The Markets January 17, 2007

Indexes Beat Out Active Managers in 06

The latest Standard&Poor’s Indices Versus Active Funds Scorecard (SPIVA) shows the S&P 500 outperformed 69.1% of large-cap funds.
Reported by
According to an S&P news release, the S&P SmallCap 600 led 63.6% of small-cap funds in 2006, however 53.3% of actively managed mid-cap funds beat the S&P MidCap 400.

Rosanne Pane, Mutual Fund Strategist at Standard & Poor’s, said in the release the performance of the S&P 500 was over 3% better than that of large-cap funds, while the S&P SmallCap 600 outperformed small-cap funds by almost 2%.She also said active managers of mid-cap funds outperformed the S&P MidCap 400 by 34 basis points.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

For international equities, in 2006, indexes continued to lead actively managed international funds. The S&P/Citigroup PMI World Index outperformed 58% of actively managed global funds.Over the same time period, the S&P/Citigroup PMI World ex U.S. outpaced 50.5% of international funds, and the S&P/Citigroup EMI World ex U.S. led 63.3% of international small company funds.

In addition, the S&P/IFCI Composite has outperformed 75% of actively managed emerging markets funds.

Also in 2006, seven of eight domestic taxable fixed income indexes (Lehman Brothers Bond Indices, Merrill Lynch All U.S. Convertibles Index) outpaced active funds, with short-term general funds being the only exception. Two of the three active global fixed income styles outperformed the Lehman Brothers Global Bond Indices in 2006.

SPIVA data also showed a decline in average fund expenses for asset-weighted index funds (S&P 500, S&P MidCap 400 and S&P SmallCap 600) in 2006 versus that of 2005.Expense ratios for both equal-weighted index funds and actively managed funds declined in two of the three capitalization categories and increased for equal weighted small-cap index funds and mid-cap active funds.

According to the SPIVA, over the past three years (and five years), the S&P 500 has beaten 66.7% (71.4%) of large-cap funds, the S&P MidCap 400 has outperformed 65.1% (79.7%) of mid-cap funds, and the S&P SmallCap 600 has outpaced 80.6% (77.5%) of small-cap funds.

Srikant Dash, Index Strategist at Standard & Poor’s, added in the press release that, while indexes outperformed active fund managers in six out of nine domestic style boxes in 2006, over the last five years, more than 70% of actively managed large-, mid- and small-cap funds have failed to beat their comparable S&P benchmark.

The complete fourth quarter 2006 SPIVA scorecard and previous quarterly SPIVA reports are available at www.spiva.standardandpoors.com.

Compliance January 17, 2007

U.S. Senate Panel OKs Deferred Comp Limit

The U.S. Senate Finance Committee on Wednesday approved by voice vote a measure that could limit the earnings corporate executives can defer into non-qualified deferred compensation (NQDC) plans.
Reported by
The measure restricting NQDC arrangements was part of a series of items lawmakers hope can raise enough revenue to offset the cost of a package of small-business tax incentives. Among other things, the incentives would extend credits for employers who hire former welfare recipients and change the tax code to simplify bookkeeping for certain companies.

The overall package came from Chairman Max Baucus (D-Montana) and the panel’s senior Republican Senator Charles E. Grassley of Iowa and carries a price tag of $8.3 billion over 10 years. The deferred comp provision was estimated to generate $307 million over five years and $806 million over 10 years. All in all, deferred comp and other tax provisions are estimated to generate more than $8 billion over a decade.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Under the deferred comp plan as it now stands, any deferred comp over the lesser of $1 million or average taxable compensation for last five years would be immediately includible in income and subject to 20% additional tax as under the 409A rules. Washington attorney Brigen Winters, of the Groom Law Group, said the measure’s definition of nonqualified deferred comp could ultimately be extremely broad, similar to the current 409A definition.

In addition to deferred comp being broadly defined, Winters said the provision’s cap could potentially come in at under $1 million, which could affect managers below the top of corporations. “It’s not just top execs,” Winters said.

Limiting deferred compensation would be “earthshaking” to American executives, Patrick McGurn, executive vice president of Institutional Shareholder Services, told the Washington Post.

“A lot of executives are deferring the lion’s share of their compensation these days, and the typical executive at a Fortune 100 company makes well over $1 million,” according to McGurn. He said there is a huge amount of compensation that executives would defer that will not be allowed to be deferred if the tax code were changed.

Winters said it appeared politically likely the deferred comp provision would survive a trip through the Senate.

The proposal is effective for amounts deferred in taxable years beginning after December 31, 2006, according to Senate documents. The proposal directs the Treasury Department to issue guidance allowing existing outstanding deferral elections to be modified on or before December 31, 2007.

«