Fixed-Income Funds Post Strong Returns in January, Morningstar Canada Data Show

TORONTO, Feb. 4, 2014 /CNW/ - After posting mostly negative returns in 2013, mutual funds in Canada that invest in fixed-income securities performed well in the first month of 2014 amid heightened volatility in equity markets around the world. Most of the world's stock indexes ended the month in negative territory, but a steep depreciation of the Canadian dollar meant several foreign-equity fund categories were able to eke out positive returns in January, according to preliminary performance numbers today released by Morningstar Canada.

"The first two weeks in 2014 were quiet for global equity markets, but negative headlines in late January increased volatility. The flight to safety started with poor economic growth data from China, combined with concerns about the country's government debt," Morningstar Fund Analyst Achilleas Taxildaris said. "This in turn adversely affected developing market currencies, some of which depreciated sharply in a matter of days, forcing central banks to raise interest rates in an effort to stop their fall."

All seven Morningstar Canada Fund Indices that measure the aggregate returns of bond funds were up in January, led by the Morningstar Canadian Long Term Fixed Income and Morningstar Canadian Inflation-Protected Fixed Income fund indices, which increased by 5% and 4%, respectively. The Morningstar Canadian Fixed Income Fund Index, whose constituent funds are the most diversified among the domestic-bond categories, increased by 2.4% for the month.

Funds in the beleaguered Precious Metals Equity category, which were the biggest losers last year, also benefitted from the month's volatility; the fund index that tracks that group increased 16.4% in January.

Among domestic-equity categories, the best performer was the Morningstar Canadian Focused Small/Mid Cap Equity Fund Index with an increase of 0.7%. The Canadian Equity fund index increased 0.2%, while Canadian Focused Equity, Canadian Small/Mid Cap Equity, and Canadian Dividend & Income Equity decreased by 0.2%, 0.3%, and 1%, respectively.

Though the Canadian stock market significantly outperformed those of the United States and other developed economies, Canadian funds that target foreign equities had returns that were comparable to those of domestic-equity funds due to currency effects. The Morningstar European Equity Fund Index increased 0.4% for the month, despite major stock indexes in Germany, France, and the United Kingdom losing between 2.6% and 3.5% in local currencies. Similarly, funds in the U.S. Equity category averaged no return while the S&P 500 Index decreased 3.5% when measured in U.S. dollars.

"Canadian equity funds faced a strong headwind versus their international counterparts because of the depreciating Canadian dollar. While the loonie has quietly depreciated during the past year, it lost more than 4 cents to the U.S. dollar last month, reaching its lowest point since July 2009. Weak data on the Canadian economy along with the more dovish tone of Bank of Canada Governor Stephen Poloz drove the Canadian dollar down," Taxildaris said.

Asian equity fund categories found themselves at the bottom of the performance table last month. The Asia Pacific Equity, Asia Pacific ex-Japan Equity, and Greater China Equity fund indices decreased by 0.6%, 1.5%, and 1.8%, respectively, while the Japanese Equity fund index dropped 3.4%. Among the more regionally diversified categories, the Global Equity fund index increased 0.2%, while International Equity was down 1.4%.

For more about January 2014 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 437,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 10 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 registered investment advisor subsidiaries and has approximately US$176 billion in assets under advisement or management as of Sept. 30, 2013. The company has operations in 27 countries.

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SOURCE: Morningstar Research Inc.