Resource-heavy Canadian small-cap funds end volatile year on a high note, Morningstar data show

    TORONTO, Jan. 3 /CNW/ - Canadian investment funds that focus on natural
resources had another volatile year in 2007, with monthly returns that often
ended up either at the very top or very bottom of the Morningstar performance
rankings. Fortunately for investors who hold these funds, the month of
December was a positive one, with the Morningstar Natural Resources Equity
Fund Index gaining 3.7%, according to preliminary performance data released
today by Morningstar Canada.
    This end-of-year surge allowed the fund index to finish the year up
13.1%. Though this is its worst one-year performance since 2001, it is
nonetheless the fourth-best return among the 42 Morningstar Canada Fund
Indices for 2007. "The demand for energy remained strong this past year,
pushing the price of a barrel of oil closer to the US$100 mark after it
started 2007 below US$52," said Philip Lee, fund analyst with Morningstar
    "The trend was strongly positive but there were some bumps along the
way," Lee explained. "Oil prices took a meaningful dip in August when the
U.S.-led credit and liquidity crisis hit full stride. There were increasing
fears that the situation would further weaken the U.S. economy and possibly
throw it into a recession that could have spread around the globe, which would
have definitely been a bearish scenario for energy. Toward the end of the
year, the price of oil spiked following Iran's announcement that it plans to
start its first nuclear plant in 2008. Also, OPEC's decision to leave product
quotas unchanged and the geopolitical tension that has built up in Pakistan
following the assassination of the country's former prime minister Benazir
Bhutto have helped to bolster oil prices."
    Also benefiting from the strong resource sector were the Canadian Focused
Small/Mid Cap Equity and Canadian Small/Mid Cap Equity fund indices, which
returned 5.7% (the best return among all fund indices) and 2.5% (the
third-best return), respectively, in December. On average, funds in these two
categories hold about half of their assets in the energy and materials
sectors. For the year as a whole, Canadian Focused Small/Mid Cap Equity gained
14.2% and Canadian Small/Mid Cap Equity was up 5.7%.
    One of the biggest stories in business circles in 2007 was the Canadian
dollar's considerable rise against many of the world's major currencies - most
notably the U.S. dollar - resulting from high demand for Canadian commodities.
The loonie, which started the year at just under US$0.86, reached parity with
its U.S. counterpart in September for the first time in more than 30 years. It
went on to briefly top the US$1.10 mark in November before closing the year at
US$1.01 for an 18% increase.
    This had a significant impact on the performance of U.S. equity funds
that don't hedge their foreign currency exposures. The Morningstar U.S. Equity
Fund Index, which is measured in Canadian dollars, lost 10.7% in 2007, despite
the S&P 500 Index rising 5.5% for the year when calculated in U.S. dollars.
Similarly, the Morningstar U.S. Small/Mid Cap Equity Fund Index was down 10%
while the Russell 2000 Index, which measures the performance of the U.S.
small-cap market, lost just 1.5%.
    "The slumping housing market in the U.S. doesn't seem to have hit bottom
yet, and the resulting credit concerns and persistent possibility of a
recession have really hurt the value of the greenback," Lee said. "While a
slump in the U.S. economy would seem to be bearish for the loonie, economic
growth - and continued demand for energy - in China, India and other emerging
countries seems to have picked up the slack thus far. Also, the weakening of
the U.S. dollar versus global currencies and geopolitical unrest in Pakistan
have bolstered demand for gold; this provided additional demand for the loonie
as foreign investors clamoured after gold-related stocks, of which Canada has
    The loonie's strength affected much more than just U.S. equity funds. It
was a major factor in the poor performances of most foreign equity fund
indices. The Morningstar International Equity Fund Index lost 6.6% for the
year, while Global Equity was down 6.4% and European Equity shed 4.8%. This
happened despite most of the world's major stock markets ending the year in
positive territory when measured in local currency terms.
    But while the loonie also made double-digit strides against the
currencies of Asian countries (excluding Japan), these had such strong market
performances that it was much less noticeable. In China, the Shanghai
Composite Index was up 96.7% for the year, while stock indexes in Hong Kong
and Korea gained more than 30%. The Morningstar Asia Pacific ex-Japan Equity
Fund Index returned 16.3% in 2007, topping all other fund indices.
    "Throughout the year, concerns about the sustainability of China's
growth, increased capital reserve requirements, increases in interest rates,
and a hike on stamp duties (essentially a tax) on securities trades were mere
hiccups for Chinese and related stocks," Lee said. "Strong economic growth in
China has drawn investors, foreign and domestic, who are willing to take on
risk. Double-digit growth in gross domestic product may not be sustainable,
but mid to high single-digit advances are nothing to scoff at. Furthermore,
this kind of growth is certainly more favourable than the forecast for the
    Asian equities also make up nearly half of the assets of funds in the
Emerging Markets Equity category, whose fund index had the second-best return
in 2007 with 16.1%. Another major contributor to that fund index's success was
Brazil, where the main stock market index, the BOVESPA, gained 43.6% for the
year. Also, the Brazilian real was one of the rare currencies around the world
to actually appreciate versus the Canadian dollar, gaining 1.7%.
    The Morningstar Japanese Equity Fund Index was one of the worst
performers among the Morningstar Canada Fund Indices in 2007, losing 21.9%.
Japan suffered from the unfortunate combination of poor market performance and
currency depreciation, with the Nikkei 225 Index losing 11.1% for the year,
and the Japanese yen dropping 9.7% versus the loonie. Japanese Equity also had
the worst return for December with a 5.5% loss.
    For more on December 2007 fund performance, go to
    Morningstar Canada releases preliminary fund performance figures at the
beginning of each month, giving investors an early indication of how fund
categories fared during the previous month. The preliminary numbers 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 such as dividends,
interest or capital gains. Final performance figures will be published on next week.

    About Morningstar Canada

    Morningstar Canada is the Canadian subsidiary of Chicago-based
Morningstar, Inc., a leading provider of independent investment research.
Morningstar Canada produces the popular PALTrak and Morningstar Advisor
Workstation investment-fund research tools, and is a major source of Canadian
investment fund information through and
Morningstar Canada is also a leading provider of Web-based solutions for fund
industry Web sites, and provides consulting services based on its data and
related analysis. Morningstar, Inc. provides data on approximately 260,000
investment offerings, including stocks, mutual funds and similar vehicles. The
company has operations in 18 countries and minority ownership positions in
companies based in three other countries.

For further information:

For further information: Philip Lee, Fund Analyst, Morningstar Canada,
(416) 484-7824,; Christian Charest, Associate
Editor, Morningstar Canada, (416) 484-7817,

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