The rising Canadian dollar and its effect on falling foreign equities contributed to flat returns from pension funds during the first quarter (Q1) of 2016, according to a new report from Morneau Shepell Inc.
The Toronto-based human resources consulting firm released its quarterly pension report on Thursday, which showed that pension funds posted a median return of 0% before management fees in Q1.
“The rise in the Canadian dollar vs several other currencies, and especially the U.S. dollar, significantly reduced returns on foreign equities calculated in Canadian dollars,” says Jean Bergeron, partner responsible for Morneau Shepell’s asset- and risk-management consulting team, in a statement on Thursday.
“Note that in the past several years, many pension funds have decreased the Canadian equity weighting in their portfolios, opting instead for foreign equities and/or investments in real estate and infrastructure, which has been generally profitable in recent years,” he adds.
Diversified pooled pension fund managers underperformed the benchmark, on average. In fact, the median return of 0% for these managers was 0.3% lower than the benchmark portfolio, which consisted of an allocation of 55% in equities and 45% in fixed-income.
The largest declines in pension fund managers’ returns came from international equities, which fell by 8.4%, and global equities, where returns declined by 5.8%. Canadian equity managers posted a median return of 4% while managers of Canadian bonds posted a median return of 1.4%.
The report notes that the solvency position of pension funds declined by about 5% in Q1 as a result of these weaker returns as well as an increase in solvency liability.
Morneau Shepell’s performance universe of pension funds covers 342 pooled funds managed by almost 50 investment-management firms. The pooled funds that are evaluated within this universe have a market value of more than $278 billion.
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