Canadian pension funds returned an estimated 26.3% on average in 1996, topping the list of leading pension fund market by a wide margin.
All but Japan chalked up double-digit returns in 1996, but returns were much more scattered last year than in 1995. U.S. pension funds, on average, returned an estimated 13.7% last year, down from a spectacular 25.2% in 1995.
Meanwhile, Japanese funds earned only 5.3% - and that figure might be on the high side.
What's more, the influence of international holdings varied greatly - largely because of currency fluctuations - as foreign holdings helped in three of the six markets, but hurt in three others. While international equities added only 6.05% to U.S. pension funds, foreign stocks provided a 38.2% boost to Japanese funds.
Still, overall returns were impressive.
"These are phenomenal returns in a year in which people did not really expect that," said Susan Douse, a senior consultant with Watson Wyatt Worldwide, Reigate, England.
On a real return basis, performance was even more impressive as inflation had dropped to rates between 0% and 3% last year, according to estimates by Goldman Sachs International, London. Strong real returns means pension funds should have been able to whittle down their liabilities.
The 1996 data were estimated by several consultants, generally by linking actual performance data for the first three quarters and applying index returns to the Sept. 30 asset mix to generate figures for the fourth quarter.
InterSec Research Corp., Stamford, Conn., provided data for the Canadian, Japanese and Swiss markets, based on its balanced manager universes. Callan Associates Inc., San Francisco, estimated returns for the U.S. pension market; John A. Nolan & Associates Pty. Ltd., Victoria, provided data for Australian funds; and The WM Co., Edinburgh, estimated returns for U.K. pension funds.
Data for Dutch pension funds, the world's fourth-largest market, could not be obtained.
Following are the highlights of pension fund performance around the world.
Strong domestic equity and bond performance propelled Australian pension funds to an estimated 10.6% return last year.
Domestic equities returned 14.6% while Australian bonds returned 11.9%. The two asset classes comprise a combined average of 53.9% to 59.3% of Australian pension fund portfolios. Inflation-linked bonds, comprising between 5.9% and 9% of average pension portfolios, rose 11.5%.
Australian corporate funds, which typically are defined benefit plans, had U.S.$36 billion in assets while newer, industrywide defined contribution plans had $9.7 billion in assets at year-end 1995, the latest data available, according to InterSec.
The corporate plans typically have higher equity allocations - 47.6% vs. 37% for the industrywide schemes - although it all balanced out to identical 10.6% returns last year, according to John A. Nolan estimates.
In contrast, industrywide funds lagged corporate funds in 1995 by nearly three percentage points because the defined contribution plans built up cash in the last quarter, missing out on surging equity markets.
Strong domestic equity returns in 1996were driven by lower domestic interest rates, a change in government that favored business, and strong profitability in some sectors, such as leisure and tourism, property and infrastructure, noted Ken Marshman, a consultant with John A. Nolan.
Government bond yields slipped 0.8% in 1996 as inflation eased and Japanese investors poured into the market.
But the rising Australian dollar - up 6.7% against the U.S. dollar last year and 9.6% on a trade-weighted basis - hurt international investments. International equities rose only 4.1%, while foreign bonds fell 2.9% in Australian dollar terms.
Raging North American equity markets boosted Canadian funds to their estimated 26.3% return, following a 17.4% return chalked up in 1995. On a real-return basis, Canadian funds gained 25% last year.
Canadian funds earned 28.2% from domestic equities, where they held an average of 37% of assets. U.S. equities, comprising 10% of the typical portfolio, earned 23.1% in local currency terms.
Meanwhile, domestic bonds - at 38% of the average portfolio - returned 12.3%.
International equities (outside of the U.S. stock market) proved to be a disappointment, returning only 6.8%.
Mortgages, at 2% of the average portfolio, returned 12.5%. Cash, at a high level of 7% of assets, returned 4.3%.
Japanese pension funds were weighed down by their heavily domestic investments. The median Japanese balanced manager returned an estimated 5.3% last year, according to InterSec.
But that figure probably overstates the true return, as InterSec measures performance of independent managers only, and does not cover Japanese trust banks and life insurance companies, which dominate the industry.
The average balanced manager had 38.2% of assets invested in domestic bonds, which returned 5.2% last year. Another 24.9% of assets were invested in Japanese equities, which lost 6.1% last year, according to the TOPIX index.
Convertible bonds, at 7.8% of assets, returned a meager 0.9%. Cash equivalents, at 10.2% of assets, provided a paltry 0.3% return.
The only shining lights in Japanese pension fund returns were international equities and bonds, as the yen lost value on world currency markets; it fell 12.5% against the U.S. dollar. International equities provided a stunning 38.2% in local currency terms. But at 11.3% of the average portfolio, foreign investments did not have a huge impact on total returns.
"The international equity return in Japan was huge," said Mike Savage, assistant vice president with InterSec.
In addition, international bonds, at 7.6% of assets, returned 19.6%.
The good news is that Japanese n funds, facing the combination of compelling international returns and liberalized investment rules, are expected to boost their foreign exposure substantially.
After the Swiss franc's 1995 rise of 12.1% against the U.S. dollar made foreign investments relatively unattractive, the franc's 16.7% decline against the dollar last year revealed the benefits of international diversification.
While Swiss equities - making up one-fifth of assets - still chalked up a glowing 18.2% return, Swiss pension funds did even better from their international holdings.
International equities, at 13.2% of the typical balanced manager portfolio, returned 32.7%. Meanwhile, foreign bonds, at 10.3% of average assets, returned 20.9%.
In contrast, domestic bonds - the largest component of Swiss pension portfolios, at 36.7% - returned only 5.4%. Also, international bonds denominated in Swiss francs, comprising 8.4% of average assets, had a slightly better return of 5.9%.
Overall, Swiss pension funds returned 13.7%, InterSec estimated, up from 11.3% in 1995.
U.K. equities' return of 17.2% powered British pension funds to an 11.1% return last year, The WM Co. estimates. Domestic stocks comprised 54.1% of the typical U.K. pension portfolio at year end, up from 53.6% at the end of 1995.
North American and continental European stocks also aided returns, earning 12.5% and 11.9%, respectively.
But local currency returns in those markets were diminished by sterling's strong gains of 9.3% against the U.S. dollar and about 16% against European currencies. In fact, sterling's 16% rise against the yen made bad returns there even worse: Japanese equities, at 4.6% of U.K. pension assets, fell 22.1% last year.
Meanwhile, U.K. pension funds missed out for the second year running on North American equity returns. North American stocks slipped to 3.8% of assets from 4.3% the year before.
Pacific Basin ex-Japan, at 4.6% of assets, provided a 7.1% gain.
U.K. bonds (6.1% of assets) returned 7.3%, while overseas bonds (3.6%) declined 6.2%. Index-linked bonds (4.3%) returned 6.2%.
Meanwhile, U.K. funds are boosting cash holdings, 5.8% at year end compared with 4.5% at the end of 1995. Cash returned 7.6% last year.
Real estate gained 7.9% but its long-term decline in the asset mix continued, falling to 5%.
Over the long haul, British pension funds have returned 16.2% annualized over the past five years, and 13.9% for the past 10 years.
U.S. pension funds chalked up a healthy 13.7% return, albeit slightly more than half of their 1995 return of 25.2%, according to Callan.
Corporate funds showed the strongest returns, up 14.4%, because of their higher average equity allocation of 53% in Callan's universe. Public funds returned 13.2% and Taft-Hartley plans were up 12.5%.
The total universe was 49.5% invested in domestic stocks, 8.2% in international equities, 36.6% in domestic bonds, 1.3% in international bonds, 2% in real estate, 1.7% in cash and nearly 1% in other investments.
The Standard & Poor's 500 Stock Index return of 23.1% was largely responsible for the strong 1996 performance.
In comparison, the Morgan Stanley Capital International Europe Australasia Far East Index rose only 6.05%, marking the second year in a row of disappointing international returns. During the past five years, the EAFE index has returned only 8.2% vs. 15.2% for the S&P. On the bond side, domestic bonds returned only 3.6% while international bonds gained 4.1%.