Median returns of 4% amid instability
RBC Investor & Treasury Services All Plan Universe, a reputable and comprehensive source of data on Canadian DB pension plans, reports that Defined Benefit (DB) pension plans in Canada continued to perform favourably in the first quarter of 2023. These investments increased Q4 2022 returns of 3.8% to a median return of 4.0%.
With a return of 6.9% in Q1 2023, foreign equities outperformed the broader sector with the biggest gains. The information technology, communication services, and consumer discretionary sectors had the best returns, accounting for 7.6% of the MSCI World Index's overall gain. The developed markets benchmark returned 3.8%, but the MSCI Emerging Markets Index fell short.
"Despite significant market instability around the world, pension plans managed to produce positive returns. The banking sector's turmoil has raised concerns about potential negative economic consequences, prompting central banks to re-evaluate their need for aggressive measures against inflation,” stated David Giannone, managing director and global head of Business Development at RBC Investor & Treasury Services (I&TS).
“This has resulted in growth-oriented stocks experiencing a significant boost, with MSCI World Growth gaining 15.0% compared to MSCI World Value's modest 0.8% increase. Additionally, bond prices have rallied as a result of this shift," he added.
With a 4.2% increase during the quarter, the asset class of Canadian equities also produced profitable returns. The consumer staples (+7.9%) and information technology (+26.5%) sectors performed excellently, as the TSX Composite Index increased by 4.6% throughout the quarter.
The downturns of the energy (-2.3%) and financials (+1.7%) sectors, which together account for a sizable portion of the index's weight, somewhat offset the advances in these other sectors.
Due to falling government bond rates, the Canadian fixed income asset class achieved a return of 3.7% in Q1 2023, a major improvement above the 0.1% return recorded in Q4 2022. With an earnings rate of 3.2% in the first quarter of 2023 compared to 0.1% in the prior quarter, the FTSE Canada Universe Bond Index was likewise in the black.
In comparison to the FTSE Canada Short Term Bond Index (+1.8%), the FTSE Canada Long Term Bond Index (+4.7%) performed better. Additionally, during this time, government bonds outperformed corporate bonds.
"It is important for asset managers to be watchful of the continuing volatility in the markets for the remainder of the year,” Giannone continued. “They should also ensure that their portfolios are diversified to effectively manage their risk exposure."
