Foreign Equities Fuel Canadian Pension Rebound

(May 1, 2012) — Canadian schemes have enjoyed their best results since the third quarter of 2010, according to RBC Dexia Investor Services, buoyed by foreign equities.

“Even with some leveling off in March, Canadian pension plans continued to build on the momentum from the fourth quarter of 2011,” said Scott MacDonald, Head, Pensions, Insurance, Financial Institutions Segments for RBC Dexia. “The appetite for equities gained steam, reflecting a renewed sense of tempered optimism and the continued need for pension plans to seek higher returns through increased equity allocation.”

Foreign equities held in portfolios of funds within the defined benefit universe spurred the stellar growth in the first quarter with a median return of 9.9%, outperforming the benchmark MSCI World index by 0.4%. The study was based on a sample of 45 Canadian defined benefit pension plans from RBC Dexia’s database of 127 pension funds with assets totaling roughly $420 billion.

Nevertheless, Canadian pensions have suffered burgeoning financial deficits since 2009 as a result of weaker investment returns and lowering bond yields, thus slowly upping their allocation to equities in hopes of higher returns.

Meanwhile, in the United States, institutional managers see the economy improving with equity correlations and volatility coming down, according to a survey by Northern Trust released last month. “Despite continuing concern about the situation in Europe, institutional investment managers saw more positive economic and financial market signals in the first quarter this year than they did at the end of 2011,” said Chris Vella, Chief Investment Officer for Northern Trust’s Multi-Manager Solutions group. “For example, 40% of managers believe market volatility will decline from current levels. Lower volatility combined with lower correlations between equities should benefit bottom-up, fundamentally focused investment managers.”

According to the study of 100 institutional managers, more than three-quarters anticipate earnings growth will remain stable or accelerate throughout 2012. Furthermore, 33% of respondents expect a pick-up in job growth and 49% expect job growth to be stable over the next six months. The biggest threat to equity markets remains the situation in Europe followed by domestic concerns, such as the impact of the US elections and the country’s sovereign debt level.

Northern Trust’s study followed another study by Bank of America Merrill Lynch that showed that improvements in equity markets, spurred by renewed confidence in economic solutions in the Eurozone, have eased investors back into risk-taking. The bank said in a weekly report: “[The] potential for a ‘Great Rotation’ from bonds to equities is huge (since 2008 bonds inflows = $480 billion versus equity outflows of $48 billion).”