Equity funds suffer

By Mark Noble | January 5, 2009 | Last updated on January 5, 2009
3 min read

There’s just no way to put lipstick on the pig — 2008 was quite simply a terrible year for equity fund performance. In fact, it was one of the worst years ever, according to preliminary performance data released today by Morningstar Canada.

How bad was it? Morningstar calls the year a “disaster for equity funds.” The performance of major stock indexes gives some insight. For example, the S&P 500 had its worst year since 1931, and 2008 was the worst year in the past 30 years for the S&P/TSX Composite index.

“We haven’t experienced such poor returns in the last 30 years. The TSX lost 33% in 2008,” says Jordan Benincasa, a fund analyst with Morningstar Canada.

For 23 of the 24 Morningstar Canada’s equity fund indexes, losses exceeded 20%. Only four of those managed to avoid their worst calendar-year return in at least 25 years.

The only fund index to avoid double-digit losses was Health Care Equity — a traditional safe haven during market turbulence. The next best performing category was Japanese Equity, which finished the calendar year at -20%.

The worst performing index was Natural Resources Equity, which lost nearly half its value, at -48.5%.

“Natural resource stocks took a beating as oil went from more than $145 US per barrel to less than $40 US, while other commodities like natural gas, aluminum and copper followed a similar path,” Benincasa says.

Any asset classes that have strong weightings in resources tumbled as well. The Morningstar Canadian Focused Small/Mid Cap Equity Fund Index lost 48.2% for the year, and the Canadian Small/Mid Cap Equity and Global Small/Mid Cap Equity dropped 41.6% and 40.6%, respectively.

Even the once hot emerging markets equity funds were hammered in 2008, and the index that tracks these funds lost 45.9%.

American holdings were hit by the 37% loss on the S&P 500 Index, marking their worst year since the Great Depression. Canadian holders of U.S. equity funds were given some respite, as losses were mitigated by the Canadian dollar’s depreciation against the U.S. currency.

As a result, U.S. Equity and U.S. Small/Mid Cap Equity categories were down 29.3% and 30.6%, respectively, for the year.

The only categories that finished the year on a high note were fixed income fund indexes, as investors flew to safety, despite historically low interest rates.

The Morningstar Global Fixed Income Fund index posted the highest gain overall in 2008 with a 15.6% return, aided by the loonie’s dramatic decline.

“The past year should serve as a reminder that unhedged global bond funds can act as a nice diversifier for those with heavy exposures to the natural resources sector,” Benincasa says.

Domestic bond funds did not get the currency bounce, although most finished the year in positive territory. Canadian Short Term Fixed Income gained 5.3%; Canadian Fixed Income gained 2.2%; and Canadian Long Term Fixed Income was up 1%.

“As markets continued to spiral downwards, investors flocked to the safety of short-term fixed income securities,” Benincasa notes. “The demand for these securities has hit a point where investors are willing to accept historically low yields in order to avoid further losses.”


Mark Noble