Pension funds to see modest growth in 2011: Report

But interest rate increases will reduce fixed income returns
||Last Updated: 01/18/2011

Pension investment funds should continue to grow in 2011 but at a slower pace than in 2010, according to a new report from consulting firm Mercer.

Mercer's 2011 Fearless Forecast, which surveyed 56 Canadian and global institutional investment managers, also found investment managers believe the global stock markets will enjoy a solid year but increases in interest rates will reduce fixed income returns.

"If manager forecast of expected increase in interest rates and solid equity returns in 2011 occurs, plan sponsors should see improvement in their funded positions," said Mark Fieldhouse, a principal at Mercer's investment consulting business in Canada.

Buoyed by a strong fourth quarter, global equity markets closed 2010 with solid performance. Managers expect the trend to continue in 2011, with Canadian equities expected to return 8.5 per cent, U.S. equities to return nine per cent, and foreign markets returning approximately 7.5 per cent in 2011. Emerging market equity returns are expected to exceed each developed market in 2011, with a median expected return of 10 per cent.

Investment managers anticipate a rise in interest rates which will end the "bull bond market" in 2011 and result in fixed income being one of the least attractive asset classes. Managers anticipate long-term bonds to deliver a return of only 0.3 per cent in 2011. Slightly higher performance is forecasted for the broad and corporate bond markets, two per cent and three per cent, respectively.

Due to strong commodity price trends and concerns on the growing U.S. deficit, the Canadian dollar ended 2010 near par with its U.S. counterpart. Managers forecast the loonie will continue to trade at par with the U.S. dollar at the end of 2011. Managers also predict the price of crude oil will remain approximately at its current level, $90 per barrel at the year end.

Other key forecasts for 2011:

•Managers recommend overweighting the allocation to equities by almost seven per cent for investors with a typical 60/40 asset mix.

•Only 12 per cent of the managers do not expect the S&P/TSX Composite Index to hit 15,000 within 1-3 years. The TSX Composite closed 2010 at 13,443.

•Energy and materials are forecast to be the best performing sectors in 2011. In contrast, utilities and consumer staples are expected to lag the market.

•Managers expect allocations to non-traditional investment mandates and duration matched assets to increase in 2011.

•With an expected increase in interest rates, 23 per cent of managers expect real estate to rank amongst the least attractive asset classes for 2011, with only 2 per cent expecting it to be among the most attractive.

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