Foreign equities stand out but strength of loonie has a softening effect
Canadian DB pension plans within the All Plan Universe demonstrated a modestly positive quarterly return of 0.8% overall and were ahead by 4.8% over the first half of 2023, according to RBC Investor Services’ (RBCIS) latest report.
The analysis revealed that, during the quarter, foreign equities emerged as the top performing asset class in the peer universe, boasting a median return of 2.9%. In comparison, the MSCI World index returned 4.5%, primarily driven by the robust performance of the Information Technology (+12.1%) and Consumer Discretionary (+8.1%) sectors. The strength of the Canadian dollar had a softening effect on the returns of pension plans invested in foreign equities, as the MSCI World index recorded a 7.1% return in local currency terms.
The report added: “Consequently, hedged pension plans outperformed their unhedged counterparts. Much like in Q1, growth style stocks outpaced their value counterparts by a significant margin – as the MSCI World growth index showcased an impressive 8.0% return. In contrast, the value index lagged with a return of 0.7%. Year-to-date, the growth index is up 24.1% compared to the value index's return of 1.5%.”
U.S. equities significantly outperformed their international counterparts over the quarter, as evidenced by the performance comparison between the S&P 500's gain of 6.3% versus the MSCI EAFE's more modest 0.7%.
Within the Canadian equity asset class, a return of 1.3% was observed. By comparison, the TSX Composite delivered a return of 1.1%. Strength in the Information Technology sector (+16.6%) was tempered by weakness in the commodity sectors (Materials -6.9% and Energy 0.0%).
In the Canadian fixed income asset class, the plans in the universe returned 0.3%, ahead of the FTSE Canada Universe Bond Index, which experienced a negative return of -0.7%. Short-term FTSE Canada Universe bonds returned -0.8% due to an increase in short-term yields, while long-term bonds achieved a slightly positive return of 0.6%.
Marijana Jovanovic, head of Product Transformation at RBCIS, said: “The analysis underscores the intricacies of the Canadian pension landscape during Q2 2023, prompting investors to remain vigilant in navigating the uncertain waters that lie ahead. While inflation has been trending favourably into Q3 following July's rate adjustment, it's uncertain whether future interest rate increases are on the horizon."
She added: “Geopolitical tensions, including U.S.-China relations and the ongoing situation in Ukraine, introduce complexity to market dynamics and pose risks for investors. Asset managers are diligently focusing on diversification and hedging strategies while maintaining a watchful eye on their portfolios to mitigate potential losses."
