Fund returns highlight 2007’s challenges

By Steven Lamb | January 3, 2008 | Last updated on January 3, 2008
3 min read

Last year was far from stellar in terms of mutual fund returns, with only four categories managing to post double-digit growth, according to data from Morningstar Canada.

Of the 42 Morningstar fund indexes, 23 managed to finish the year with positive returns, while only 12 managed to beat the 2.4% rate of inflation posted by StatsCan in October.

The best full-year performance was found in the Asia Pacific (Ex-Japan) fund index, which posted a return of 16.3%, despite a loss of 2.0% in December. This index was followed closely by the Emerging Market fund index, which gained 16.1% year over year.

“Strong economic growth in China has drawn investors, foreign and domestic, who are willing to take on risk. Double-digit growth in gross domestic product may not be sustainable, but mid- to high-single-digit advances are nothing to scoff at,” says Philip Lee, fund analyst with Morningstar Canada. “Furthermore, this kind of growth is certainly more favourable than the forecast for the U.S.”

But investors were also able to find double-digit growth closer to home. The Canadian Focused Small/Mid Cap Equity index gained 14.2%, with an increase gain of 5.7% coming in December alone. These gains were largely due to the hefty dose of resource companies that fall into the category. The Natural Resources Equity fund index posted a gain of 13.1% on the year.

The resource category benefited from the soaring price of oil, which nearly doubled over the course of the year, from $52 to almost $100 a barrel.

“The trend was strongly positive but there were some bumps along the way,” says Lee. “Oil prices took a meaningful dip in August when the U.S.-led credit and liquidity crisis hit full stride. There were increasing fears that the situation would further weaken the U.S. economy and possibly throw it into a recession that could have spread around the globe, which would have definitely been a bearish scenario for energy.”

But international tensions in December, ranging from the nuclear standoff between the U.S. and Iran to the assassination of Benazir Bhutto, helped to maintain the price of crude.

The strong demand for virtually every resource Canada has to offer the world drove the dollar from $0.86 US to a high of more than $1.10 US in November.

The soaring loonie pared gains even within similar mandates, as evidenced in the small/mid cap space. While the Canadian Focused index topped 14%, the Canadian Small/Mid Cap Equity fund index, which lacks the Canadian focus, returned only 5.7% on the year.

Meanwhile, the U.S. Small/Mid Cap Equity index, which is far less concentrated in the resource sector than its Canadian counterpart, lost 10% over the same 12 months. Returns on U.S. investments were also hampered by the slowing U.S. economy, which continues to pose a threat to global growth.

“The slumping housing market in the U.S. doesn’t seem to have hit bottom yet, and the resulting credit concerns and persistent possibility of a recession have really hurt the value of the greenback,” says Lee.

The Morningstar U.S. Equity fund index lost 10.7%, despite a nominal gain of 5.5% on the S&P 500.

Overseas, the loonie continued to wreak havoc on Canadian investors’ portfolios. The Morningstar International Equity fund index lost 6.6%, while Global Equity slipped 6.4% and European Equity dropped 4.8%, at a time when global markets were posting healthy returns in their native denominations.

In Japan, market losses were exacerbated by the currency issue, and the Morningstar Japanese Equity index was the second worst performer on the year, losing 21.9%. The only index to fare worse was the Real Estate fund index, which dropped 24%.

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Steven Lamb