Canadian DB Pensions End 2018 in the Red

Tumbling equity markets in Q4 negated a strong first half.

Despite a promising first half of 2018, falling equity markets during the fourth quarter sent Canadian defined benefit plans into the red for the year, according to RBC and Northern Trust.

According to the RBC Investor & Treasury Services All Plan Universe, Canadian defined benefit plans fell 3.5% during the fourth quarter, compared to a 0.1% gain the previous quarter, to end the year down 0.7%, compared to a gain of 9.7% in 2017. Data from the Northern Trust Canada Universe also showed a loss of 3.5% for defined benefit plans during the fourth quarter, however, it reported a 0.1% loss for the third quarter, and a 1.0% loss for the year.

“Geopolitical and economic uncertainty reverberated through the market all year,” Ryan Silva of RBC Investor & Treasury Services, said in a release. “Trade wars, rate hikes, oil prices, and Brexit helped contribute to lower earnings expectations which drove returns sharply lower in Q4 and for the year.”

Canadian equities and the TSX Composite Index had a rough fourth quarter, shedding 10.6% and 10.1%, respectively, as each ended the year down 8.9%. This was a sharp reversal from 2017 when Canadian equities rose 9.0%, and the TSX Composite Index climbed 9.1%. Higher interest rates and lower oil prices contributed to the disappointing returns as eight of the 11 sectors on the TSX were negative for the year.

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The decline in the price of oil and other commodities, combined with the expectation of a more moderate growth environment, attributed to much of the weakness of the markets in the fourth quarter. The healthcare and energy sectors were hit the hardest during the quarter, according to Northern Trust, while information technology was the strongest-performing sector for the year.

“Equity markets wrapped up 2018 on a sour note amid slowing global growth, inflation fears, rising interest rates, US-China trade war concerns, an unsettled Brexit, and struggles in emerging markets,” said Arti Sharma, CEO of Northern Trust Canada. “Volatility once again resurfaced in the wake of these stresses and allowed uncertainty to dominate markets in the fourth quarter.”

Despite ending the year in negative territory, the Canadian defined benefit plans outperformed Canadian diversified pooled fund managers, which posted a median loss of 5.6% before management fees in the last quarter of 2018, and a loss of 2.7% for the year, according to human resources services company Morneau Shepell.

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New York Closes Out Year with over $15 Billion in Transactions

Private equity sees the biggest contributions, with more than $7 billion committed.

The New York State Common Retirement Fund (CRF) executed approximately $15.8 billion in transaction value throughout the 2018 calendar year, wrapping up the year with more than $1.8 billion in December activity, according to a recently issued report from the $207 billion pension system.

A summary of its transaction activity throughout the year is below:

In December, the institutional investor handed out three large commitments to funds managed by Brookfield, KKR, and Thoma Bravo. Brookfield Capital V received a $400 million commitment, taking an opportunistic approach towards asset-heavy businesses, while $300 million was committed to the KKR Global Impact Fund, investing across five impact verticals aligned with the UN Sustainable Development Goals. A commitment of $400 million was given to Thoma Bravo Fund XIII, which invests exclusively in software.

The fund also made a large contribution to Blackstone Real Estate Partners IX, giving the manager $500 million as part of an existing relationship across several past funds.

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Smaller commitments were given to Boy Capital Fund IV ($25 million), CDH Fund VI ($25 million), Estancia Capital Partners Fund II ($20 million), and TSSP Opportunities Partners IV ($150 million).

Representatives of the pension did not respond to questions by press time.

Negative Q3 Performance
The CRF’s estimated return for the three-month period was -7.17%, New York State Comptroller Thomas P. DiNapoli said in a recent statement. The underperformance was mainly a result the ubiquitous global equity market downturn during the period.

The CRF has a significant exposure to public markets, with 36.4% allocated to domestic and 14.9% to international equities, as of December 31,, 2018.

“Like other investors, the fund saw strong half gains erased during the market’s steep drop at the tail end of 2018,” DiNapoli said in a statement.Other large pension plans, such as the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) also reported negative returns as an influence of the market’s dismal performance.

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