For the quarter ending September 30, the median Canadian pension plan returned negative 3.7%, according to data from the Northern Trust Corp.’s Canada Universe. Stronger returns in previous quarters provided some cushion, resulting in a 1.6% increase in return year-to-date for the median Canadian plan.
The Canada Universe tracks the performance of Canadian institutional defined benefit plans that subscribe to Northern Trust performance measurement services.
Threats of a U.S. government shutdown, strikes by the United Auto Workers and the downgrade of the U.S. sovereign rating and 10 regional U.S. banks all impacted international markets and economies, particularly Canada, in the third quarter. According to Northern Trust, investors were alarmed by mixed economic readings, such as record oil prices that factored into inflation readings, combined with positive economic data, making investors fear that those metrics meant inflation could stay at elevated levels for an extended period of time.
Because of these economic uncertainties, yields trended higher, resulting in a sell-off in bonds and a decline in the equity markets, resulting in negative results for both asset classes during the quarter.
According to Northern Trust, Canadian inflation rates (3.8% at the end of September, up from 2.8% at the end of June) are lower than at this time last year, although still higher than many central banks’ target levels. The Bank of Canada raised interest rates to 5% during the quarter, up 25 basis points from Q2.
“The combination of uncertainty and high interest rates resulted in a decline for both equity and bond markets during the period” and resulted in a decline for the median Canadian pension plan, Northern Trust’s summary stated.
“This past quarter demonstrated how rapidly volatility can resurface, creating unfavorable market conditions and increasing pressure on investment portfolios,” said Katie Pries, president and CEO of Northern Trust Canada, in a statement. “As monetary policymakers adhere to their mandates and exercise discipline amid these pockets of uncertainty, pension plan sponsors also maintained discipline in challenging environments, affording them the ability to deliver on their long-term pension promise.”
Northern Trust found that Canadian equities, as measured by the S&P/TSX Index, returned a 2.2% loss in the quarter, with information technology the best-performing sector. Consumer staples, materials and real estate were the weakest-performing. U.S. equities returned negative 1.2%, as measured in Canadian dollars, with only three out of 11 sectors positive. International developed markets, as measured by the MSCI EAFE Index, returned negative 2%.
The Northern Trust Canada Universe tracked positive returns for the first and second quarters of 2023, with Canadian pensions returning a median of 4.2% and 1%, respectively. Negative returns were tracked in the first and second quarters of 2022, when Canadian plans returned –6.4% and –8.8%, respectively. In Q3 2022, Canadian plans returned 0.76%, and in Q4 2022, Canadian plans returned a median of 2.8%, resulting in a return of negative 12.8% for the full year.
Given that Canadian pension funds, and the markets overall, had a rocky quarter, the Canadian economy fared somewhat better: Solid job growth was reported in August and September, with 100,000 jobs added, although the unemployment rate rose 0.1% to 5.5% during the quarter.
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Tags: Canada, Katie Pries, Northern Trust, Northern Trust Canada Universe, Pensions