he said.
Ron Ryan, president of Ryan Labs Inc., New York, said the third quarter was the worst since the third quarter of 1990.
A portfolio of 60% domestic equities (benchmarked to the Standard & Poor's 500 index), 30% domestic fixed income (benchmarked to the Lehman Aggregate index), 5% international equity (benchmarked to the Morgan Stanley Capital International Europe Australasia Far East index) and 5% cash returned -8.3% in the third quarter. In the third quarter of 1990, the return was -9.1%, according to Ryan Labs. Year-to-date Sept. 30, the return based on this asset allocation is -11.4%, according to Ryan Labs.
The assets-to-liabilities ratio also was at one of its highest levels for any quarter, said Mr. Ryan. Liabilities were up 7.4% in the third quarter, according to the Ryan Liability index. Combined with a return on assets of -8.3%, the overall drain on a pension portfolio was 15.7% for the quarter, the highest since the fourth quarter of 1987, when the drain was 27.2%.
Mr. Schutes said plan sponsors have been calling in with concerns about the third-quarter performance: "People are very anxious about the numbers."
Still, he doesn't expect to see much asset allocation or manager search activity as a result, at least until next year. "We're going to see people keep their targets and stay the course through the end of the year and then re-evaluate," he added.
Russell's Mr. Smith said short-term events of the third quarter haven't triggered any "knee-jerk reactions" from clients. He said the third quarter is an extreme scenario that consultants must figure into their range of potential outcomes, but "we try not to manage to extremes." While the one- and three- year equity numbers are below historical averages, five- and 10-year annualized returns are still on par with historical averages.
Mr. Disabato added that despite the terrible quarter, some pension funds have survived with decent year-to-date returns. "A lot of pension funds missed the bullet," said Mr. Disabato, particularly those that avoided overweighting growth equity allocations through the bull market run of the late 1990s. "If people had a diversified strategy, either by luck or by skill, and avoided some of these growth stocks, they've come through this bear market reasonably intact."
Some positive numbers
Among those pension funds that did post positive numbers in the third quarter was the $5.7 billion Indiana State Teachers' Retirement Fund, Indianapolis. It finished the third quarter up 0.84%, said Robert Newland, chief investment officer, according to preliminary data. This is despite a -3.2 return for the month of September. The fund is up 0.23% for the nine months, Mr. Newland said.
Mr. Newland attributed the performance to being overweighted in fixed income. As of the end of the third quarter, the pension fund had 62% of its assets in bonds and 38% in equities. In the fourth quarter, said Mr. Newland, the fund has started rebalancing back into equities to return to asset allocations ranges, which call for about 48% of the portfolio in equities.
Richard Dahab, president of consultant Dahab Associates Inc., Bay Shore, N.Y., said clients that buoyed their portfolios with fixed income in the third quarter are starting to rebalance back into equities.
Mr. Disabato said the continued weakness of the equity markets is making alternative investments such as market-neutral strategies, hedge funds and real estate even more attractive to pension executives. Mr. Disabato added, however, that he is encouraging clients to raise their risk profiles and reinvest in growth equities while they are at bargain basement prices.