Equity Funds Take a Beating in 2011, Morningstar Canada Data Show

TORONTO, Jan. 4, 2012 /CNW/ - After two years of solid gains in 2009 and 2010, equity funds in Canada had mostly negative returns in 2011 amid roller-coaster-like volatility. Among the 22 Morningstar Canada Fund Indices that measure the aggregate performance of equity fund categories, only the ones that track the Real Estate Equity and Health Care Equity categories ended the year in positive territory, with increases of 12.1% and 7.1%, respectively, while most other fund categories posted double-digit declines. Also, fixed income funds posted impressive rises, according to preliminary performance numbers released today by Morningstar Canada.

"Funds in most equity categories struggled under the uncertainty that accompanied natural disasters, the European debt crisis, and continued turmoil in the Middle East," said Morningstar Fund Analyst Adam Fisch.

Hardest hit by this uncertainty were Asian markets, whose fast-growing economies depend to a large extent on sustained growth from the developed world. The Morningstar Greater China Equity Fund Index suffered a 21% decline for the year, while the fund indices that track the Emerging Markets Equity, Asia Pacific Equity, and Asia Pacific ex-Japan Equity categories dropped 18.7%, 16.5%, and 15.1%, respectively. Market losses in the region were actually more severe, but Canadian fund investors benefited from currency effects that saw the Canadian dollar lose ground against the Hong Kong dollar and the Chinese renminbi.

The worst performer among all Morningstar Canada Fund Indices was the one that tracks the Precious Metals Equity category, which declined 24.5% for the year. "Despite gold having another solid year, up more than 10%, precious metals stocks failed to move in step as investors displayed a lack of appetite for risk," Fisch said.

Lack of confidence in global markets also led to declining commodity prices, which hurt Canadian equity funds particularly hard considering the significant weight that resources occupy in Canadian portfolios. The energy sector in Canada lost 14.8% in 2011, while the materials sector lost 21.2%; these two sectors together account for roughly half of the domestic stock market. As a result, the Morningstar Canadian Equity Fund Index posted a decline of 10.4%, while the Morningstar Canadian Small/Mid Cap Equity Fund Index dropped 10.2%. The best-performing domestic equity fund category was Canadian Dividend & Income Equity, which declined just 1.1% owing to a much smaller exposure to resources by the category's constituent funds.

Despite a constant barrage of negativity throughout the year, the U.S. stock market proved resilient and benefited from the flight to quality that hurt emerging markets funds, signalling that when the going gets tough, many investors still consider the United States as a safe haven. The S&P 500 Index (measured in U.S. dollars) eventually closed out the year with a modest positive increase of 2.1%. For Canadians who hold funds in the U.S. Equity category, this translated into a decline of 0.8% after incorporating currency effects and fund fees.

As is often the case when equity markets falter, fixed income funds benefited from their status as safe harbours and posted strong gains for the year. The Morningstar Canadian Long Term Fixed Income Fund Index had the biggest increase among all fund indices with 17.3%, while Canadian Inflation-Protected Fixed Income was second with 14.9%. The broader Canadian Fixed Income category rose 7.4% for the year. Meanwhile, the 11 fund indices that track balanced or target-date portfolio categories had varying performance that depended greatly on the proportion they allocated to bonds versus equities. Performance ranged from a 4.2% rise for the 2015 Target Date Portfolio fund index, which has constituent funds that hold mostly bonds and cash, to a 6.7% decline for Tactical Balanced.

For more on 2011 fund performance, go to www.morningstar.ca.

Morningstar Canada's preliminary fund performance figures are based on change in funds' net asset values per share during the month, and do not necessarily include end-of-month income distributions. Final performance figures will be published on www.morningstar.ca next week.

About Morningstar
Morningstar Research Inc. is a Canadian subsidiary of Chicago-based Morningstar, Inc., a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 330,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services and has more than $167 billion in assets under advisement and management as of Sept. 30, 2011. The company has operations in 26 countries.

SOURCE Morningstar Research Inc.

For further information:

Adam Fisch, Fund Analyst, Morningstar Canada, (416) 484-7815; Christian Charest, Editor, Morningstar Canada, (416) 484-7817


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