Monday, January 31, 2011

Canadian Pensions Surge Ahead?

Ten days ago, CNW reported, RBC Dexia survey: Canadian Pensions Surge Ahead of Pre-Crisis Levels (HT: Bruce):
Strength in Canadian equities have helped Canadian pension plans surge ahead of their pre-financial crisis levels of 2008, according to a survey just released by RBC Dexia Investor Services, which maintains the industry's most comprehensive universe of Canadian pension plans and money managers.

Within the $340 billion RBC Dexia universe, pension assets earned 4.3 per cent in the quarter ending December 2010, improving the full year performance to 10.4 per cent, making this a second consecutive year of double digit returns.

Despite the volatility in the global markets during the past ten years, Canadian pension plans have achieved an average annualized return of 5.4 per cent. "What the last decade has taught us is that diversification and disciplined investing is key over the long run," noted Fay Coroneos, Global Head of Risk & Investment Analytics for RBC Dexia.

Canadian equity markets flourished as nine out of ten TSX sectors experienced double digit annual gains. Even though Canadian Pension plans underperformed the index by 0.4, "it was encouraging to see strong returns not only in energy and materials but also in industrials and the consumer discretionary sectors" added Coroneos.

Foreign equities increased 6.3 per cent over one year. "Returns were muted by the soaring loonie, which gained significantly against the US dollar and was one of the best performers among major world currencies," reported Coroneos. The MSCI World index in local currency increased 10.0 per cent for the year, but was reduced to 5.9 per cent when translated into Canadian dollars.

For the year, domestic bond holdings within Canadian pension plans advanced 7.8 per cent, surpassing the DEX Universe index by 1.1 per cent. "Long-term bonds, with maturity of over ten years, continue to dominate short-term and mid-term bonds in 2010," said Coroneos.

"The growing focus on asset-liability matching has resulted in pension plans shifting into the longer end of the yield spectrum, increasing demand for long-term bonds. In light of this, we believe a governance structure which includes the use of a liability-based benchmark will be of great interest for pension plans in 2011."

The growing focus on asset-liability matching has increased pensions' demand for long bonds. Meanwhile, Canadian pensions enjoyed the benefits of a strong Canadian stock market. I was surprised to read nine out of ten TSX sectors experienced double digit annual gains in 2010. That "beta boost" helped Canadian pensions surge ahead from pre-crisis levels.

And On Monday the S&P/TSX composite index jumped 114.41 points to 13,551.99 led by energy as political unrest in Egypt raised worries about a disruption in oil supplies and pushed crude prices higher:

Crude has surged almost eight per cent over the last two sessions on worries that the Suez Canal, a key route for oil tankers and cargo ships, may be closed and that the unrest could spread.

“The market doesn’t know quite what to make of it,” said John Stephenson, portfolio manager at First Asset Funds.

“I think energy and financials are moving higher (because) Canada is a safe haven and commodities is a store of value. If there’s some problem with oil, it may be good for Canadian producers, Canada’s stock index but it’s not good for the U.S. economy broadly.”

The energy sector rose 2.74 per cent as Cenovus Energy shares gained $1.24 to C$34.60 while Suncor Energy (TSX: SU) climbed $1.42 to $41.46.

Imperial Oil Ltd. (TSX: IMO) reported that its net income increased 50 per cent in the fourth quarter to $799 million, or 94 cents per share. That’s up from $534 million, or 64 cents per share, a year earlier on higher oil prices and improved operations and Imperial shares rose $1.95 to $44.65.

There is increasing talk of Canada as a "safe haven". I'm not so convinced but global investors are buying up Canadian assets and the Canadian dollar. Just how much of this is speculative flow and how much of it based on fundamentals is very hard to ascertain, but there is no reason to believe the uptrend won't continue. In fact, I wouldn't be surprised to see the S&P/TSX make new highs in 2011. If it does, Canadian pensions will continue riding the beta wave higher.

But even if Canadian pensions ride the beta wave higher, they're not out of the woods because liabilities grew faster than assets. It was last April that the Certified General Accountants Association of Canada (CGA) said that Canadian pension funding deficits have risen from $160 billion in 2003 to an estimated $350 billion in 2008 and continue to grow. Moreover, the CGA said that the number of defined benefit pension schemes that are in deficit has doubled over the past five years to stand at 92% of the total, making retirement prospects bleak unless changes were made. Other experts are also sounding the alarm on pension deficits. So all this talk of "surging ahead" should be put in proper context.

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