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Investment returns for Canada’s defined-benefit pension plans roared back to life last year with an average return of 9.1 per cent, recouping most of the losses suffered in a tumultuous 2022, according to a new Royal Bank of Canada report.

The strong gains recorded in 2023 were capped off by a solid fourth quarter, when returns averaged 8.2 per cent, which was one of the best performances for pension funds over the past two decades. As investors became increasingly optimistic that central banks might start cutting benchmark interest rates in the near term, stock and bond markets both surged and generated positive returns for investors.

Last year’s gains were nearly a mirror image of the sharp losses many plans endured one year earlier, when the average loss was 10.3 per cent – the worst annual performance since the global financial crisis in 2008 – as equities and fixed-income securities fell in tandem.

The report, released Monday, was written by RBC’s investor services arm, and analyzed client plans from both the public and private sectors to produce its data.

After a strong finish to 2023, there are potential pitfalls ahead arising from uncertainty about inflation and international conflicts, tempering the sense of momentum investors have enjoyed of late, RBC said.

“Potential future inflation arising from the Red Sea crisis introduces uncertainties impacting global trade and supply chains,” Marijana Jovanovic, managing director and head of product development at RBC Investor Services, said in a statement.

“Geopolitical tensions, notably conflicts in the Middle East and Ukraine, are also under consideration as plan managers adapt their strategies to navigate this environment.”

The strongest returns were driven by the lofty performance of growth-oriented stocks such as Apple Inc. AAPL-Q, Microsoft Corp. MSFT-Q and Inc. AMZN-Q. They dominate the MSCI World Growth Index, for instance, which returned 33.3 per cent last year.

Value stocks and Canadian equities produced more plain vanilla returns, with pension-plan returns on Canadian stocks averaging 7.5 per cent in the fourth quarter – which fell shy of its quarterly benchmark, the S&P/TSX Composite Index, at 8.1 per cent – and 10.9 per cent for the year.

Bonds performed well, as falling yields and tighter credit spreads gave defined-benefit pension plans an average return of 10.9 per cent in the fourth quarter, boosting the average for the full year to 7.8 per cent. That beat the relevant benchmark, the FTSE Canada Universe Bond Index. Longer-term bonds that are sensitive to interest rates performed better than their shorter-term counterparts.

Among the common benchmarks that pension funds use to measure performance, real estate-related equities were one of the best-performing asset classes, with a 14.3-per-cent average return in the fourth quarter. That was in spite of mounting pressure on property owners, as high interest rates have driven down valuations on many properties and caused borrowing costs to soar as loans come up for renewal.

RBC has not yet tabulated detailed returns for pension plans in privately owned asset classes such as real estate, infrastructure or private equity.

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