Precious metals shine through 2006

Soaring commodity prices and a flurry of consolidation activity in the mining sector fuelled stellar returns for investors holding precious metals funds in 2006, according to preliminary year-end data from Morningstar Canada.

The Morningstar Canada Precious Metals Equity Fund index posted a full-year gain of 49.9% — despite a 2% decline in December — as gold prices jumped 23% to $632 US an ounce, with silver doubling that gain with a 46% rise.

“Precious metals funds had an outstanding year,” says Morningstar Canada senior fund analyst Brian O’Neill. “Consolidation within the precious metals sector and exposure to smaller, more highly leveraged stocks helped boost the returns of many funds in the category.”

In fact, 2006 was a fairly positive year for Canadian fund investors, with all but one of Morningstar’s 42 fund indices ending the year in the black. With the preliminary data excluding the year-end distributions for some funds, final data could push returns higher.

Among the more broadly diversified equity funds, the Asia Pacific Rim Ex-Japan index and the European index saw strong growth, with returns of 34.8% and 33.7%, respectively. The Emerging Markets Equity fund index earned investors a healthy 31.5%, thanks to its top-performing 6.7% return for the month of December.

“The Canadian dollar was relatively flat over the course of the year in relation to the U.S. dollar and the yen, but it was down 10% and 12% for the year against the euro and the pound, respectively,” O’Neill said. “In times when the loonie is relatively weak, foreign funds get a boost when their returns are translated back into Canadian dollars.”

The International Equity and Global Equity fund indices lagged slightly in comparison, but still offered quite healthy returns of 23.9% and 18.1%, respectively. Funds in these indices may have been weighed down by their Japanese holdings, as the Japanese Equity fund index ends the year with a miserly 0.4% gain.

Canadian equity funds posted respectable gains, but paled in comparison to the front-runners. The Canadian Equity fund index earned 15.3%, roughly matched by the 15.2% gain in the Canadian Anchored Equity index.

Canadian Small/Mid Cap Equity gained 13.7%, and Canadian Anchored Small/Mid Cap Equity gained 13.2%.

The U.S. Equity fund index returned 12.7%, making it the top performer among American-focused indices.

With equity markets providing strong returns, fixed-income funds trailed. As may be expected, the High Yield Fixed Income fund index led the group, offering a return of 8.2%, while most of the other indices had gains of roughly 3%.

“With the Bank of Canada keeping its key lending rate at 4.25% for the latter half of the year, and with the market offering relatively low long-term yields, bond-based mutual funds have steadily churned out moderate returns,” says O’Neill.

The Canadian Inflation-Protected Fixed Income fund index was the only one to decline over the past 12 months. With expectations of a continued low inflation environment, investors saw little reason to buy into the real-return bond market, driving the fund index lower by 3.5%.

This year, Morningstar began tracking life cycle funds, which rebalance to a lower risk profile as their maturity date approaches. Given the outperformance of equities over fixed income, it should come as no surprise that the longer-dated 15+ Year Target Date Portfolio index ranked the highest in this subset, with a return of 13.4%. The shortest-dated 5 Year Target Date Portfolio index returned 8.4%, placing it at the back of this class of funds.

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