Morningstar debunks January barometer

(February 14, 2003) Mutual fund performance took another hit in January as 26 of the 32 fund indexes tracked by Morningstar Canada lost ground. Overall, 88% of the 4,500 funds rated by Morningstar reported losses last month, but that doesn’t necessarily mean 2003 will be a losing year. Morningstar analyst Rob Chang says those who believe January is a harbinger for the rest of the year haven’t closely examined the numbers.

Although U.S. equity funds have held true to the January barometer in 14 of the last 15 years, Canadian and international equity funds have not followed the same path, says Chang. “The calendar returns of both categories have mimicked the performance of the first month of the year in nine out of 15 instances, which is just a little better than random chance,” he says.

“Rather than basing investment decisions on such an unreliable measure, investors could focus instead on the variety of fundamental factors that will be the more likely drivers of market performance this year,” Chang adds.

On the bullish side, Chang notes that governments around the world are using their full monetary and fiscal powers to stimulate their economies. And he says there are trillions of dollars sitting on the sidelines in Canada and the U.S., waiting to be invested in equities. “Among other optimistic signs is the weakening U.S. dollar, which will help the world’s largest economy with its large current account deficit.”

Negative factors include geopolitical tensions, high consumer debt and the fact that North American equities are still overvalued relative to the last bear market in 1990, Chang adds.

Morningstar’s International Equity fund index was January’s worst performer, dropping 7.4%, as European and Asian stock markets declined. The Canadian Equity index was off 2% while the U.S. Equity index declined 5%. On the plus side, the Canadian Income Trust index advanced 1.5%. High yield bonds and real estate funds were also higher.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca