Canadian pension plans made significant gains in the third quarter as increased monetary support from central banks reassured global markets and increased investors’ appetite for taking on risk, according to the latest survey from RBC Investor Services (RBC IS).
Within the $410 billion RBC IS All Plan universe, Canadian defined benefit (DB) pensions gained 3.2% in the quarter ending September 30, 2012 against a loss of 1.1% in the second quarter. The median year-to-date return for Canadian DB plans is 6.6%.
“Canadian defined benefit pension plans returned to positive territory, driven by the financials, energy and materials sectors as global markets continued their liquidity-driven climb from the summer lows,” said Scott MacDonald, head, pensions, insurance, and sovereign wealth strategy for RBC IS. “Despite headwinds from deteriorating economic conditions in Europe and China, as well as lacklustre economic news from the U.S., this rally was driven by major central banks pledging further monetary support which led to a positive performance for commodities and energy-based stocks.”
After being the worst performing asset class in the second quarter, Canadian equities rebounded sharply in Q3, with the S&P/TSX Composite increasing 7.0 percent and bringing year-to-date performance up to 5.4%. All 10 sectors of the S&P/TSX Composite had positive gains in Q3, with materials and energy leading the way, up by 13.1 and 8.5% respectively, DB pension plans’ Canadian equity holdings returned 6.2% for the quarter, underperforming the S&P/TSX Composite by 0.8% as they were underweight in materials and returned only 6.7% for that sector.
Returns from foreign equities were dampened by the Canadian dollar strengthening against the U.S. dollar and the euro. The S&P 500 returned 6.4% in USD versus 2.7% in CAD and the MSCI World Index returned 5.6% in local currencies versus 3.0% in CAD. Canadian DB pension’s foreign equity holdings edged the MSCI World (CAD) by 0.1% in the third quarter.
The DEX universe bond index remained in the positive, returning 1.2% over the third quarter compared to 2.3% return in the second quarter as central banks around the world continued to signal their commitment to bolstering their respective economies.
“Within the DEX Universe index, the corporate segment outpaced its government counterparts, indicating a flight to risk as managers went after additional yield,” added MacDonald.
The median domestic bonds return for Canadian DB pensions of 1.6% outperformed the DEX Universe by 0.4%.