Pension funds got off to a good start in 2006, with major equity markets around the world showing positive returns in the first quarter.

“The first quarter was great news for pension funds,” said Peter Muldowney, business leader for Mercer Investment Consulting in Canada. “Not only did equity markets post strong returns, but long bonds, which provide an estimate for pension liabilities, declined during the quarter.”

Mercer’s Canadian Pension Health index showed a solvency rate of 85% at the end of March 2006, an improvement of 5% from the December 2005 rate of 80%.

Those results were echoed by a survey released by RBC Dexia Investor Services, which found that
Canadian pension funds earned a healthy 4% in the quarter ending March 2006.

“Since the low-point in March 2003, stock markets across the world have been on a tear,” noted Don McDougall, Director Advisory Services, RBC Dexia Investor Services. “The average Canadian pension plan has realized a robust 15.8% annualized return over three years.” In the latest 12 months, performance averaged 14.9%.

According to the results of Mercer Investment Consulting’s Pooled Fund Survey, the first quarter was not only about energy stocks. Good returns were seen from a range of sectors with commodities leading the way.

Canadian bonds were not so lucky and were a drag on balanced fund performance, as the Bank of Canada moved the overnight rate up another 0.50%. Canadian balanced funds, which invest in a combination of equities and bonds, posted a median return of 4.3%.

Canadian stocks continued their strong performance with the S&P/TSX composite index returning 8% for the first quarter. Active Canadian equity managers generally trailed the index with a median return of 7.8%.

Small cap securities outpaced large caps, a reversal from year-end 2005 results: the BMO Nesbitt Burns Small Cap (weighted) index delivered 13.5%, while the S&P/TSX 60 index delivered 8%.

Growth stocks outperformed value stocks: the S&P Citigroup PMI Growth Index returned 10.3% while the S&P Citigroup PMI Value Index posted 5.6%.

There was a wide dispersion between the best and worst sectors. The best performing sectors were Materials (15.0%), Industrials (11.1%), and Technology (10.5%), while the worst performing sectors were Utilities (-8.7%), Telecom Services (-1.3%), and Consumer Staples (-1.3%). The top performing sector of 2005, energy, continued to fair well in the first quarter of 2006 with a return of 8.6%.

International equities took top honours for the quarter with the MSCI EAFE returning 9.6% (in Can$). Europe had the strongest regional return at 11% (in Can$), while the MSCI Pacific ex-Japan index returned 6.8% (in Can$) and Japan returned 6.9% (in Can$). The median international equity return was 9.5% (in Can$) for the quarter.

U.S. equities were lower in comparison to the Canadian and international equity markets, but the S&P 500 Index still posted a respectable 4.3% return (in Can$) for the quarter. In U.S. dollar terms, the index posted a return of 4.2%. The active median return was 4.5% for the quarter.

According to the RBC Dexia Investor Services survey, the median Canadian pension plan has increased foreign equity allocations by 2% over the last quarter.

“The repeal of the Foreign Property Rule last June has paved the way for more global diversification. That’s been good for pensions, although the strong loonie has tempered foreign returns for many unhedged Canadian plans,” explained McDougall.

Canadian bonds declined during the quarter with the Scotia Capital Universe index returning -0.4%. The SC Short Term index delivered a positive return of 0.5%, while longer maturity bonds, as represented by the SC Long Term index, declined -1.7%. On a broad sector basis, Corporates performed the strongest at -0.2%, while the worst performing sector for the quarter was Provincials at -0.8%. The active median return of -0.4% for the quarter was on par with the SC Universe index.