Third quarter returns on U.S. and international equities were up for institutional investors, but the assumed credit premium over fixed income yields fell, resulting in a 1% increase on the Mercer Pension Health Index from the previous quarter.

“The Canadian equity market uptrend continued in the third quarter, accompanied by strong returns in both the U.S. and international equity markets,” says Yvan Breton, leader of Mercer’s investment consulting business in Canada. “Overall, third quarter gains on pension plan assets bumped up the index by about 4%.”

“The increase in the cost of purchasing annuities decreased the index about 3%,” said Paul Forestell, professional leader for Mercer’s retirement, risk and finance business. “As well, with the fiscal year-end approaching, corporate AA bond yields continued to slide from the beginning of the year, also increasing pension liabilities that companies report on their financial statements.”

Asset class performance
Canadian equities was the best-performing asset class, with the S&P/TSX returning 10.6% for the last quarter. Within this class, the best-performing sectors for the quarter were Healthcare, Financials and Materials, returning 22.2%, 16.1% and 12.4%, respectively. The worst-performing sectors were Information Technology (-8.1%), Consumer Staples (-2.7%) and Utilities (3.6%).

Small cap stocks (BMO Small Cap Blended Weighted Index) returned 21.1% for the quarter, outperforming large cap stocks (S&P/TSX 60), which returned 8.8% during the third quarter. Value stocks outperformed growth stocks as shown by the S&P Canada BMI total return value and growth indexes, which returned 12.5% and 9.6%, respectively.

Canadian bond performance (as measured by the DEX Universe Bond Index) returned 2.7% in the third quarter, led by long-term bonds (4.3%), followed by mid-term bonds (3.5%) and short-term bonds (1.6%). Real return bonds as measured by the RRB Overall Index had a return of 3.3% over the same period.

The Canadian dollar continued its climb in the third quarter, negatively affecting foreign equity indices. International and U.S. equities returned 10.5% and 6.8%, respectively, as represented by the MSCI EAFE (CAD) and the S&P 500 (CAD) indexes. The local currency returns for the MSCI EAFE and the S&P 500 were 14.9% and 15.6%, respectively, during the third quarter.

Emerging markets performed well, returning 11.9% (in Canadian dollar terms) in the third quarter.

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