Interest rate jitters and the strengthening Canadian dollar largely erased healthy stock market gains in the second quarter, according to a survey just released by RBC Dexia Investor Services.

Within the $340 billion RBC Dexia universe, Canadian pensions earned 0.9% in the quarter ended June 30, 2007, bringing year-to-date totals to 2.9% — a lacklustre return, although still ahead of inflation.

Domestic stocks, the top performing asset class for Canadian pensions, returned an impressive 6.3% in the quarter, supported by firm commodity prices and market speculation about takeovers. “Year-to-date, Canadian pension plans have beaten the S&P TSX Composite benchmark index by almost a full percentage point – that’s a 10% gain, on the strength of superior security selection in the materials sector,” said Don McDougall, director advisory services, in a release.

However, the loonie’s dramatic rise against most major currencies prevented most Canadian pension plans from benefiting from buoyant equity markets outside the country. The MSCI World index’s healthy 6% rise in local currency terms translated into a loss of 1.8% for the quarter, once Canadian exchange rates were taken into account.

“Currency fluctuations have assumed crucial significance for pension plan sponsors. Foreign stocks now account for about half of the typical pension plan’s strategic equity allocation, but most plans do not hedge their foreign currency exposure,” explained McDougall. Over the quarter, Canada’s dollar appreciated almost 8% against a basket of world currencies, including 8.3% against the U.S. dollar, 6.8% against the euro and 13.2% against the Japanese yen.

Canadian pension plans also saw domestic bond holdings lose 1.8% over the quarter, as anticipation of interest rate hikes triggered a sell-off, shaving 0.1% from the Scotia Capital Universe Bond Index. Longer duration bonds (maturities of 10 years or more) had their worst quarterly showing in 13 years, while Canadian real return bonds suffered the most, declining 3.5% in value.