Which funds outperformed in 2014?

Mutual funds performed well in 2014, despite a sharp increase in volatility over the last four months.

Overall, the value of 39 out of 42 Morningstar Canada Fund Indices increased between 2013 and 2014. As was the case in 2013, funds that invest in U.S. equities were among the best performers, according to preliminary data today released by Morningstar Canada.

The fund index that tracks the returns of funds in the U.S. Equity category increased by 17.3% last year. That reflects a 13.7% gain for the benchmark S&P 500 Index, as well as a depreciation of 8.3% of the loonie versus the U.S. dollar.

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The Morningstar U.S. Small/Mid Cap Equity Fund Index was also among the top performers of 2014, with an 11.6% increase over the past 12 months.

“An accelerating U.S. economy, high corporate profits, and patient monetary policy by the Federal Reserve […] all helped the S&P 500 reach new highs over the past year,” says Morningstar research analyst Vishal Mansukhani.

“The slide in the price of oil, a major export for Canada, was one reason for the depreciation in the loonie, [but] an expectation that the U.S. Federal Reserve will lift rates before the Bank of Canada also hurt [that currency], as the anticipation of rate increases can spur demand for the currency of that country.”

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Unlike in 2013, bond funds outperformed in 2014, with all seven fund indices that track fixed-income categories in the black. The Morningstar Canadian Long Term Fixed Income Fund Index finished the year with a 17.1% increase, while the Canadian Fixed Income and Global Fixed Income Fund Indices were up 6.9% and 6.8%, respectively.

“Canadian sovereign, provincial, and corporate bonds returned 8.7% in 2014, as measured by the Bank of America Merrill Lynch Canada Broad Market Index, versus 6.1% and 7.6% for the comparable U.S. and global bond indexes, respectively,” adds Mansukhani. “The U.S. economy fared well in 2014, [but] growth in other major economies sputtered, increasing the demand for safe-haven securities like Canadian bonds.

“Also, despite economists’ expectations that rates on 10-year Canadian government bonds would rise by about 50 basis points, the year ended with rates being almost 1% lower. Along with increased demand for Canadian government bonds from foreigners, lower inflation and tumbling gas prices were tailwinds for bond rates.”

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Meanwhile, sector-specific funds found themselves both at the top and bottom of the performance table in 2014: among the best performers were the Real Estate Equity and Financial Services Equity Fund Indices, with increases of 13.6% and 12.2%, respectively.

The two worst performers were Natural Resources Equity and Energy Equity. Those dipped 10.7% and 11.1%, respectively.

“Oil prices fell to a five-year low because of increased supply from U.S. shale oil production, weaker demand from Europe and China, and OPEC’s refusal to cut production amid this supply-demand dynamic,” says Mansukhani. And, “falling oil prices are a huge headwind for the Canadian oil and gas sector, which has one of the highest production costs in the world.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.