Canadian-based funds strong in 2004

(January 6, 2005) It probably comes as no surprise, but it’s now official: Income trusts and natural resources were the hot sectors for mutual fund investors in 2004, according to data from Morningstar Canada.

Overall, it was a pretty good year for Canadian mutual funds, with 30 of Morningstar’s 32 fund indices posting a positive return for 2004. The best performance came from the Latin American Equity index, which returned 28.1%. But this tiny group — made up of four funds with just $85 million in total assets — is soon to be eliminated by Morningstar.

Of the major indices, staying domestic proved to be a good strategy for Canadian investors. Behind Latin America, the next five best performing indices were predominantly Canadian in content.

The Canadian Income Trusts index posted a return of 21.2%, thanks in large part to energy trusts, which benefitted from soaring oil prices. In 2003, the trust index returned 24.9%. Oil and gas trusts comprise roughly one-third of the S&P/TSX Capped Income Trust Index, which itself gained 26% on the year.

The Natural Resources index ranked third, yielding 19.4%, as demand from China boosted prices on most commodities, from energy to base metals and forestry products.

Canadian Small Cap Equity, Canadian Equity (Pure) and Canadian Dividend rounded out the top six, with returns of 14.0%, 13.9% and 12.5%, respectively.

“A buoyant Canadian economy, as evidenced by the S&P/TSX composite index’s 14.5% return, has been the main reason for these funds’ performance,” Morningstar analyst Mark Chow writes. “Companies continue to show strength even with the backdrop of a rising loonie, which generally hurts Canada’s export-driven economy. Small cap issues did a particularly good job; the fund index easily doubled the S&P/TSX Small Cap Index’s 6.5% return.”

The Canadian Equity fund index posted a return of 11.6%, topping the U.S. Equity index, which saw its gains reduced to just 2.3%, due to the soaring loonie. On both sides of the border, these fund indices failed to match their benchmarks.

One of 2003’s best performers also did not follow through in 2004. The Precious Metals index dropped more than 16%, resulting from a plummeting price of gold in the second quarter. Gold itself has since recovered, but investors remain wary of producers’ stock. In 2003, the index returned nearly 47%, so one might have expected a correction.

The Science and Technology index also declined, but Chow points out this was due more to currency fluctuations, rather than poor stock performance. The Nasdaq Composite index, home of the world’s top tech stocks, actually gained 8.6% on the year, but the sagging U.S. dollar left the Morningstar tech index with a loss of 2.4%.

To illustrate the strength in tech, the S&P/TSX Capped Information Technology Index returned nearly 25% in 2004, despite languishing heavyweight Nortel. Funds which held Research in Motion, ATI Technologies and Cognos enjoyed strong gains in these firms’ shares.

In December …

On a monthly basis, Precious Metals finished the year even weaker, dropping 6.2% as the price of gold again cooled. The Natural Resource index was the only other group to decline in December, falling 2.1% on weaker oil prices.

The remaining 30 indices finished higher, with Latin American Equity again leading the pack with a return of 9.3%. The Healthcare index earned investors 6.5%, Emerging Markets Equity gained 5.7% and European Equity returned 5.3%.

U.S. equity funds outperformed Canadian funds, returning 4.2% versus 2.4%, as the Canadian dollar began to tire from its long-term appreciation.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com