Poor performance as year ended saw sharp reversal of annual returns
Canada’s defined benefit pension plans performed so badly in the final three months of 2018 that they tipped annual returns into the red.
RBC Investor & Treasury Services said Tuesday that plan returns in Q4 2018 posted a loss (-3.4%) following a narrow gain (0.1%) in the previous quarter. It was the first quarter with a loss since 2015.
Such was the impact of the fourth quarter decline that it wiped out the small gains made in the previous three quarters with 2018’s annual return negative at -0.7%.
The annual loss contrasts sharply with the previous year’s positive 9.7% return.
“Geopolitical and economic uncertainty reverberated through the market all year. 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,” said Ryan Silva, Director, Head of Pension and Insurance Segments, Global Client Coverage, RBC Investor & Treasury Services.
The weak performance of Canada’s DB pension plans is explained by the heavy losses seen by Canadian equities during 2018.
In Q4, Canadian equities were down 10.6% and the TSX Composite Index was down 10.1%. Both posted negative returns of -8.9% compared to around 9% for 2017.
Fixed income returns turned positive
Canadian Fixed Income returns rebounded into positive territory in Q4 in the RBC All Plan Universe, returning 1.8%, vs. Q3 2018 returns of -1.5%. Annual returns also finished in the black at 1.2%.
The FTSE TMX Universe Canadian Bond Index returned 1.8% in Q4 2018 compared to -1.0% in Q3 2018. The Index returned 1.4% in 2018.
Global equities in the RBC All Plan Universe posted declines during the year: -1.3% and quarter: -7.8%. (weakness in the Canadian Dollar tempered some of the local currency losses in that asset class for unhedged plans).
The MSCI World Index’s returns declined -0.5%for the year and -8.5% during Q4 2018.
Emerging markets outperformed developed markets over the quarter, returning -2.2% vs. -8.5%, but trailed over the year returning -6.9% vs. -0.5%.
Looking ahead
RBC’s Ryan Silva says that there are some positive signs in Q1 2019 but that investors and their FAs should be prepared.
“With the Fed pausing on rate hikes as well as trade negotiations between the U.S and China showing progress in January, markets have started the year strong but investors need to remain vigilant as we are approaching the end of the market cycle and volatility is unlikely to go away,” he said.
