Canada, emerging markets pad pension returns

(July 26, 2005) Managers of institutional pooled funds found their best returns in emerging markets stock investments in the second quarter of the year, according to Morningstar Canada.

The median fund in the nine-fund category returned 6% in the three months ending June 30, with the overall top performing fund — Fidelity Latin America MF — gaining 11.8% alone. Domestic bond fund investments were the next best performers, with the median Canadian Bond fund gaining 4.3% during the same period. The second best single fund was SEI Long Duration Bond, up 9.8%.

“Continued strong growth from China helped drive exports from resource-rich developing countries, lifting eEmerging mMarkets funds to excellent second-quarter performance,” said Morningstar Canada analyst Mark Chow. “Canada’s developed and relatively strong economy has generated interest from foreign investors. Demand for yield continues to be high, pushing up bond prices and other securities that offer investors a yield.”

The average mix of domestic bond fund holdings shifted slightly toward corporate issues, although federal government bonds remained the top holding, at 39.4%, down from 40.1% at the end of Q1. Corporate bonds rose from 36.4% to 36.7%, while other government issues crept up to 23.9% from 23.6%.

Maturity and duration increased on average, from 6.6 years and 9.9 years respectively, from 6.3 and 9.8 years at the end of Q1. The Bond fund category average cash position slipped to 8.6% from 8.7%.

Pension fund managers also benefited from the domestic stock market, as the S&P/TSX Composite Index topped the 10,000 mark in the second quarter. The Canadian Equity (Pure) category returned a median gain of 3.6%, while the Canadian Equity category, which allows up to 30% foreign content, posted a median return of 3.1%.

Financial services remained the most popular domestic stock holdings in both Canadian Equity (Pure) and Canadian Equity categories, although both were underweight compared to the S&P/TSX Composite’s 32.4% weighting. The pure category held 31.6% in the sector, up from 30.7%, while the standard Canadian equity portfolio held 30.2%, up from 28.9%.

Perhaps not surprisingly, energy was the second most popular sector, making up 22% of the average Pure fund and 19.1% of the “impure” fund. Energy represented 23.9% of the S&P/TSX Composite at the end of June.

The real estate market continued to offer strong gains, with the median fund on that category returning 3.3%, as the single stock &P/TSX Capped Real Estate Index rose 12.8%, while the S&P/TSX Capped REIT Index gained 9.3%. Top performing funds in the category included Westpen Properties Ltd., which returned 5.2%, and London Life Real Estate, which gained 5.1%.

The median Canadian Balanced fund rose 3.2%, with Duncan Ross Equity turning in the best performance for the category with a gain of 7.8%.

Balanced funds put more of their capital to work, with cash positions dropping from 8.5% to 7.5% from March 31 to June 30. Average bond positions grew from 33.1% to 34.1% in the same period, while domestic stock investments dropped from 32.1% to 31.6%. The average balanced fund left its foreign equity position unchanged, while allocation to “other assets” grew from 6.9% to 7.4%.

Domestic bonds were so attractive, that with nearly 43% of assets invested in Canadian bonds, Goodman Private Wealth Management Balanced, returned 4.6% for the quarter.

The worst performing fund category was International Equity, with a median return of 0.6%. Not all Canadian investments were winners either, as Canadian Money Market and Canadian Small Cap Equity they rounded out the bottom three with returns of 0.65% and 0.7%, respectively

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com