Investor uncertainty regarding the direction of interest rates, the containment of core inflation, and the ensuing impact on global growth have had an effect on major equity markets around the globe as they struggled in the second quarter of 2006.

With both equities and bonds falling in the quarter, there was no reprieve for Canadian balanced funds, which posted a median quarterly return of -3.1%, according to Mercer Investment Consulting’s pooled fund survey.

Canadian bonds delved further into negative territory as the Bank of Canada increased rates up another 0.50%, moving the overnight rate up from the March 31 level of 3.75% to 4.25% at the end of June. The late rally in June couldn’t prevent the negative returns for the quarter in major equity markets.

“Despite a negative market returns, the second quarter did not have a material impact on the funding status of pension plans. Although equity market performance provided little support to pension plan assets, long-term bonds, which act as a proxy for pension liabilities, experienced a decline. The improvements in the funding status seen in the first quarter of the year were slightly bettered in the second,” said Peter Muldowney, business leader for Mercer Investment Consulting in Canada.

The situation is illustrated in Mercer’s Canadian Pension Health index, an indicator of the impact of capital markets on the financial position of Canadian pension plans, which showed a solvency rate of 86% at the end of June, representing a 1% increase from the March ratio, and essentially its improvement over the December 2005 low of 80%.


Here is a summary of the results from Mercer’s survey:

– Canadian stocks ran into negative territory, with the S&P/TSX Composite index returning -3.5% during the second quarter. Strong first quarter performance salvaged the year-to-date return into positive territory at 4.2%. The median Canadian equity return was below the index at -3.7% during the quarter and 3.9% on a year-to-date basis.

– Although capitalization and style influence returns, all major styles and market cap indices declined over the quarter: Large cap securities outpaced small cap securities, a reversal from first quarter results: S&P/TSX 60 index returned -3.8% quarterly, while the BMO Nesbitt Burns Small Cap (weighted) index delivered -5.0%. Growth stocks also outperformed value stocks as the S&P Citigroup PMI Growth index returned -2.6% while the S&P Citigroup PMI Value index posted -5.8%.

– There was a wide dispersion between the best- and worst-performing Canadian equity sectors during the quarter, with the strongest areas of the market recording modest positive returns. The best performing sectors were utilities (1.1%), materials (0.8%), and energy (0.3%) while the worst performing sectors were information technology (-21.5%), health care (-9.2%), and financials (-7.1).

– International equities also recorded negative performance for the quarter with the MSCI EAFE returning -3.8% (in C$), but year-to-date performance was strong at 5.2% (in C$). Over the quarter, Europe declined the least at -1.9% (in C$), while the MSCI Pacific ex-Japan index returned –2.3%. Japan was a drag on returns and posted -8.8% (in C$). The median international equity return was -4.3% (in C$) for the quarter and 5.1% (in C$) on a year-to-date basis.

– For U.S. equities, the S&P 500 index’s total quarterly return (in C$) was -6.0%, significantly lower than the index’s U.S. dollar return of -1.4%, with the Canadian dollar appreciating relative to the US over the quarter. The strong Canadian dollar influenced year-to-date results, with -2.2% (in C$) and 2.7% (in US$). The median US equity return was -6.1% (in C$) for the quarter and -1.9% (in C$) on a year-to-date basis.

– Canadian bonds continued their negative performance trend in Q2 with the Scotia Capital Universe index registering -1.0% for the quarter, leading to an overall year-to-date return of -1.5%. The mid- and long-term bonds, as represented by the SC Mid and SC Long Term indices, returned -0.8% and -2.9%, respectively. On a broad sector basis, Corporates declined the least (-0.8%) while the worst performing sector for the quarter was Provincials at -1.5%. The median Canadian fixed income return was equal to the index during the quarter and slightly ahead of the index on a year-to-date basis (-1.4%).