Foreign funds the place to be in January

Foreign equity investments continued to lead the pack for mutual funds in January, according to Morningstar Canada. Of the 42 indexes tracked by Morningstar, 10 of them posted returns better than 2% — and all 10 were focused on foreign investments.

But for a change, the gains were led by American markets, following months of heavy lifting by Europe and emerging markets.

“The [MSCI] index, a gauge of global equity markets, rose 1.8% (in local currency terms) for the month,” says Philip Lee, fund analyst at Morningstar Canada. “Notably, the U.S. equity markets continued to roll as data showed signs that the world’s largest economy will likely experience a soft landing instead of a recession. This boosted global equity funds because U.S. equities represent a substantial chunk of their assets.”

At the top of the Morningstar table was the Health Care Equity fund index, with gains of 3.8%. As is often the case with this volatile sector, gains were largely driven by a handful of specific events.

“One of the sector’s heavyweights, Abbott Laboratories, announced that it is selling its diagnostics business to GE for $8.1 billion US in cash. That stock gained more than 9% for the month,” says Lee. “Also, Bristol-Myers Squibb ended the month up more than 10% amid speculation that French conglomerate Sanofi-Aventis was interested in acquiring the company.”

The oft-overlooked Real Estate fund index posted a 3.6% gain, making it the second strongest performer for the month. The small size of this index makes it susceptible to sudden movements, as there are only 10 funds in the group, with a combined asset base of $785 million.

Among the more widely diversified indexes, funds that focus on the small- to mid-cap segment of the market tended to outperform large-cap funds. The U.S. Small/Mid Cap Equity index earned investors 3.5% in January, while its globally focused counterpart gained 2.9%.

But regardless of market cap, American equity funds tended to perform well, following the Federal Reserve’s decision to leave interest rates unchanged. Not only did stock markets cheer the news, but the U.S. dollar gained 1.2% against the loonie, giving Canadian investors a multiplier effect. The U.S. Equity fund index gained 2.6%.

“This was a relief for market participants because a rate hike would increase corporate and consumer borrowing costs, potentially choking off economic growth,” says Lee.

The European Equity fund index managed to extend its run, gaining 2.2% on improved economic growth in Germany, with an appreciating British pound also adding some lift.

The Global Equity index gained 2.1%, while the International Equity index picked up 2%. The Asia Pacific Rim Equity index was up 1.2% and Emerging Markets Equity grew by 0.8%.

Canadian funds, in general, were a little disappointing in January, at least when compared to the stellar gains elsewhere in the market. The Canadian Equity fund index gained 0.8%, roughly matching the S&P/TSX 60 Index. The Canadian Anchored Equity fund index fared better, returning 1.5%, as these funds are allowed up to 50% foreign exposure.

The Canadian Small/Mid Cap Equity fund index gained 1.6% for the month.

There were just five Morningstar Canada Fund Indices posting negative returns in January, all on the fixed-income side. The Canadian Long Duration Fixed Income index dropped 0.6%, making it the biggest loser.

The Canadian Inflation-Protected Fixed Income index dropped 0.3%, while the Canadian Core Fixed Income index was off 0.3% and Canadian Short Duration Fixed Income, 0.1%. Heading offshore did little to improve performance, as the Global Fixed Income index fell 0.1%.

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

(02/02/07)

Steven Lamb