A strong start for all fund categories

Investment funds in Canada started the new year with a bang, posting gains in all equity, balanced and fixed income fund categories for the month of January. All 42 of the Morningstar Canada Fund Indices had positive results, including increases of more than 2% for each of the 24 equity fund categories, according to preliminary performance data released by Morningstar Canada.

The best-performing categories were those that invest in riskier asset types such as gold, emerging market equities, and small- and mid-cap stocks.

The top performer overall was the fund index that tracks the Precious Metals Equity category, rising 12.2% for the month. Usually among the most volatile categories, the Emerging Markets Equity (+9.2%), Greater China Equity (+8.7%), and Asia Pacific Ex-Japan Equity (+7.1%) also saw considerable gains.

Domestic equity funds also performed well, with Canadian Focused Small/Mid Cap Equity gaining +6.1%, Canadian Small/Mid Cap Equity rising +5.3% and Global Small/Mid Cap Equity categories earning +5%.

“Widespread strength in riskier asset categories is indicative of broader macro factors, rather than company-specific events, driving market movements,” said Nick Dedes, fund analyst for Morningstar. “While there were a number of U.S.-listed companies that reported estimate-beating earnings, it’s likely that steps toward a solution in Europe and accommodative central-bank policies had an outsized influence on the month’s results.”

Equity funds targeting developed markets underperformed their riskier peers, but still managed to produce higher-than-normal returns in absolute terms in January. The Morningstar International Equity Fund Index increased by 4.2%, while the indices measuring the U.S. Equity, Global Equity and Canadian Equity all rose by 4%. Surprisingly, the European Equity category also saw gains of 3.3%.

Due to tighter budget controls, Morningstar specifically saw a decline in yields on periphery European debt, as well as the possibility of progress regarding Greece’s debt and the hope that the ECB will extend unlimited loans to banks, Dedes says.

He adds, “In the United States, the Federal Reserve also changed key language around its intentions for maintaining exceptionally low rates, now likely through late 2014. Chinese stocks [also] gained in January.”

Fixed-income funds posted gains across the board in January, which is unusual for a period when all segments of the equity markets are doing well. This suggests a percentage of the investing public have less conviction in riskier assets and has parked their money in the safety of bonds.

Returns among the six fixed-income fund indices ranged from 0.3% for the Morningstar Canadian Short Term Fixed Income Fund Index to 2% for the Morningstar High Yield Fixed Income Fund Index.