Surging emerging markets equities were the catalyst behind a robust 6% second quarter median investment return for Canadian defined benefit plans, which rebounded strongly from a weak first quarter, according to RBC Investor Services.
The plans covered, which are exclusively in RBC’s custody, also registered a median 6.4% return for the first half of the year. The returns cover a period of the year before the U.S, and Canada entered a trade war, with Canada imposing tariffs of up to 50% on certain U.S. goods after U.S. President Donald Trump imposed similarly high tariffs on Canadian goods.
Global equities were the top-performing asset class, with a median return of 15.1%, compared with the MSCI World Index’s 15.7% rise for the quarter, bringing its year-to-date return to 13.5%. Emerging markets equities—particularly Korea’s and Taiwan’s semiconductor companies—led the period’s performance, which jumped 26.1% as measured by the MSCI Emerging Markets Index, which was also up 28.2% for the first half.
Among developed markets, U.S. equities led the gains, with the S&P 500 Index returning 17.1% for the quarter and 14.1% for the first half. The information technology sector surged 34%, led by the semiconductor and semiconductor equipment sub-sector, which soared 52.2%. Pension funds with unhedged U.S. exposure also benefitted from a weakening Canadian dollar, which increased returns.
“This quarter was a stress test for the diversification assumptions built into most investment policies,” said Isabelle Tremblay, RBC Investor Services’ director of client solutions and its asset owner segment lead, said in a statement. “What we’re seeing from plan sponsors is a growing interest in understanding their [artificial intelligence] exposure, not just their asset class breakdown.”
Canadian equities, as measured by the S&P/TSX Composite, returned 7.0% for the quarter and 11.2% for the first half. However, RBC stated the overall return “concealed significant variation” among sectors.
The Middle East war was the macro factor that dominated multiple sectors, according to RBC. Oil prices spiked but retreated, as energy closed out the quarter 5.0% lower. Surging oil prices led to inflation concerns, as investors priced in tighter monetary policy, while the materials sector sank 11.5% following a sharp sell-off of gold and silver. These losses were offset by financial sector investments, which advanced 25.6%.
It was the first time the pension funds’ equities and debt securities saw gains during the same quarter in nearly a year, as fixed-income assets returned 3.0% for the quarter and 3.2% during the first half. This was well ahead of the FTSE Canada Universe Bond Index, which ended the quarter and first half up 2% and 2.2% respectively.
“The more significant development may be what comes next for plan sponsors: the Bank of Canada held its policy rate at 2.25% through the quarter,” RBC stated. “With rates at the lower end of the neutral range and the outlook subject to two-sided risks, the interest rate sensitivity of both plan assets and liabilities remains a key consideration for sponsors.”
Tags: Canada, Defined benefit (db) pension plans, Emerging Market Equities, Emerging Markets, RBC Investor Services
