Q3 Market Drop Socks It to Institutional Investors

In the third quarter, institutional asset owners lost 4.6% at the median, according to Northern Trust Universe data.

Since 1998, the third quarter has averaged a -0.25% return. This year’s third-quarter return ranks in the bottom quartile all-time of third-quarter returns, as measured by Northern Trust Universe data.

Corporate Employee Retirement Income Security Act (ERISA) plans were the relative best performer among plan types last quarter, losing 3.9% at the median, while Foundations & Endowments lost 4.7% and Public Funds lost 4.9%. 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 two percentage points compared with the prior quarter.

“Having the smallest exposure to equities was a key factor behind the relative outperformance of corporate ERISA plans,” says 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.”   

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, Northern Trust reports. Private equity was the best returning asset class in the third quarter with the median private equity program up 3%. Real estate was up about 2.3%, and the median bond program was up only 0.4%. International equity was down more than 10%, and the median U.S. equity program was down 7.6%.

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

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% last December to 5.8% currently. Foundations & Endowments reduced their allocation to fixed income from 16% to 11% while continuing to allocate to hedge funds and private equity.

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.