The strength of Canadian and global equities thrust the returns of Canadian defined-benefits (DB) pension plans into positive territory, rising by 2.9% in the second quarter (Q2) of 2016, according to a report by Toronto-based Royal Bank of Canada’s (RBC) investor and treasury services arm.
The outperformance of the Canadian material and energy sectors is one reason DB plans fared much better in Q2 compared with their first quarter (Q1) results, which dropped by 0.03% overall.
These sectors largely offset “a quarter of sustained market volatility and economic uncertainty globally, particularly in the period surrounding the U.K. referendum, which saw the U.S. dollar drop considerably and bond yields hit record lows,” says James Rausch, head of client coverage in Canada and global head of banks, brokers and exchanges for RBC Investor and Treasury Services, in a statement.
The materials sector produced a strong return of 26.9% in Q2, which was a primary reason that Canadian equities posted a gain of 4% for the median Canadian DB pension plan. Canadian pensions underperformed the S&P/TSX composite index return of 5.1% in Q2 because pensions underweight materials, the best performing sector in the index.
The energy sector was an additional help to the success of Canadian equities as it posted a return of 9.5% thanks to a rise in crude oil prices.
Canadian fixed-income holdings also saw a boost with a return of 3.1% in Q2 compared with 1.8% in Q1.
Global equities in Canadian DB pension plans were also in positive territory in Q2 with a return of 1.6%, a significant jump from a loss of 6.2% in Q1. Global equities within DB pension plans slightly outperformed the MSCI world index, which posted a return of 1.4% in Q2, also a stark improvement from the drop of 7.2% in Q1.
“While global equities swung into positive territory, markets continued to experience significant volatility over the course of the quarter amidst downward pressure stemming from persisting concerns around slowing global economic growth as well as the U.K. referendum,” the report states.
Going forward, global investors will be looking for clarity regarding the U.K.’s exit from the European Union, which may contribute to ongoing market volatility for the foreseeable future, according to Rausch.
RBC’s “all-plan universe” tracks the performance and asset allocation of more than $650 billion in assets under management across Canadian DB pension plans.
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