Canadian Diversified Pool Funds Return 4.4% in Q3

Robust quarterly returns were not enough to overcome falling interest rates as solvency ratio drops from beginning of year.

Canadian diversified pooled fund managers posted a median return of 4.4% before management fees in the third quarter, and 2.6% since the beginning of the year, according to human resources (HR) services and technology company Morneau Shepell.

“The good returns obtained in the third quarter enabled pension funds to improve their financial position,” Jean Bergeron, partner for the Morneau Shepell Asset & Risk Management consulting team, said in a statement. “However, the financial situation of the pension funds remained worse than it was at the start of the year due to the significant drop in interest rates.”

Bergeron said the drop in interest rates caused solvency liabilities to rise sharply since the beginning of the year, estimating that the solvency ratio of an average pension fund has declined approximately 1% year to date.

Canadian bonds had a median return of 0.9% during the quarter, which was 0.5% higher than the benchmark index, as short-term and mid-term indices returned 0.7% and 1.1%, respectively, while long-term bonds were down 0.3%. The high-yield bond index posted a 4.6% return, while the real return bond index returned 4.4%.

The median return for Canadian equity managers was 5.9% during the quarter, compared with the 4.7% return posted by the S&P/TSX Index. The S&P/TSX Small Cap Index increased 6.6%, while the S&P/TSX Completion Index, which represents mid-cap stocks, posted a 6.1% return, and the large-cap S&P/TSX 60 Index rose 4.4%.

Foreign equity managers’ median return for US equities was 6.6% during the third quarter, matching the quarterly return of the S&P 500 Index, while international equities increased 4.9% compared with the 2.8% increase registered by the MSCI EAFE Index. Managers also reported a 5.3% return for global equities, which was below the 5.9% earned by the MSCI World Index, and an 8.4% return for emerging market equities, compared with 7.6% for the MSCI Emerging Markets Index.

The Morneau Shepell Performance Universe of Pension Managers’ Pooled Funds covers more than 300 funds managed by nearly 50 investment management firms. The results of Morneau Shepell’s study are based on the returns provided by portfolio managers, including independent investment management firms, insurance companies, trust companies, and financial institutions. The returns are calculated before management fees are deducted.

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