Steady returns for Canadian DB pension plans as international equities lead gains

Hedged pension plans outperformed unhedged peers due to strong Canadian dollar

Steady returns for Canadian DB pension plans as international equities lead gains
Steve Randall

The second quarter of 2023 delivered steady returns for Canadian defined benefit (DB) pension plans according to the latest stats from RBC Investor Services.

Its analysis of plans in its All Plan Universe reveals a quarterly return of 0.8% overall, helping the first half of the year to end ahead by 4.8%.

The best performing asset class in the second quarter was foreign equities with a median return of 2.9%.

The MSCI World index returned 4.5% thanks largely to information technology (+12.1%) and consumer discretionary (+8.1%) sectors, but 7.1% on a local currency basis with the strong Canadian dollar giving a boost to those pension plans that were hedged versus their unhedged peers.

Winning stocks

Growth stocks continued to outperformed value stocks by some way – 8% vs. 0.7% across the second quarter - to provide year-to-date returns of 24.1% compared to 1.5% for value.

US stocks also proved a better bet than international equities with the S&P 500 gaining 6.3% while the MSCI EAFE posted a more modest 0.7%.

Canadian equities returned 1.3% in the second quarter while the FTSE Canada Universe Bond Index posted a negative return of -0.7%. Long-term bonds (+0.6%) fared better than short-term options (-0.8%) as short-term yields increased.

Marijana Jovanovic, head of Product Transformation at RBCIS, said that the analysis shows why investors should remain vigilant in the uncertain times ahead, given the intricacies of the Canadian pension landscape in the last quarter.

"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 said. "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."