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What Asset Classes and Funds Should Plan Sponsors Be Adding in 2001?

Excerpts reprinted with permission from IOMA's DC Plan Investing Spring 2000 IOMARATE

High tech and Asian markets were clearly some of the best sectors to be in during the past twelve months and, as a result, were most often on last year's list of new fund areas for DC plan managers. But with valuations at such lofty levels in high tech and Japan still in mired in recession, what should plan sponsors be looking to add next year? Another small cap growth fund? Biotech? Stable Value? Will value prove to be the common sense area once again? To get some answers to these questions, DC Plan Investing takes a look at the latest trends from its analysis of the leading stable value pooled funds, the performance of company stock, and more than 4,000 funds with five-year performance records in its IOMARATE database.

Review safest asset classes first

If, as Alan Greenspan speculates, we are in a market bubble, the first order of duty is to make sure participants have a safe haven for their gains. In this regard, stable value funds stand head and shoulders above the crowd. Any captain worth his or her salt, looks to the safety of the passengers first. Make sure participants have an option should they see storm clouds on the horizon. The time to make such a move though is well before the weather changes. Enormous drops in markets occur so quickly that most participants make these moves after the market has completed its correction. Today's Web-based plans, however, make it easy for participants to switch quickly out of high risk equity funds into the safety of stable value with a few keystrokes. And, while timing the market is bad advice generally for 401(k) plan participants, many sponsors are now taking heed and building cautionary advice and common sense strategies into their education programs. IOMA's recommendation: If you don't have a stable value option in your plan-add it now. A guaranteed 6% gain looks spectacular next to a potential 25% decline.

Next, look at company stock - If you are so lucky

The use of company stock in 401(k) plans is expanding rapidly. It is commonly found in many Fortune 1,000 plans and more generally in about 14% of all 401(k) plans nationwide. Company stock is a great way to build participants' sense of "ownership" and is a relatively inexpensive match for the corporation. Moreover, studies have shown, that when company stock is used in conjunction with stable value, the combination actually allows the participant to hold higher percentages of company stock in their portfolio without out increasing risk as much as they would with out stable value.

Growth funds - Too late to add in 2000?

Clearly the place to be in 1999-mid cap growth funds were up a whooping 53% on average while small cap funds were up only slightly less with a 51.6% gain. The longer term trends however, favor large-cap growth funds-which posted a 31.8% over the last three years (versus 21.8% and 28.7% for mid and small cap respectively) and 30.0% for the last five years (versus 24.2% and 27.3%). IOMA's recommendation: Add a large cap growth category and fund if you don't have one in your plan. Not only are the valuations of most of the larger companies in these funds likely to be more realistic than in their smaller cap peers, but these funds also tend to incorporate some of the large cap high tech growth companies so they tend to track the high tech areas ups and downs but with somewhat overall slower growth. It is also abundantly clear that despite Greenspan's best efforts, the economy's growth and these funds are likely to remain on the fast track at least for the rest of 2000.

Value funds - Still out of favor?

Once the bedrock foundation of many wise investment strategists ranging from Warren Buffet to Michael Price, the market's tilt towards growth and high tech has left most value funds in their wake in the last two years. Indeed. Value large-cap funds gained just 7.5% in 1999 and 13.8% in 1998. Mid cap value gains were similar. Small cap value however had a good 1999-with a gain of 27.3%. Small cap value fund performance is likely to continue beating out their larger value peers this year since the market is still having a hard time placing a value on underperforming "old economy" large cap stocks. IOMA's recommendation: If your plan doesn't have a small cap value category or fund-add it in 2000.

European or Asian?

Was 1999 a fluke for Asian funds? After waiting for nearly eight years, most Asian funds with a significant Japanese exposure jumped any-where from 80% to 113%. Was it worth the wait after significant declines in both 1997 and 1998? Not many plan participants have this time horizon or risk tolerance. Besides, now that Japan has slipped back into recession, has this market gone into a holding pattern? European market funds, on the other hand, lead by the region's growth engine Germany, have climbed steadily - up 22.5% over the last five years, 23% over three years and 25% last year. IOMA's recommendation: If you don't have a European category or fund in your plan, add one this year.

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