U.S. Equity Funds Outperform Again in 2014, Morningstar Canada Data Show

TORONTO, Jan. 5, 2015 /CNW/ - Mutual funds in Canada offered generally positive results in 2014, despite a sharp increase in volatility in the last four months of the year. Thirty-nine of the 42 Morningstar Canada Fund Indices, which measure the aggregate returns of funds in various standard categories, increased for the year overall. As was the case in 2013, funds that invest in U.S. equities were among the best performers, according to preliminary data today released by Morningstar Canada.

The fund index that tracks the returns of funds in the U.S. Equity category increased by 17.3% during the year, reflecting a 13.7% gain for the benchmark S&P 500 Index as well as an 8.3% depreciation of the Canadian dollar versus its U.S. counterpart. The Morningstar U.S. Small/Mid Cap Equity Fund Index was also among the top performers with an 11.6% increase over the past 12 months.

"An accelerating U.S. economy, high corporate profits, and patient monetary policy by the Federal Reserve, with a carefully calibrated winding down of its enormous bond-buying program, all helped the S&P 500 reach new highs over the past year," Morningstar Manager Research Analyst Vishal Mansukhani said. "The slide in the price of oil, a major export for Canada, was one reason for the depreciation in the loonie. An expectation that the U.S. Federal Reserve will lift rates before the Bank of Canada also hurt the loonie, as the anticipation of rate increases can spur demand for the currency of that country."

Unlike the previous year, 2014 was a very good year for bond funds, as all seven fund indices that track fixed-income categories were in the black. Most impressive was the Morningstar Canadian Long Term Fixed Income Fund Index, which finished the year with a 17.1% increase, while the Canadian Fixed Income and Global Fixed Income Fund Indices were up 6.9% and 6.8%, respectively.

"Canadian sovereign, provincial, and corporate bonds returned 8.7% in 2014, as measured by the Bank of America Merrill Lynch Canada Broad Market Index, versus 6.1% and 7.6% for the comparable U.S. and global bond indexes, respectively," Mansukhani said. "Although the U.S. economy fared well in 2014, growth in other major economies sputtered, increasing the demand for safe-haven securities like Canadian bonds. Also, despite economists' expectations that rates on 10-year Canadian government bonds would rise by about 50 basis points, the year ended with rates being almost 1 percentage point lower. Along with increased demand for Canadian government bonds from foreigners, lower inflation and tumbling gas prices were tailwinds for bond rates."

Sector-specific funds found themselves both at the top and bottom of the performance table in 2014. Among the best performers were the Real Estate Equity and Financial Services Equity Fund Indices with increases of 13.6% and 12.2%, respectively, while the two worst performers were Natural Resources Equity and Energy Equity, down 10.7% and 11.1%, respectively.

Despite a difficult spell that started in September, diversified Canadian equity funds ended the year with solid results. The Morningstar Canadian Equity Fund Index increased by 10.4% over the past 12 months, in large part because of the strength of the financial services sector. The slumping energy sector, which represents a significant portion of the Canadian market, dragged results.

"Oil prices fell to a five-year low because of increased supply from U.S. shale oil production, weaker demand from Europe and China, and OPEC's refusal to cut production amid this supply-demand dynamic. Falling oil prices are a huge headwind for the Canadian oil and gas sector, which has one of the highest production costs in the world," Mansukhani said.

For more about 2014 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 Research Inc. and Morningstar, Inc.
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 individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 479,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 13 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and has approximately US$169 billion in assets under advisement or management as of Sept. 30, 2014. The company has operations in 27 countries.

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SOURCE Morningstar Research Inc.