While year-to-date performance has been good, decreasing interest rates has caused accelerated growth in solvency liability
Pension managers generated positive returns in the third quarter, though they generally weren’t able to outperform broad benchmarks, according to a new report.
In its Performance Universe of Pension Managers' Pooled Funds for the third quarter of 2019 — which covers about 319 pooled funds managed by nearly 51 investment management firms — Morneau Shepell revealed that diversified pooled fund managers posted a median return of 1.5% before management fees. Extending the observation period to the beginning of the year shows a return of 12.8%.
However, diversified fund managers’ observed Q3 performance was 0.3% below that observed for the benchmark portfolio (55% equity, 45% fixed income) used by many pension funds.
“In general, markets posted positive returns in the third quarter, despite higher volatility,” said Jean Bergeron, vice-president responsible for the Morneau Shepell Asset & Risk Management consulting team, referring to various benchmark return figures reported in Canadian dollar terms.
“Although returns have been good since the year started, the decrease in interest rates has caused the solvency liability of many pension funds to increase at a faster pace than their assets,” he added. “This means that on a solvency basis, pension fund financial positions have decreased by about 2 to 5 per cent since the beginning of the year.”
In the third quarter, managers posted a median return of 1.2% on bond mandates, matching the benchmark FTSE Canada Universe Bond Index’s reported return. Short-, mid-, and long-term bond indices registered returns of 0.3%, 0.9%, and 2.5% over the same period, while the high-yield bond index posted 2%. The real return bond index, meanwhile, reflected a 1.3% return.
Among Canadian equity managers, the median Q3 return was reported at 2.4%, lagging the S&P/TSX Index by 0.1%. That came as the S&P/TSX Small Cap Index shed 1.2%, the S&P/TSX Completion Index representing mid-cap stocks rose 1.7%, and the large cap S&P/TSX 60 Index grew by 2.7%.
The pattern of underperformance in Q3 2019 mostly persisted among foreign equity managers and their benchmarks:
- Median returns of 2.5% for U.S. equities, versus 2.9 per cent for the S&P 500 Index;
- 0.1% for international equities, versus 0.2 per cent for the MSCI EAFE Index;
- 0.9% for global equities, versus 1.9% for the MSCI World Index; and
- -2.1% for emerging markets equities, versus -2.8% for the MSCI Emerging Markets Index
The report also revealed that the Dow Jones Credit Suisse Hedge Fund Index (formerly CSFB/Tremont Hedge Fund Index) saw a return of 1.5% in Canadian dollar terms for the third-quarter period.
