Canadian pensions falter in Q3

Ongoing volatility across global equity markets in Q3 2015 contributed to the second consecutive quarter of negative growth for Canadian pensions, according to the $650-billion RBC Investor & Treasury Services All Plan Universe.

It finds that, overall, Canadian defined benefit pension plan assets declined by 2% in the third quarter of 2015, bringing year-to-date returns to 2.5%.

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That’s because the quarter saw global equity markets post some of their worst returns in four years. “The sharp correction of the Chinese stock market in August put the focus squarely on the possibility of a hard landing for China in particular, and stalled global growth in general,” says David Heisz, CEO of RBC Investor Services Trust, RBC Investor & Treasury Services. “[But], despite the volatility over the past few quarters, plan returns are 2.5% year-to-date. [That’s] respectable in light of prevailing market conditions, and thanks in part to weakness in the Canadian dollar.”

In Q3, the Canadian dollar depreciated 6.9% against the U.S. greenback, offsetting some of the investment losses Canadian pensions experienced on their foreign equity holdings. And while domestic equities continued to lose ground, particularly in the resource sectors, Canadian bonds finished the quarter more or less flat.

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A look at EMs and energy

Canadian pensions’ foreign equity holdings returned -2.2% in Q3, underperforming the benchmark MSCI World Index by 0.5%, says RBC Investor & Treasury Services.

On the domestic side, Canadian equities lost 7.8% for the quarter, versus -7.9% for the benchmark TSX Composite Index. On the year to-date, pensions’ Canadian equity holdings have lost 7.5%

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“The emerging markets sector was hardest hit in Q3, declining 11.8%, reflecting investors’ concerns over the mounting economic challenges faced by these nations with export and GDP growth stalling,” says Heisz. “On the year, foreign equities have generated 8.6% for Canadian pensions.

“Additionally, materials and energy equities continued to bear the brunt of weak global demand, losing 24.5% and 17.2%, respectively.”

Fixed income assets

Canadian pensions’ returns on their domestic fixed income assets were flat for the quarter, marginally underperforming the broad market FTSE TMX Universe Canadian bond index by 0.2%. Year to date, domestic bonds have returned 2.3%.

“Government bonds were the best performing segment in Q3 as prices rose with a flattening yield curve, reflecting a strong flight-to-safety,” says Heisz. “Corporate and provincial bonds meanwhile had to contend with widening credit spreads as investors prioritized safety over yield, and both segments were slightly negative on the quarter.”

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