Foreign equity funds start 2009 on bleak note

Gold seemed to be the only bright spot amidst the market carnage that continued into the first quarter of 2009.

According to preliminary performance data released by Morningstar Canada, the year started on an especially bleak note for investment funds that target non-Canadian equities, as the Morningstar Canada Fund Indices that track these funds posted heavy losses in January.

Esko Mickels, fund analyst with Morningstar Canada, said it’s tough to trace this worldwide downturn to any one factor. Falling demand, which is driving down commodity prices, and an overriding fear about impending doom and massive global unemployment are among a host of issues that Mickels speculated could be causing money to come off the markets and sit on the sidelines.

The Morningstar International Equity Fund Index had the worst return among all fund indices in January, with a 10.3% loss, followed by European Equity, down 9.7%. These numbers reflect market losses on almost every exchange in Europe and Asia, as well as a 7.1% depreciation of the euro versus the Canadian dollar. Meanwhile, the fund indices that track the Asia Pacific ex-Japan Equity, Asia Pacific Equity, Greater China Equity and Japanese Equity lost 7.8%, 8.2%, 8.3% and 9.2%, respectively.

Domestic equity funds were also down last month, even though their losses were not as severe. In Canada, the S&P/TSX Composite Index had a good run in the first few days of the month, but finished with a 3% loss, dragged down by bleak economic news and worries over worsening conditions in both Canada and the United States. The Morningstar Canadian Equity Fund Index lost 3.6%, while the Morningstar Canadian Focused Equity Fund Index was down 4.8%.

Mickels said despite foreign equity’s bleak performance, advisors shouldn’t be discouraged from recommending the asset class to clients, as it still provides the benefits of diversification. “Some countries are riskier than others. Maybe advisors should factor that in and consider them a separate asset class,” he added.

Markets also had it tough in the United States, where the S&P 500 Index lost 8.4% for the month. “Even a new president failed to inspire hope, as U.S. indices resumed their decline in January,” Mickels said. “The day of Barack Obama’s inauguration alone, the S&P 500 fell almost 5.3%.”

However, unlike funds that invest in Europe, currency movements had a positive impact on funds in the U.S. Equity category, which collectively lost 7.8% for the month. The Canadian dollar shed almost 1% against the greenback, as investors sought the relative safety of U.S. dollars.

Bucking a recent trend, small-cap funds outpaced their larger capitalization counterparts last month; the Morningstar Canadian Small/Mid Cap Equity Fund Index lost just 0.3%, while Canadian Focused Small/Mid Cap Equity was down 1.2%.

Only five of the 43 Morningstar Canada Fund Indices had positive returns in January. Topping the list were the indices that track the Precious Metals Equity and Natural Resources Equity fund categories, with gains of 8.4% and 5.8%, respectively.

“Global economic woes chopped demand for resources, keeping prices at depressed levels. Nevertheless, these sector funds posted gains as investors nibbled at companies trading at significant discounts to their mid-summer prices, while some companies are beginning to benefit from takeover speculation,” Mickels said.

The other fund categories with positive aggregate returns were High Yield Fixed Income, up 1%, and the two money market categories, both of which gained less than 0.1%.

Final performance figures will be published on www.morningstar.ca next week.

(02/03/09)