The URL can be used to link to this page

Home My Public Portal AboutDeferred Comp 2003 4th Quarter ReportOne Main Street, Cambridge, Massachusetts 02142-1524 (617) 374 -1300; F: (617) 374-1313 www.nepc.com February, 2004February, 2004 Fourth Quarter 2003Fourth Quarter 2003 457 Deferred Compensation Plan457 Deferred Compensation Plan Executive SummaryExecutive Summary Ms. Doris Ewing, PartnerMs. Doris Ewing, Partner Mr. Doug Moseley, Senior ConsultantMr. Doug Moseley, Senior Consultant Metropolitan St. Louis Sewer District 2 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Executive Summary Executive Summary ––Fourth Quarter 2003Fourth Quarter 2003 •As of December 31, 2003, total plan assets were $14.8 million, up from $13.4 million on September 30, 2003. •The Plan ’s equity commitment, including international stock, was 75.1%. In comparison, the average defined contribution plan ’s equity commitment was 63.6%. –The Plan’s higher-than-median equity commitment ranks among the top 12th percentile of the Defined Contribution universe.This signifies t hat plan participants are taking on more equity risk than the median DC plan participa nt. •The plan experienced net contributions of $181 thousand and inve stment gains of $1.25 million in the quarter. –The Money Market Fund, the Bond Index Fund, and the Retirement Savings trust experienced net withdrawals during the quarter. •The top three strategies by net asset size are the Vanguard Windsor II Fund (28.0%), the Vanguard S&P 500 Index Fund (16.0%), and the Vanguard Balanced Fund (14.4%). •Absolute performance for the quarter was good, as all of the funds posted gains for the quarter. –The Small-cap Index fund was the Plan’s top performer, posting a gain of 14.89%; the Plan’s worst performer was the Total Bond Market Index fund, which returned 0.18%. •Over a three-(five-year) period, the Vanguard Total Bond Market Index Fund (Vanguard Mid Cap Index Fund) was the Plan ’s top absolute performer, posting a gain of 6.87% (9.19%). 3 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Key 2004 NEPC Capital Market ExpectationsKey 2004 NEPC Capital Market Expectations •Investment grade bond yields remain low and interest rate risk remains above average –Interest rates more likely to rise than fall over the next few years –Corporate bond spreads across the credit spectrum are back to fair value •Improved economic environment largely reflected in the significant rally in global equity markets –P/E multiple on S&P 500 forward-looking earnings is 18.5x (moving above long term normalized ratio of 17x) –Risk premium over bonds remains at long term averages –Wall Street analyst expectations are getting more optimistic (2004 earnings estimates reflect 13% earnings growth) •We continue to favor the diversifying equity asset classes, particularly small cap, international, and emerging market equities •Expectation of subdued long term returns remains –Indexes and traditional diversification strategies alone will no t support most return targets without assuming undue levels of risk –Manager value added, non-traditional investments, and rebalancing disciplines can provide investment programs an extra source of return 4 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Actions for ClientsActions for Clients •Control your risk exposure by rebalancing back to target weights –Conserve a portion of your 2003 profits and control risk by rebalancing –Discipline can add substantial value in choppy markets –Be prepared to act, timing is important •Maximize diversification •Emphasize manager value added strategies –Utilize active management and non -traditional index funds –Re-examine manager constraints that limit their flexibility •Consider non -traditional allocations –Alternative strategies (hedge funds, private equity) –Real return strategies (TIPs , real estate, commodities) –Globally diversified tactical asset allocation (TAA) strategies •Avoid complacency –Maintain discipline and do not let your expectations out -grow reality –Think outside the box 5 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA EQUITY MARKETS FIXED INCOME MARKETS •The Domestic Equity Markets finished 2003 with an outstanding quarter. The S&P 500 index returned 12.2% during the quarter. Small cap stocks, as measured by the Russell 2000 index, continued to outpace the return of their large cap peers, returning 14.5% during the quarter. •After a slow start, the equity markets posted three consecutive strong quarters resulting in an impressive 2003. The S&P 500 advanced nearly 29%, while the Russell 2000 soared over 47%. The tech heavy NASDAQ gained 50%. •Underneath the equity returns, there was quite a divergence among the sectors and types of stocks generating the returns. Economically sensitive (cyclicals) and highly volatile (technology) sectors far outpaced the more defensive consumer staple and health care sectors. •The Developed International Equity Markets outperformed the S&P 500 index for the third consecutive quarter. The MSCI EAFE index surged 17.1% higher in U.S. dollar terms during the fourth quarter, and closed the year up 38.6%, its strongest annual return in 17 years. •The Emerging Equity Markets were the best performing asset class during the fourth quarter and trailing year, returning 17.8% and 55.8%, respectively. 2003 was the third year in a row the emerging equity markets outperformed the S&P 500. •The returns to U.S. based investors in the Developed and Emerging markets were supported by the weakening U.S. dollar. •The first half of the year was marked by strong performance in the broad investment grade fixed income market. However, the second half finished flat as the Lehman Aggregate index returned 0.2% for the last 6 months of 2003, and 0.3% for the fourth quarter. The Aggregate returned 4.0% for the year. •The Treasury market posted a modest 2.4% return for the year, which included a -0.4% return during the last quarter. Performance was negatively impacted by rising interest rates. •Investment Grade Corporate Bonds were the best performing component of the Lehman Aggregate. The narrowing of corporate spreads to Treasuries helped generate significant capital gains. Corporate bonds posted a return of 7.7% for the year and 0.5% for the quarter. •High Yield Bonds were the top performing sector of the market as they returned 5.9% for the quarter and 29.0% for the year, as measured by the Lehman Brothers High Yield index. •Global/International Bonds continued their strong run during the quarter as the Citigroup World Government Bond index rose 5.2% for the quarter and 14.9% for the year. Returns were aided by the falling U.S. dollar. Market Environment Market Environment ––Fourth Quarter 2003Fourth Quarter 2003 6 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Market Environment Market Environment ––Fourth Quarter 2003Fourth Quarter 2003 7 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Asset Allocation Asset Allocation ––Fourth Quarter 2003Fourth Quarter 2003 Vanguard US Growth 11.6% Life Strategy Conservative Growth 1.0% Vanguard Small Cap 3.5% Life Strategy Income 0.5% Vanguard Windsor II 28.0% Life Stragety Moderate Growth 1.8% Life Strategy Growth 2.4% Vanguard Balanced 14.4% Vanguard S&P 500 Index 16.0% Vanguard Mid Cap Index 2.0% Vanguard Money Market 5.1% Vanguard International Growth 1.6%Vanguard Bond Index 6.8% Vanguard Retirement Savings 5.4% 8 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Asset Growth Asset Growth --Fourth Quarter 2003Fourth Quarter 2003 Beginning Net Income Gain Ending Vanguard Fund Name Value Contributions Received (Loss)Value Composite $13,361 $181 $101 $1,150 $14,793 Balanced Fund 1,917 68 16 130 2,131 Windsor II Fund 3,593 42 44 461 4,140 US Growth Fund 1,521 41 5 147 1,714 S&P 500 Index Fund 2,103 10 12 243 2,368 Mid Cap Index Fund 237 20 3 29 289 Small Cap Fund 415 42 5 60 522 International Growth Fund 190 17 3 25 235 Money Market Fund 891 (141)1 0 751 Bond Index Fund 1,082 (83)0 2 1,001 Retirement Savings Fund 873 (81)8 1 801 Life Strategy Growth 240 77 0 31 348 Life Strategy Moderate Growth 138 113 3 14 268 Life Strategy Conservative Growth 116 22 1 7 146 Life Strategy Income 44 32 1 2 79 (Dollars in 000’s) 9 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Account Market Values Account Market Values ––Fourth Quarter 2003Fourth Quarter 2003 Domestic Int'l Domestic Cash &Life Equity Equity Fixed Equiv.Cycle Composite Composite $11,164 $235 $1,001 $751 $1,149 $14,793 Balanced Fund 2,131 $2,131 Windsor II Fund 4,140 $4,140 US Growth Fund 1,714 $1,714 S&P 500 Index Fund 2,368 $2,368 Mid Cap Index Fund 289 $289 Small Cap Fund 522 $522 International Growth Fund 235 $235 Money Market Fund 751 $751 Bond Index Fund 1,001 $1,001 Retirement Savings Fund 801 $801 Life Strategy Growth 348 $348 Life Strategy Moderate Growth 268 $268 Life Strategy Conservative Growth 146 $146 Life Strategy Income 79 $79 10 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Fund Allocation HistoryFund Allocation History 0% 20% 40% 60% 80% 100% Jun-03 Sep-03 Dec-03 LS Income LS Cons. Growth LS Moderate Growth LS Growth Retirement Savings Bond Index Money Market Int'l Growth Small-cap Mid Cap Index S&P 500 Index US Growth Windsor II Balanced 11 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Domestic Equity Style AnalysisDomestic Equity Style Analysis Composite 500 Index Fund S&P 500 Index Small Cap Index Fund Russell 2000 Index Mid Cap Index Fund Balanced US GrowthWindsor II 12 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Fourth Quarter Performance Fourth Quarter Performance ––Category SpecificCategory Specific NetNet --ofof--Fee Returns for Comparative PurposesFee Returns for Comparative Purposes Expense Ratio Quarter 1 Year 3 Years 5 Years Federal Money Market 0.32%0.2%0.9%2.2%3.6% Retirement Savings Trust 0.30%1.0%4.3%5.1%5.5% BT 3-Year GIC Rate 1.2%5.0%6.0%6.0% Total Bond Market Index 0.22%0.2%4.0%6.9%6.2% LB Aggregate Bond Index 0.3%4.1%7.6%6.6% Median bond manager 0.4%4.7%7.8%6.8% Balanced Index Fund 0.22%7.4%19.9%1.1%3.2% 60% S&P 500/ 40% LB Aggregate Index 7.3%18.5%1.0%2.7% Median balanced fund 7.8%19.1%1.6%4.3% Life Strategy Income 0.28%3.2%10.8%4.9%5.1% Life Strategy Conservative Growth 0.28%5.9%16.6%3.3%4.2% Life Strategy Moderate Growth 0.28%8.5%22.4%1.6%3.1% Life Strategy Growth 0.28%11.2%28.5%-0.5%1.8% 13 L:/Client/St. Louis Sewer/ 457 Plan/ IPA/ Exec IPA Fourth Quarter Performance Fourth Quarter Performance ––Category SpecificCategory Specific NetNet --ofof--Fee Returns for Comparative PurposesFee Returns for Comparative Purposes Expense Ratio Quarter 1 Year 3 Years 5 Years S&P 500 Index Fund 0.18%12.1%28.5%-4.2%-0.6% S&P 500 Index 12.2%28.7%-4.0%-0.6% Windsor II Fund 0.43%13.8%30.0%1.5%2.8% Russell 1000 Value Index 14.2%30.0%1.2%3.6% U.S. Growth 0.55%9.8%26.1%-17.9%-11.6% Russell 1000 Growth Index 10.4%29.7%-9.4%-5.1% Mid Cap Index 0.26%13.6%34.1%4.5%9.2% Russell Mid Cap Index 14.0%40.1%3.5%7.2% Small Cap Index 0.27%14.9%45.6%6.3%7.6% Russell 2000 Index 14.5%47.3%6.3%7.1% Median domestic equity manager 12.4%30.1%-2.0%1.8% International Growth 0.69%14.6%34.5%-3.6%N/A Citigroup PMI EPAC Index 16.9%38.4%-2.7%0.7% MSCI EAFE Index 17.1%38.6%-2.9%0.0% Median international equity manager 15.2%34.1%-0.6%5.7%