Moving north, Canadian pension fund returns came next, with an estimated 6.5% return on the typical 60-40 portfolio, said Bruce Curwood, director, investment strategy at Russell Investments Canada in Toronto. While volatility hit global markets, Canadian plans fared well based on three major, interrelated issues: rebounds in material and energy prices; a resulting 21.08% gain in U.S. dollar terms for the Canadian stock market, the S&P/ TSX; and increased Canadian bond yields.
“Even with a soft economy, subdued domestic growth and low inflation, Canadian bond yields increased across the board this past year, decreasing pension liabilities, yet still managing to provide a positive investment return” of 1.7% for the FTSE TMX Universe in Canadian dollar terms, said Mr. Curwood.
Last year “was almost a complete reversal from the poor year Canada experienced in 2015 for commodities, the Canadian stock market and domestic Canadian interest rates,” he added. He said Canadian funds will have “gained ground in their fight for 100% solvency funding,” as rising interest rates decreased liabilities, while assets increased in value.
Swiss pension funds also made a marked improvement on their 2015 returns, hitting an estimated 4.2% vs. 0.7% a year previous, estimated Daniel Blatter, senior analyst at WTW in Zurich. Pension funds made small shifts out of bonds in favor of alternatives and real estate, and equities saw a small increase in terms of the proportion of overseas exposure. “The key driver of decisions on investment strategy in 2016 has been the low/negative interest rate environment with Swiss government bond yields below zero for much of the curve,” Mr. Blatter said.
This, along with fears of the effects of negative interest rates on fixed-income portfolios, has led to moves away from bonds, he said. “Given the subdued return expectations together with high risks associated with equities, our clients have sought to improve portfolio diversification by moving into alternative assets such as insurance-linked securities.”