All Equity Markets Gain in Q406

Modest overall economic growth and a subsiding of inflation fears contributed to strong performance from U.S. equity markets in the last quarter of 2006, according to Mercer Investment Consulting (Mercer IC).

Mercer IC’s fourth-quarter 2006 Defined Contribution Universe Summary found gains in all equity markets, according to a news release; while the international equity asset class bested U.S. equities for the quarter by 3.7%, the global equities gained 8.4% for the period but lagged international equities by 200 basis points.

Looking at the broader market indexes, the S&P 500 Index gained 6.7%, while the fixed income asset class turned in a positive quarter with the Lehman Aggregate Bond Index posting a 1.2% gain. Money market instruments rose 1.3% while the balanced asset class, using a benchmark of 60% S&P 500/40% Lehman Aggregate Bond, posted a gain of 4.5%. International equity markets gained 10.4% during the quarter.

Capital market returns remain solidly positive over the long term, according to Mercer. Over a 10-year time frame, the S&P 500 Index returned 8.4% while the Russell 2000 Index returned 9.4%.

International equity markets produced a smaller gain of 7.7% over a 10-year time frame, lagging their U.S. counterparts. Over a 10-year period, the fixed income asset class, as measured by the Lehman Aggregate Bond Index, produced a return of 6.2%, which was below U.S. equity returns over the same time period but with significantly less risk, according to the Mercer analysts.

Style Differences

Looking at investing style, value funds outperformed growth funds in the fourth quarter as the median large cap value fund posted a gain of 7.3% compared to a gain of 5.4% for the median large cap growth fund. The small cap segment of the market followed along with large cap stocks, as the median small cap value fund outperformed the median small cap growth fund by a margin of 60 basis points.

The median large cap fund equaled the S&P 500 Index for the fourth quarter. Small cap funds outperformed their large cap counterparts for the quarter, as the median small cap fund gained 8.1% for the quarter versus a gain of 6.7% for the median large cap fund, Mercer said.

Within the international equity asset class, the median manager outperformed the index by 20 basis points during the quarter. The median emerging markets manager gained 17.5% for the quarter and lagged the index by 10 basis points, Mercer said.

The median core fixed income fund outperformed the index by 10 basis points for the fourth quarter.

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