HomeMy Public PortalAboutDeferred Comp 2007 4th Quarter ReportMs. Doris EwingMs. Doris Ewing
PartnerPartner
One Main Street, Cambridge, Massachusetts 02142-1524
(617) 374-1300; F: (617) 374-1313
www.nepc.com
457 Deferred Compensation Plan
Executive Summary
Fourth Quarter 2007 PerformanceFourth Quarter 2007 Performance
January 2008January 2008
Brian DonoghueBrian Donoghue
ConsultantConsultant
Metropolitan St. Louis Sewer District
1
Fourth Quarter 2007 Summary & Discussion
•Market Performance
• Global stock markets corrected during the 4th quarter (meaning a drop of
10% or more)
– November’s declines were the worst for the major indices in five years
– The MSCI World Equity Index ended the quarter with a -2.4% return; the S&P
500 Index ended the quarter with a -3.3% return
• The U.S. bond market gained 3% for the quarter and 7.0% for the year;
global bonds delivered higher returns because of the falling dollar
• Economically, recessionary fears are growing, credit markets around the
globe remain under pressure, and stock markets in the major developed
markets remain below highs reached in early October
2
Fourth Quarter 2007 Summary & Discussion
Asset Commentary
• As of December 31, 2007, assets were $27.4 million, down from $27.8
million at the end of last quarter
• The top four Plan options account for 57% of total assets
– The most prevalent options include Vanguard Windsor II (24%), Vanguard
Balanced Index (13%), Vanguard 500 Index (12%) and Vanguard U.S. Growth
(8%).
Plan Investment Performance
• Quarterly fund returns ranged between -6.1% and 3.1% and returns for
the year ranged between 16.0% to 1.2%
– Vanguard Total Bond Market Index had the highest absolute return for the
quarter and was in line with the Lehman Brothers Aggregate Index
– Vanguard Windsor II had the lowest return for the quarter
– The Vanguard Life Strategy fund returns ranged between -2.0% to 1.3% for
the quarter and 6.7% to 7.5% for the year-to-date
• Longer-term, most funds remain attractive against the Indexes and peer
groups. For the five-year period, all but three funds ranked above
median in their peer group.
Recommendations and other Comments
• Possible 2008 discussion items for MSD to consider:
– Consider using a Qualified Default Investment Alternative (QDIA) as the Plan’s
default
• The Plan’s default is currently the Vanguard Federal Money Market. As we indicated in
last quarter’s report, the DOL finalized their QDIA regulations in which they designated
lifecycle funds, balanced funds and managed accounts as QDIAs
– While QDIA does not technically apply to a 457 plan, NEPC feels utilizing a
QDIA as the plan’s default investment option is considered best practice
– Consider using Vanguard’s target date retirement funds (lifecycle) in place of
the Vanguard Life Strategy (lifestyle) funds
• We would be happy to discuss any of the above in further detail.
3
Selected Manager Commentary
Selected funds are highlighted below for discussion purposes.
Vanguard U.S. Growth
• The Vanguard U.S. Growth fund trailed its benchmark Russell 1000
Growth index by 100 basis points in the 4th quarter, ranking in the 66th
percentile. One-year, three-year and five-year returns also rank below
median. The funds holdings in finance detracted from returns given the
continued problems emanating from the subprime crisis. According to
Morningstar, the fund held 15.4% of the portfolio in financials as of the end
of the year compared to 7.0% for the index.
• As we indicated last quarter, AllianceBernstein recently announced the
retirement of their CIO of Growth Equities, Paul Rissman. NEPC
continues to not recommend any client action as a result of this
announcement as the investment teams should not be immediately or
significantly impacted. However, we will be monitoring the situation
carefully, especially any turnover of investment personnel.
Vanguard Windsor II
• Vanguard Windsor II trailed its benchmark by 30 basis points last quarter
and ranked in the bottom 30% of peers. This fund has five subadvisors
but Texas-based Barrow Hanley manages most of the assets (greater than
50%). Contributing to the fund’s near-term under performance is the under
weight to energy, which was the top performing sector in 2007. Offsetting
the energy under weight was the fund’s slight under weight to financials,
which is a significant portion (about 30%) of it index. Longer-term returns
rank solidly in the top half of large cap value peers. We remain
comfortable with this fund.
4
Key 2008 NEPC Capital Market Expectations
• Chance of recession is increasing
– Problems that started in subprime will continue to spread
– Credit markets remain under pressure
– Earnings are likely to soften, including the possibility of a “big bath” quarter
– US dollar could swing upward in the short-term, but long-term continued
decline is likely
• Volatility has returned to the markets
– Quick reactions to negative news
– “Tail” risk is high -- greater chance of either a very good or very bad year,
relative to recent past
– Fed bias to delay recession and avoid deflation increases risk of inflation
– Uncertain election year can increase instability
– Dispersion of manager performance should widen
• Prior years’ Actions for Clients positioned clients well during 2007. We
continue to advise the following Actions:
– Underweight equities in favor of better beta and alternative strategies
– Overweight international equities relative to targets
– Underweight small cap equities relative to targets
– Underweight domestic fixed income in favor of opportunistic fixed income, real
return or other strategies
5
Plan Structure Summary
Number of Funds in a Plan
19
14
0 4 8 121620
MSD Plan
Top Ten DC Funds Offered
1. US Large Cap Equity (92%)
2. US Small Cap Equity (83%)
3. Developed Non-US Eq. (75%)
4. Balanced (71%)
5. US Mid Cap Equity Active (67%)
6. Money Market (67%)
7. LifeStyle/Cycle (58%)
8. US Bond (58%)
9. Stable Value (58%)
10. S&P 500 Index (50%)
Your Plan Asset Allocation
Versus Average Defined Contribution Plan
Source: IOMA’s Annual DC Survey - 2005
MSD Plan
10%
14%
6%5%
13%
7%
12%
6%
33%
19%
12%
7%
4%
6%
4%6%6%
4%
0%
5%
10%
15%
20%
25%
30%
35%
40%Stable ValueBondBalancedLifestyleLarge Cap US Eq.S&P 500 IndexMid US EqSm US EqInt'l EqMSD Plan
Average Plan
Average Plan
6
Asset Summary
7
Asset Summary
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Jun-07Dec-07Intl Growth
Small Cap Index
Mid Cap Index
US Growth
Windsor II
500 Index
LS Growth
LS Mod Growth
LS Conserv Growth
LS Income
Balanced Index
Total Bond
Retirement Savings
Money Market
Balanced Index
12.6%
Windsor II
24.4%
US Grow th
8.4%
Small Cap Index
3.5%
Mid Cap Index
3.7%
Total Bond
6.5%Retirement Savongs
5.0%Money Market
5.4%
LS Grow th
4.1%
Intl Grow th
6.1%
LS Income
1.1%
500 Index
12.5%
LS Conserv Grow th
1.8%
LS Moderate Grow th
5.1%
8
Performance Summary
Plan default: Vanguard Money Market Auto-enrollment: No
Auto-increase: N/A
9
Risk Analysis
Russell Midcap
Russell 1000 Value
Russell 1000 Growth
S&P 500
Windsor II
Mid Cap Index
Vanguard 500
US Growth
10
Risk Analysis
MSCI EAFE
Citi PMI EPAC
60/40 S&P 500/LB Agg
LB Agg. Bond
Total Bond
Small Cap IndexLS Moderate Growth
LS Income
LS Growth
LS Conserv Growth
Intl Growth
Balanced Index
Russell 2000
Mid Cap Index
11
Style Analysis
The above “snail trail” displays changes to a fund’s style over time as determined by Morningstar’s holdings-
based analysis over the prior three years. The smallest circled plot point represents the furthest period; the
largest circled plot point represents the current period. The number of plot points is a function of the
frequency of each fund’s release of holdings data.
Windsor II
Vanguard 500
US Growth
Small Cap Index
Balanced Index
Mid Cap Index
12
Fund Profiles
13
Fund Profiles
14
Fund Profiles
15
Fund Profiles
16
Fund Profiles
17
Fund Profiles
18
Fund Profiles
19
Fund Profiles
20
Fund Profiles
21
Fund Profiles
22
Fund Profiles
23
Fund Profiles
24
Fund Profiles
25
Fund Profiles
26
Fund Profiles
27
Fund Profiles
28
Fund Profiles
29
Fund Profiles
30
Fund Profiles
31
Fund Profiles
32
Fund Profiles
33
Fund Profiles
34
Appendix
• New England Pension Consultants, Inc. (NEPC) uses, as a data source,
the plan’s custodian bank or service provider for asset balances,
calculation of accruals, transfers, exchanges and contribution deferral
information. While NEPC has exercised reasonable professional care in
preparing this report, we cannot guarantee the accuracy of all source
information contained within.
• This report is provided as a management aid for the client’s internal use
only. This report does not constitute a recommendation by NEPC.
• Information in this report on fund returns, market indices and security
characteristics is received from sources external to NEPC. While efforts
are made to ensure that this external data is accurate, NEPC cannot
accept responsibility for errors that may occur.
35
Glossary of Terms & Symbols
•Batting Average - measures a fund’s ability to consistently beat the
market.
•Beta - risk measure based on a comparison of the volatility of the fund’s
returns and the benchmark’s returns.
•Down Capture Ratio - measures a fund’s performance in down
markets. It provides the percentage of a down market that is captured
by the manager.
•Excess Beta - measures a fund’s volatility in excess of its benchmark.
•Excess Return - measures a fund’s return in excess of its benchmark.
•Information Ratio - measures a fund’s performance against risk and
return relative to the benchmark.
•Jensen’s Alpha - a risk adjusted performance measure that represents
the average return of a fund over and above that predicted by the capital
asset pricing model, given the fund’s beta and the average market
return.
•R-Squared - reflects the percentage of a fund’s movements that can be
explained by movements in its benchmark.
•Sharpe Ratio - measures risk adjusted performance of a fund based on
total risk (standard deviation).
•Tracking Error - measures the volatility of a fund’s excess returns
relative to its benchmark.
•Treynor Ratio - measures returns earned in excess of that which could
have been earned on a riskless investment per each unit of market risk.
It measures returns on a risk adjusted basis using systematic risk.
•Up Capture Ratio - measures a fund’s performance in up markets
relative to the market (benchmark) itself.