Energy stocks take top honours for the year, up over 63%, and this despite the sector´s fourth quarter decline of 2.1% . This helped fuel the Canadian equity market to a return of 24.1% for 2005. This was the key contributor to Canadian balanced fund returns, with the median return being 12.0%, according to the results of Mercer Investment Consulting´s Pooled Fund Survey.
"Unfortunately for pension funds, the strong Canadian equity return was only half of the story. Long-term interest rates dropped for the fifth year in a row, which led to a reduction in the funded position of pension plans overall." said Peter Muldowney, business leader for Mercer Investment Consulting in Canada. The decline is illustrated in Mercer´s Canadian Pension Health index, an indicator of the impact of capital markets on the financial position of Canadian pension plans, which showed a solvency rate of 80% at the end of December 2005-a drop below the December 2004 solvency rate of 84%.
Summary of the results from Mercer´s survey:
Canadian equities closed the year as the strongest performing major asset class, as evidenced by the S&P/TSX Composite index´s total annual return of 24.1%. The index´s fourth quarter return was more moderate at 2.9%. Overall, active Canadian equity managers performed well and keep pace with the energy-driven index. The median return of 23.7% in Canadian equities for the year was below the S&P/TSX Composite index´s total return by 0.4%. For the quarter ending December 2005, the median returned 2.8%, 0.1% below index results. Overall, 2005 saw all major styles and market caps deliver strong positive returns.
Large cap securities outpaced small caps: the S&P/TSX 60 index delivered 26.3% annually and 2.9% quarterly, while the BMO Nesbitt Burns Small Cap (weighted) index delivered 19.7% and 4.7%, respectively.
For the fourth quarter of 2005, value stocks returned 5.0%, outperforming their growth counterparts, up only 0.6%. However, growth stocks outperformed value securities for the year: the S&P Citigroup PMI Growth Index returned 30.3% while the S&P Citigroup PMI Value Index posted 22.9%.
Over the past year, the best performing sectors were Energy (63.4%), Utilities (38.3%), and Financials (23.9%) per the S&P/TSX sector indices. The worst performing sectors were Information Technology (-15.8%), Health Care (-2.7%), and Consumer Staples (-1.1%). For the quarter ending December 2005, the best performing sectors were Materials (9.9%), Financials (7.8%), and Utilities (5.6%). The worst performing sectors were Consumer Staples (-7.2%), Telecommunication Services (-6.3%), and notably, Energy (-2.05%).
International equities delivered strong returns over 2005, with the MSCI EAFE returning 10.4% (in Can$) for the year and 4.6% for the fourth quarter, the strongest showing of major asset classes for that quarter. The strongest performing region, both on an annual and quarterly basis, was the Far East: the MSCI Far East index´s total returns (in Can$) for the year and the quarter were 20.3% and 11.1%, respectively, aided by a strong showing by Japan. The strength of the Canadian dollar continued to have an impact on foreign returns. For the year, the median return of 10.9% in international equities outperformed the MSCI EAFE index´s total returns (in Can$) by 0.5%. For the quarter ending December 2005, the median returned 4.7%, 0.1% above index results.
US equities trailed behind other equity markets during the quarter and the year: the S&P 500 index´s total returns (in Can$) were 1.6% annually and 2.5% quarterly. Again, the strengthening Canadian dollar had an impact on performance for Canadian investors as shown by the S&P 500 index´s US$ annual return of 4.9%. However, in the fourth quarter, a weaker Canadian dollar added to US returns. For the year, the median return of 3.8% in US equities outperformed the S&P500 index´s total returns (in Can$) by 2.2%. For the quarter ending December 2005, the median returned 2.8%, outperforming the index by 0.3%.
For 2005, Canadian bonds, the Scotia Capital Universe registered 6.5%, but the strongest performance was in long bonds, where the SC Long Index returned 13.8%. On a broad sector basis, Provincials performed the strongest, up 8.4%, while the worst performing sector for the year was Canadas ( 5.7%).The median return of 6.5% for the year in Canadian fixed income was on par with the Scotia Capital Universe index. For the last quarter of 2005, the median registered 0.8%, slightly above the Scotia Capital Universe index´s quarterly return of 0.7%.
Information on the Mercer universe statistics and on the Mercer Pension Health Index is available quarterly at www.mercerIC.com.
Mercer Investment Consulting is a leading provider of investment consulting services - such as investment strategy, including asset allocation, portfolio structure, investment policy, manager searches, and performance evaluation - to the fiduciaries of pension funds, foundations, endowments, and other institutional funds. Mercer Investment Consulting is part of Mercer Human Resource Consulting, which is part of Mercer Inc., a wholly owned subsidiary of Marsh & McLennan Companies, which lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific, and London stock exchanges. Visit Mercer Investment Consulting online at www.mercerIC.com.