Despite market uncertainty due to the coronavirus pandemic and a turbulent U.S. presidential election cycle, Canadian defined benefit pension plans ended the year with near double-digit gains, according to a report by the Royal Bank of Canada’s Investor & Treasury Services.
Amid the once-in-a-century crisis, market returns in 2020 for retirement assets were 9.2 per cent, noted the report.
“It’s been a tumultuous time for the markets, but we’re seeing positive returns for a third consecutive quarter,” said David Linds, managing director and head of asset servicing in Canada at RBC Investor & Treasury Services, in a press release.
Successful development of multiple coronavirus vaccines, anticipated government support packages and the conclusion of the U.S. elections were all contributing factors to the gains, he added.
According to the report, Canadian equities returned just over four per cent for the year (9.4 per cent for the quarter), whereas the benchmark TSX Composite Index returned 5.6 per cent for the year (nine per cent for the quarter). The technology sector, propped up by Ottawa-headquartered Shopify Inc., led the market, returning 80.7 per cent for the year. Materials (21.2 per cent) and consumer discretionary (17.1 per cent) trailed significantly. Energy was the lowest performing sector with negative 26.6 per cent.
Additionally, domestic bonds returned 11.1 per cent in 2020 (just over one per cent in the fourth quarter), compared to 8.7 per cent for the FTSE TMX Canada Universe Bond Index (0.6 per cent in the last quarter), noted the report. Longer-dated bonds benefited from the steep drop in longer-term yields during the first two quarters and outperformed their shorter-dated counterparts over the entire year. And the FTSE TMX Long Bond Index returned an annual 11.9 per cent versus the FTSE TMX Short-Term Bond Index’s annual return of 5.3 per cent.
The report also showed global equity markets posted solid returns in the fourth quarter, with stocks in the energy and financials sectors leading those gains. But while value stocks outperformed growth stocks over the quarter, growth far outdistanced value for the year. Indeed, foreign equities were the top-performing asset class in 2020, returning 12.6 per cent overall, noted the report’s results, compared to 13.9 per cent for the benchmark MSCI World Index (10.1 per cent and 8.7 per cent respectively in the final quarter).
During the quarter, a weakened U.S. dollar led to a rise in commodity prices, which strengthened the Canadian dollar and trimmed unhedged plans’ foreign equity returns. Meanwhile, the MSCI World Index returned 12.4 per cent in local currency terms, translating to an 8.7 per cent return in Canadian dollars.
Despite the gains made in 2020, choppy waters may yet lie ahead in the market this year. “Investor confidence may be tempered into 2021 as uncertainty surrounding the vaccine rollout, new virus strains and other unknowns may place additional pressure on equity markets,” cautioned Linds.