A disastrous year for equity funds, Morningstar data show

    TORONTO, Jan. 5 /CNW/ - Equity funds in Canada had one of their worst
years ever in 2008, as markets around the world braced for what could be a
painful recession. All of the Morningstar Canada Fund Indices that track
either equity or balanced fund categories had negative returns for the year,
according to preliminary performance data released today by Morningstar
    For 23 of the 24 equity fund indices, the losses exceeded 20%, and all
but four of them recorded their worst calendar-year return in at least 25
years. The best performing equity fund indices for the year were Health Care
Equity (-8.4%) and Japanese Equity (-20%), while the worst was Natural
Resources Equity (-48.5%).
    "Oil and commodity prices tumbled in 2008 as a result of dwindling global
demand," said Jordan Benincasa, fund analyst with Morningstar Canada. "Natural
resource stocks took a beating as oil went from more than US$145 per barrel to
less than US$40, while other commodities like natural gas, aluminium and
copper followed a similar path."
    Falling commodity prices also impacted funds that focus on small-cap
equities: the Morningstar Canadian Focused Small/Mid Cap Equity Fund Index
lost 48.2% for the year, while Canadian Small/Mid Cap Equity and Global
Small/Mid Cap Equity dropped 41.6% and 40.6%, respectively. Emerging Markets
Equity funds, which also hinge on resources to a large extent, collectively
lost 45.9%, casting serious doubt on the decoupling theory, which purports
that countries like China and India are no longer dependent on the economic
health of the United States.
    In the U.S., the S&P 500 Index plunged 37% in 2008 amid the most severe
financial crisis since the Great Depression. But for Canadian holders of U.S.
equity funds, the losses were mitigated by the Canadian dollar's sharp
depreciation against the U.S. currency. The Morningstar Canada Fund Indices
that measure the U.S. Equity and U.S. Small/Mid Cap Equity categories were
down 29.3% and 30.6%, respectively, for the year.
    Fixed income fund indices were the only ones able to provide positive
returns in 2008. The Morningstar Global Fixed Income Fund Index posted the
highest gain overall (15.6%), helped by the loonie's dramatic decline, which
in turn was mainly caused by plunging commodity prices. "The past year should
serve as a reminder that unhedged global bond funds can act as a nice
diversifier for those with heavy exposures to the natural resources sector,"
Benincasa said.
    Domestic bond funds did not fare as well, though most indices were up for
the year; Canadian Short Term Fixed Income gained 5.3%, Canadian Fixed Income
gained 2.2% and Canadian Long Term Fixed Income was up 1%. "As markets
continued to spiral downwards, investors flocked to the safety of short-term
fixed income securities," Benincasa said. "The demand for these securities has
hit a point where investors are willing to accept historically low yields in
order to avoid further losses."
    This rising demand for risk-free securities punished funds in the High
Yield Fixed Income category, which collectively lost 21.5% last year.
"High-yield bonds were clobbered as investors demanded to be paid more for
assuming higher risk," Benincasa said.
    Among the 11 balanced and target-date fund categories, the losses for the
year ranged from 8% for the Morningstar 2010 Target Date Portfolio Fund Index
to 23.4% for the Morningstar Global Equity Balanced Fund Index.
    For more on 2008 fund performance, go to www.morningstar.ca.
    Morningstar Canada's preliminary fund performance figures are based on
the 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 the Canadian subsidiary of Chicago-based
Morningstar, Inc., a leading provider of independent investment research. The
company offers an extensive line of Internet, software, and print-based
products and services for individuals, financial advisors, and institutions.
Morningstar provides data on more than 290,000 investment offerings, including
stocks, mutual funds, and similar vehicles. The company has operations in 19
countries and minority ownership positions in companies based in three other

For further information:

For further information: Jordan Benincasa, Fund Analyst, Morningstar
Canada, (416) 484-7821; Christian Charest, Associate Editor, Morningstar
Canada, (416) 484-7817

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