Falling Loonie Boosts Foreign Equity Funds in January, Morningstar Canada Data Show

TORONTO, Feb. 3, 2015 /CNW/ -  Mutual funds in Canada that invest in foreign stocks posted healthy gains in January, in large part because of the Canadian dollar's sharp drop against most major world currencies. The falling loonie was also indirectly responsible for the strong results of fixed-income funds during the month. Thirty-seven of the 42 Morningstar Canada Fund Indices, which measure the aggregate returns of funds in various standard categories, increased for the month of January, according to preliminary data today released by Morningstar Canada.

Among the best performers last month were the indices that track fund returns in the Asia Pacific ex-Japan Equity, Greater China Equity, and Asia Pacific Equity categories, which increased by 12%, 10.6%, and 10.3%, respectively. These results are significantly better than the market returns of Asian stocks when measured in local currencies; for example, the Nikkei 225 Index of Japanese stocks increased by 1.3%, while Hong Kong's Hang Seng Index and South Korea's KOSPI Index were up 3.8% and 1.8%, respectively. However, the Canadian dollar depreciated by more than 8% against the Hong Kong dollar, Japanese yen, and Chinese yuan, which boosted Canadian unhedged funds that invest in these markets.

Similarly, funds in the U.S. Equity category collectively increased by 3.8%, despite the S&P 500 Index falling 3% when measured in U.S. dollars. The loonie dropped 8.8% versus its U.S. counterpart in January. In Europe, stock markets in France, Germany, and the United Kingdom posted strong results, which were also helped by currency effects, albeit to a lesser extent, and the Morningstar European Equity Fund Index increased by 8.9% for the month. Meanwhile, the International Equity and Global Equity fund indices increased by 8% and 6.3%, respectively, while the Emerging Markets Equity fund index was up 9%.

"The Canadian dollar has continued its dramatic decline so far this year, falling below US$0.80 for the first time since early 2009 because of falling oil prices and a weakening economic outlook that led to the Bank of Canada to cut interest rates," Morningstar Manager Research Analyst Shehryar Khan said.

The interest rate cut in turn was the catalyst for strong positive results in fixed-income categories in January. The Canadian Long Term Fixed Income and Canadian Inflation-Protected Fixed Income fund indices increased by 8.3% and 7.3%, respectively, while the more broadly diversified Canadian Fixed Income fund index was up 3.8%.

"The Bank of Canada surprised many market observers and participants with a 25-basis-point cut in the overnight rate, which signalled its concern about the effect of falling oil prices on the economy. However, this move lessens the central bank's cushion in case the economic situation deteriorates, as the margin toward zero interest rates is now less than before," Khan said.

By comparison, domestic equity fund performance was much more muted last month, though the aggregate numbers understate the wild ride that individual sectors experienced. The Morningstar Canadian Equity Fund Index increased by a modest 0.2%, closely tracking the S&P/TSX Composite Index's 0.5% uptick. However, these returns included an increase of 15.7% for the Canadian basic materials sector as well as decreases of 2.2% for energy and 7.7% for financials. The fund indices that measure the Energy Equity and Financial Services Equity categories were among the month's worst performers with decreases of 1.8% and 7.9%, respectively, while the Morningstar Precious Metals Equity Fund Index was the best performer overall with a 25% increase.

"The combination of a weakening economic outlook, lower interest rates, and the continued decline of the Canadian dollar resulted in a poor start to the year for the financial sector, culminating late in the month with Barclay's downgrading its view of three of the largest banks in Canada," Khan said. "The energy sector was negatively affected by the continuing fall in oil prices following OPEC's announcement late last year it would not cut oil production despite the lack of demand in the market."

For more about January 2015 fund performance, go to www.morningstar.ca.

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.

About Morningstar Research Inc. and Morningstar, Inc.
Morningstar Research Inc. is a Canadian subsidiary of Chicago-based Morningstar, Inc., a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 479,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 13 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and has approximately US$169 billion in assets under advisement or management as of Sept. 30, 2014. The company has operations in 27 countries.

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SOURCE Morningstar Research Inc.