Resource funds finish 2005 with a bang

December capped off a winning year for investors holding resource-based mutual funds, with the Precious Metals fund index ranking as the top performer for the month, according to data from Morningstar Canada.

The Precious Metals index provided returns of 13.2% for the final month of the year, as the price of gold soared to more than $500 an ounce. There should be little surprise that the Natural Resources fund index provided the best returns overall in 2005, due to the massive run up in energy prices.

“Although down from its late summer peak of $70 US a barrel, the price of oil still rose nearly 50% on the year, and natural gas prices were up more than 60%,” says Morningstar analyst Brian O’Neill.” At the same time, base metal prices have generally been robust.”

Strong oil prices helped raise the Natural Resources fund index by 7.6% in December, which boosted the full year performance to 46.1%. The second and third place spots for 2005 went to Emerging Markets Equity and Precious Metals with returns of 28.4% and 23.6%, respectively.

Latin American funds, which were folded into the Emerging Markets index earlier this year, drove the performance of that group, as high commodity prices benefited the large resource sectors in those countries.

Japanese Equity and Asia/Pacific Rim Equity rounded out the top three best performers for December. The month’s worst performing fund fund groups were Canadian Short Term Bond & Mortgage and High Yield Bond, with both slipping 0.1%.

On a full year basis, there were only two fund indices that failed to provide positive returns for investors: Foreign Bond and Science & Technology. Foreign bond investments suffered from the strength of the Canadian dollar, which drove that index to a 6.2% loss. Science & Technology slipped 0.1%, again largely due to the dollar’s strength, as most of the sector is located outside of Canada.

Over the course of 2005, the loonie rose 3% against the U.S. dollar, 18% against the euro, 15% versus the pound and 19% against the yen.

The dollar’s strength encouraged Canadian investors to think domestically and that bet paid off in 2005. The Canadian Equity (Pure) fund index returned 23.2%, while Canadian Small Cap Equity brought in 21.1%. Income trusts remained hot, returning 20% in their index, while Canadian Equity was up 17.4% and Canadian Dividend rose 16.3%.

Despite the negative effect of the high dollar, Japanese Equity and Asia/Pacific Rim Equity gained 20.6% and 19.1%, respectively. Stripping out the huge returns from Japanese stocks — the Nikkei gained more than 40% on the year — Asia Ex-Japan Equity Fund Index gained a modest 9%.

South of the border, American stocks lagged the world, but some savvy investment managers side-stepped these problems and the Morningstar U.S. Equity fund index still managed to return 2.3%. U.S. Small & Mid Cap Equity performed much better, rising 7.3%.

“It was a rocky year in the U.S., as towering twin deficits, the war in Iraq and massive hurricanes threatened consumer confidence,” O’Neill said. “But the big economic wheel kept on turning, helping U.S. Equity funds eke out a modest return on the year, despite mild currency depreciation.”

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