Canadian equities pay off for pension funds

(April 26, 2005) Canadian equity investments provided superior returns for pension fund managers in the first quarter of 2005 compared to those focused outside our borders, according to a report from Morningstar Canada.

A study of institutional pooled fund data, found the median fund in the Canadian Equity (Pure) pooled fund category returned 4.6% in the first three months of the year. The second best performance came from Canadian Equity, which had a median fund return of 4.4%, matching the S&P/TSX Composite Index.

In comparison, the median U.S. Equity pooled fund lost 1.2%, while Global Equity median returns were flat. The median International Equity fund returned 1.1%, matching that of the Canadian Bond group, while the median Balanced fund rose 2.1%.

Much of the Canadian gains came from holdings in the resource sector, where stocks rode the wave of rising commodity prices. In the first quarter, the S&P/TSX Capped Energy index gained 17.9%, while the Diversified Mining index returned 16.8%.

In fact, it’s virtually impossible to track the Canadian benchmark index without taking a substantial stake in the energy sector, which became an even larger component of the overall index in the first quarter. While financial services easily remains the sectoral top dog, its position has slipped from making up 32.8% of the TSX to 32.2%. Over the same time period, energy has grown to 21.2% from 18.5%.

Gains in the oilpatch have rewarded professional investors handsomely. The average fund in the top quartile held 22.4% of their non-cash holdings in energy, while fourth quartile funds tended to be underweight in energy, holding 16.2%.

According to Rudy Luukko, investment funds editor for Morningstar Canada, the average Canadian equity pooled fund holding was closer to the lower end, with 16.4% in energy. And while retail funds were slightly higher with an average holding of 17%, this remains 420 basis points lower than the market.

Financial services were also underweighted, making up 30.7% of the Canadian Equity (Pure) group’s holdings and 28.9% for Canadian Equity. Canadian Equity funds allowed their cash holdings to drop from 6.2% to 5.6%, while Canadian Equity (Pure) funds average cash position was higher at 3.2% from 3.0%.

Among international funds, Europe remained the primary investment destination, with the average International Equity fund allocating 41.2% of its holdings on the continent, with an additional 21.3% in the United Kingdom. UK holdings were down from 25.7% at the end of the previous quarter, while mainland investments were up from 39.9%. The MSCI EAFE Index’s weightings for the first quarter of 2005 were 47.7% in continental Europe and 20.3% in the U.K.

Japan continues to be underweighted by International Equity fund managers, making up just 15.2% of their portfolios, compared to 23.4% for the benchmark.

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