Canadian Pension Funds Tread Water in Q3

Declining Canadian equities, weakness in energy stocks weigh down returns.

Canadian defined benefit pension plans remained relatively unchanged during the third quarter, returning only 0.1%, compared to gains of 2.2% for the previous quarter, and 0.4% for the year-ago quarter, according to the RBC Investor & Treasury Services All Plan Universe.

The returns were weighed down by disappointing Canadian equities, which posted a loss of 0.3% during the quarter after surging 6.8% during the second quarter.

The TSX Composite Index also registered a loss for the quarter, primarily due to weakness in energy and materials stocks, falling 0.6% compared to gains of 6.8% during the previous quarter.

“Despite a lackluster quarter for Canadian equities, Canadian pension returns remain in positive territory for 2018,” Ryan Silva, RBC Investor & Treasury Services’ head of pension and insurance segments, said in a release. “Interest rate hikes and free trade negotiations weighed on Canadian indices and impacted returns this quarter.”

The healthcare sector bucked the overall trend and had a strong quarter, thanks to strong returns from cannabis stocks. Global equity returns were diminished due to trade war fears and central bank rate hikes, the firm said, yet they still managed to register another quarter of positive returns, gaining 2.3% compared to 2.6% in the second quarter.

The MSCI World Index gained 3.2% during the quarter, down from 3.8% the previous quarter, and emerging markets had another negative quarter, although the 2.8% loss was an improvement from a 6.1% drop in the second quarter. 

RBC also said rising long-term yield levels helped rein in Canadian fixed-income returns during the third quarter, falling 1.5% after gaining 0.6% the previous quarter. Likewise, the FTSE TMX Universe Canadian Bond Index also retreated during the third quarter, losing 1% after rising 0.5% in the second quarter.  The FTSE TMX Canada Long-Term Bond Index lost 2.4%, while the FTSE TMX Canada Short-Term Bond Index was flat for the quarter.

Despite the downbeat quarter, Silva said the newly negotiated United States-Mexico-Canada Agreement (USMCA) should provide some relief in the final stanza of 2018.  However, he added that ongoing geopolitical concerns, global interest rate anxieties, and an economic slowdown in China shouldn’t be ignored.

“Asset managers will need to maintain their vigilance to the ongoing volatility,” he said, “and retain a diversified portfolio to actively manage their risk exposure.”

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