The Markets June 9, 2009

Separate Accounts Saw Equity Rebound in Q1

Investors showed continued confidence in U.S. stock separate accounts and collective trusts in the first quarter of 2009, according to Morningstar.
Reported by

The fourth quarter’s $70 billion outflow from international stock and U.S. stock assets classes reversed in the first three months of 2009, with $67 billion of positive net flows, according to an analysis by Morningstar.

The category that received the most inflows ($27 billion) during the first quarter was large blend. Large blend saw 40% of the inflows into U.S. equities.

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Large growth gained $23 billion and large value gained $14 billion. Morningstar said this indicates that investors’ demand for domestic stocks has remained steady, but investors might possibly be reacting to the perceived “safety” that large-cap stocks have to offer.

Investors pulled about $5 billion out of the small blend category, largely accounted for by T. Rowe Price losing $2.4 billion of assets from its Small-Cap Value II (separate account) Strategy, according to Morningstar.

The largest outflows came from the taxable bond asset class, which lost $73 billion in the first three months of 2009 as a follow-up to the fourth quarter’s record $212 billion in outflows. The intermediate-term bond category lost $39 billion—over half of the taxable bond asset class’s net outflow.

Long-term bond products accounted for another $19 billion of the total outflow. Morningstar cited possible explanations for taxable bond products experiencing outflows, indluding the slight narrowing of credit spreads, the realization that domestic interest rates don’t have much room to fall further, anemic cash flows in the corporate sector, and a March equity rally.

Appetite for international exposure lessened, as investors fled because of recent performance. The International Stock broad asset class lost $6 billion during first quarter of 2009, with the Foreign Large Value category losing $10 billion in outflows. Some international categories did see positive inflows, such as Foreign Large Blend with $4 billion.

Janus Capital Management gained the most ($32 billion) in separate account and CIT assets. Other money management firms with big gains in unregistered vehicles included Prudential Retirement and PIMCO with $17 billion and $15 billion, respectively, according to Morningstar.

The Markets June 9, 2009

Shifts from Equity Insulates Participants from Market Losses

Defined contribution balances continued to slip in the first quarter, but at a slower pace.
Reported by

The Callan DC Index lost roughly 6% in Q1, but that loss was mitigated by participants’ failure to rebalance—and to some extent, their general movement away from equity investments. Since the beginning of 2006, the equity allocation of the DC Index has declined 15 percentage points, from 70% to 55% as of the end of March, according to the report.

According to the Callan DC Index, participants were hesitant to transfer balances in Q1, with total Index turnover just 0.35%, compared with 0.51% in the fourth quarter, and well short of the historical quarterly average turnover of 0.73% for the life of the Index.

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When money did move, the report authors said it flowed “less decisively” into stable value funds than in past quarters. While the majority of money movement was from equities to stable value funds in the fourth quarter of last year, in 2009’s first quarter, stable value inflows dropped to just 27% of shifting monies.

Equity funds, including domestic large cap, domestic small cap and international equity attracted inflows, which the report’s authors attributed to a result of a rebound in those sectors. Reflecting their position as a typical default vehicle, target-date funds accounted for nearly one-third of inflows, while company stock and balanced funds experienced much of the outflows tracked by the index.

Target-Dates

The reduced equity allocation drove the Index to outperform what Callan called the “average” 2030 target-date fund (which has 81% in equities) by nearly 2.5 percentage points in the first quarter.

According to the announcement, the Callan DC Index is designed to meet the needs of plan sponsors and investment managers by measuring performance and net flow activity of defined contribution plans. The Index tracks the asset flows and performance of approximately 70 participant-directed plans comprised of more than 800,000 participants and $50 billion in retirement assets dating back to January 2006.

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