Fund Investing

European, U.S. equity funds also do well, while Canadian equity funds lag.
By Christian Charest | 03/01/18

Mutual funds in Canada had muted results in December, but most fund categories ended up posting solid gains for the year as a whole. Forty-one of the 44 Morningstar Canada Fund Indices, which measure the aggregate returns of funds in various standard categories, were up in 2017, including 12 indices that gained more than 10%, according to preliminary performance data released today by Morningstar.

About the Author
Christian Charest is the editor responsible for Web sites at Morningstar Canada. He has been in the investment industry since 1995, having previously worked for Laurentian Bank and Merrill Lynch Canada. He holds a BBA in finance from the École des Hautes Études Commerciales in Montreal.

The best performer among the 44 fund indices was the one that tracks the Greater China Equity category, with a 35.9% gain, mirroring the 36% increase of Hong Kong's Hang Seng Index. Funds in this category that hedge their currency exposure will likely outperform their peers that do not, since the Hong Kong dollar depreciated by 7.3% against the Canadian dollar during the year.

Other market indexes in the Asia/Pacific region also did very well last year, including South Korea's KOSPI, Japan's Nikkei 225, and the Taiwan Stock Exchange Weighted Index, which increased 21.8%, 19.1%, and 15.0, respectively. As a result, the fund indices that track the Asia Pacific Equity and Asia Pacific ex-Japan Equity categories finished 2017 among the top performers with gains of 24.9% and 25.7%, respectively. The strength of Asian stocks also helped funds in the Emerging Markets Equity category, which collectively gained 24.3%.

European equity funds benefited from a combination of strong market performance and favourable currency movements, and the Morningstar European Equity Fund Index posted a 14.6% gain for the year. Germany's DAX Index increased 12.5% in 2017 when measured in local currency, while France's CAC 40 and the United Kingdom's FTSE 100 were up 9.3% and 7.6%, respectively. Meanwhile, the euro and UK pound appreciated by 6.2% and 2.4%, respectively, against the Canadian dollar.

In the United States, the S&P 500 Index posted a total return of 21.8% -- its ninth consecutive calendar year in positive territory and best performance since 2013. However, Canadian fund investors only captured a fraction of this gain as the Morningstar U.S. Equity Fund Index increased 13.2% for the year, hampered by the loonie's 7% appreciation against the U.S. dollar.

Domestic equity funds had positive results for the year but trailed their foreign counterparts. The Morningstar Canadian Equity Fund Index gained 7.7% -- underperforming the benchmark S&P/TSX Composite Index, which had a total return of 9.1% -- while the fund indices that track the Canadian Dividend & Income Equity and Canadian Small/Mid Cap Equity categories were up 7.9% and 3.2%, respectively. Among Canada's three largest stock sectors, financial services and basic materials both contributed positively with total returns of 13.3% and 7.7%, respectively, while energy was a detractor with a 10.6% loss.

The worst-performing equity fund indices were Natural Resources Equity and Energy Equity, which decreased 3.4% and 13.1%, respectively. Though they partially recovered in the second half of the year, funds in these two categories suffered substantial losses in the first six months as oil prices tumbled.

Despite the interest rate hikes enacted by central banks in many countries including Canada and the United States, seven of the eight fund indices that track fixed-income categories increased in 2017. By far the best-performing fund index in this area was Preferred Share Fixed Income with a 14.1% gain. Second-best was one of the categories most sensitive to interest rates -- Canadian Long Term Fixed Income -- which finished the year with a 6.3% increase, suggesting that the market may have been expecting more meaningful rate hikes from the Bank of Canada. The only fixed income category in the red was Canadian Inflation-Protected Fixed Income, down 0.03%.

Morningstar Canada's preliminary fund performance figures are based on change in funds' net asset values per share during the month, and do not necessarily include end-of-month income distributions. Final performance figures will be published on www.morningstar.ca next week.

 

Fund IndicesDec2017
Greater China Equity-0.335.9
Asia Pacific ex-Japan Equity-0.025.7
Asia Pacific Equity-0.724.9
Emerging Markets Equity0.924.3
International Equity-0.716.7
European Equity-1.014.6
Preferred Share Fixed Income-0.014.1
U.S. Equity-1.113.2
Financial Services Equity0.913.2
Global Equity-1.312.5
2035 Target Date Portfolio-0.510.5
Cdn Focused Small/Mid Cap Equity0.510.4
Global Infrastructure Equity-2.69.4
U.S. Small/Mid Cap Equity-1.69.2
Global Equity Balanced-0.78.5
2030 Target Date Portfolio-0.28.5
Global Small/Mid Cap Equity-1.18.2
North American Equity-0.58.0
Canadian Dividend & Income Equity0.47.9
Real Estate Equity0.37.7
Canadian Equity0.77.7
Global Neutral Balanced-0.56.8
Canadian Long Term Fixed Income-0.06.3
2025 Target Date Portfolio-0.26.2
Canadian Focused Equity-0.16.1
Canadian Equity Balanced-0.35.9
Tactical Balanced-0.45.6
Canadian Neutral Balanced-0.25.5
2035+ Target Date Portfolio-0.35.3
Short-Term Target Date-0.44.2
Global Fixed Income Balanced-0.64.1
High Yield Fixed Income-0.24.0
Global Fixed Income-0.43.8
Canadian Fixed Income Balanced-0.53.7
Canadian Small/Mid Cap Equity1.93.2
Precious Metals Equity3.42.8
Floating Rate Loans-0.12.8
Canadian Fixed Income-0.51.7
U.S. Money Market0.10.9
Canadian Money Market0.10.4
Canadian Short Term Fixed Income-0.40.3
Cdn Inflation-Protected Fixed Income0.1-0.0
Natural Resources Equity3.7-3.4
Energy Equity1.8-13.1
Data as of Dec. 31, 2017

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