U.S. Equity Funds Post Historic Gains in 2013, Morningstar Canada Data Show

TORONTO, Jan. 3, 2014 /CNW/ - Mutual funds in Canada that invest in U.S., European, and Japanese equities performed exceptionally well in 2013, as the global bull market that began in 2009 offered a banner year. However, funds that depend heavily on natural resources—including diversified domestic-equity funds—trailed significantly, while fixed-income funds were among the worst performers, according to preliminary data released today by Morningstar Canada.

The Morningstar Canada Fund Indices that measure the aggregate returns of funds in the U.S. Equity and U.S. Small/Mid Cap Equity categories increased by 38.5% and 40%, respectively, during the year. For both indices, 2013 was their best annual performance in 25 years, the longest period for which Morningstar data is available. Additionally, both fund indices beat the standard benchmarks for their respective category, as the large-cap S&P 500 Index and the small-cap Russell 200 Index were up 32.4% and 38.8%, respectively.

"The S&P 500 Index had its best year since 1997 as growth in the U.S. economy gathered steam, and the nearly 7% appreciation of the U.S. dollar relative to its Canadian counterpart added even more to the returns of U.S. equity funds," said Morningstar Fund Analyst Joanne Xiao. "Investors should expect the best performers in that category to be those funds that didn't hedge their currency exposure and therefore benefited from the rising U.S. dollar."

Also among the top-performing fund indices in 2013 was the one that tracks the Japanese Equity category, which increased by 38.1%. The Nikkei 225 index of Japanese stocks gained nearly 57% when measured in local currency, but because the Japanese yen declined by 12% versus the loonie, Canadian investors didn't receive the full benefit of the market gain. The fund indices that track the European Equity, Global Equity, and International Equity categories increased by 30.8%, 29.9%, and 26.2%, respectively, in 2013.

Canadian equity funds had a solid year on an absolute basis, but they trailed their foreign counterparts significantly. Among the five domestic-equity categories, the best performers were Canadian Focused Small/Mid Cap Equity, up 23.2%, and Canadian Focused Equity, up 22%; funds in these two categories allocate more than 20% of their assets to U.S. stocks, on average. By comparison, the purely domestic Canadian Small/Mid Cap Equity fund index increased by 21.9%, while Canadian Dividend & Income Equity and Canadian Equity funds were up 16.5% and 14.8%, respectively.

"Canadian Equity funds in aggregate outperformed the S&P/TSX Composite Index's 13% increase in 2013 by underweighting the basic materials sector, which is the third-largest sector represented in the index and was the biggest loser this year with a 29% drop. Within the sector, gold producers struggled as the price of gold plunged," Xiao said. "The best-performing sectors, healthcare and consumer discretionary, together comprise less than 10% of the Canadian market."

At the top of the rankings was the Morningstar Health Care Equity Fund Index with a 49.8% increase, while the worst-performing equity categories were Natural Resources Equity with a 6% decrease and Precious Metals Equity, which was down 48.2%.

Four of the seven fixed-income fund categories were in the red for the year. Funds in the Canadian Long Term Fixed Income and Canadian Inflation-Protected Fixed Income categories, which respectively decreased by 7% and 12.3%, were hit particularly hard by the increasing yields that resulted from the U.S. Federal Reserve's plan to taper its bond purchase program.

"The anticipation of the Fed's tapering, more than the actual tapering, is what led to the increase in bond yields," Xiao said.

The Canadian Fixed Income and Preferred Share Fixed Income fund indices also ended the year in negative territory, down 1.7% and 2.6%, respectively.

For more on 2013 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.

SOURCE: Morningstar Research Inc.