Mutual fund families that feature growth funds, index funds or funds that hedge exposure to the Canadian dollar performed best in 2007. On the other hand, value-style funds and those with heavy exposure to financial services stocks languished.

According to data from Morningstar Canada, fund families with top-drawer performance in 2007 were those of RBC Asset Management Inc., Barclays Global Investors Canada Ltd., Fidelity Investments Canada ULC, Dynamic Mutual Funds Ltd. (all based in Toronto) and Montreal-based Standard Life Mutual Funds Ltd. At these fund manufacturers, 80% or more of long-term assets under management were in the first or second quartiles in terms of performance.

The presence of Barclay’s iShares speaks to the success of indexing in 2007. RBCAM and Fidelity take more of a growth investment approach than value, and Dynamic is strong in resources. Standard Life believes its conservative investment style, which emphasizes capital preservation and uses a blend of top-down and bottom-up approaches, is responsible for its excellent results.

This certainly wasn’t the year to be in financial services stocks.

Mackenzie Financial Corp. counts among the companies with improved performance. After years of weak performance, Mackenzie funds suddenly improved, with 53.6% of long-term AUM in the first or second quartiles.

David Feather, president of Mackenzie Financial Services Inc. in Toronto, thinks there’s a new phenomenon going on — a broadening of the Canadian equities market. Mackenzie tends to be much more diversified than many of its competitors, he says: “If you look at the top 10 names in Mackenzie Canadian equity funds, only 1.2 are the same as the top 10 in the overall market, while the average for the other big funds is 5.4.”

Overall, Mackenzie’s 2007 performance was middle of the pack.

Performance numbers for 2007 are based on new Canadian Investment Funds Standards Committee categories, to which CIFSC and Morningstar agreed in June 2007 to create a single standard for rating funds. In 2006, Morningstar, frustrated by what it saw as outdated categories, broke away from CIFSC and created its own categories.

The 2006 data in the accompanying table is based on the new standards and doesn’t match the figures produced last year using either the old CIFSC categories or those used by Morningstar at that time. There may be some upward bias in the 2006 numbers because funds that have since disappeared or were merged are not included.

For most of the fund families, this data for 2006 does not create a substantially different impression to that published a year ago. That is, families with good performance (more than 60% of long-term AUM in funds with above-average performance) stayed in that group; likewise, middle performers (40%-60% with above-average performance) or bottom performers (less than 40%) stayed in their respective groups.

But there were two notable exceptions: BMO Investments Inc. and Guardian Group of Funds Ltd. , both of Toronto. In 2006, using the old CIFSC categories, both had 75% of AUM in funds in the first or second quartile; using Morningstar’s 2006 categories, BMO Investments had only 11% and GGOF had 8.4%. With the new CIFSC categories, they had 38.2% and 40.3%, respectively.

Given that 55.2% of BMO’s long-term AUM were in funds in the first or second quartile in 2007, it’s clear that BMO didn’t have a performance problem in 2006.

GGOF is another story, as its performance deteriorated in both 2006 and 2007 using the new CIFSC categories. Gavin Graham, chief investment officer at GGOF, feels that part of the reason for the poor performance is because GGOF’s Canadian balanced funds are being compared with funds with much less income trust exposure. He points out that income trusts had a return of 5.8% in 2007, while the S&P/TSX composite index was up 9.8%. In addition, 2007 was a particularly bad year for real estate investment trusts, which lost 5.7%. GGOF is always overweighted in REITs because REITs have the most stable cash flow and longest life assets.

Graham expects the GGOF family to perform better this year because REITS tend to do well when interest rates are coming down.

Executives at most fund companies feel the new CIFSC categories are an improvement over the old ones. Moreover, they are relieved to have only one rating system because that makes comparisons easier for investors. As is usual with any new system, some executives feel certain funds are in the wrong categories and they are discussing this with the rating companies.

@page_break@There are also suggestions for further refinements in the system. Jay Aizanman, vice president of client portfolio management at Standard Life, suggests the rising popularity of funds of funds could justify one or more separate categories. Investors tend to decide they want a fund of funds and then choose among those available.

A global dividend fund category would also be useful, says Scott Steele, chief investment officer at BMO Investments. Currently, these funds are lumped in with all global equity.

As well, he says, performance analysis should exclude F-class funds. Fees on that class are very low because the funds do not pay sales commissions to advisors. He says that over the past five years, almost 75% of the assets in funds with above-average performance were in F-class funds.

There are always some fund companies whose performance numbers in a particular year are heavily affected by a few large funds whose returns are slightly more or slightly less than the median return. This was the case for BMO Dividend Fund in 2007; its 1.8% return was less than the 2.6% median for Canadian dividend income equity funds. With $5.8 billion in AUM, this fund accounts for 21% of the non-cash AUM in BMO Investments’ fund family.

TD Mutual Funds’ standing was affected by weak performance in its $8.6-billion TD Canadian Bond Fund, which accounts for 16% of the family’s total long-term AUM. Its return has been less than the median for two years now. Scott Sullivan, managing director with TD Asset Management Inc., says this is because the fund has an overweighted position in corporate bonds.

TD Dividend Growth Fund, with $2.8 billion in AUM, also had lacklustre performance, thanks to a heavy weighting in financial services companies. Scott expects these two funds to do better in 2008, noting that corporate bonds and financial services stocks never underperform for too long.

Overall performance of Toronto-based Acuity Funds Ltd. was hurt by the fourth-quartile return of Acuity High-Income Fund. It has $1.4 billion in AUM, accounting for 26.9% of the firm’s long-term AUM. The fund has a bit of a small-cap tilt, which hurt it last year, says Stephen Crawford, Acuity’s national sales manager: “Owning energy service companies was detrimental in 2007.” However, a number of Acuity’s smaller funds did well, he adds.

Most of the fund families with disappointing 2007 performance are value managers. This includes the funds of Montreal-based Federation des caisses Desjardins du Qu»bec. As well, Denis Dion, products specialist at Desjardins, points out that its Canadian dividend fund has more preferred shares than do competitors; the preferred share index was down 6.6% in 2007. As with other value-oriented families, Dion feels the manager is well positioned to do well this year.

Montreal-based National Bank Securities Inc. also leans toward value and includes preferred dividends in its Canadian dividend fund — and it is very protective of capital in down markets. Martin Lavigne, president and chief operating officer, notes that NBS’s managed products are doing much better. More than 60% of $5 billion in AUM in these products is in first or second quartile. These are the firm’s focus and the source of almost 100% of its sales.

Another value manager is MD Funds Management Inc. in Toronto. It was also badly hit by the rise in the C$. MD Growth Investments Ltd., which has no Canadian content, reported a 12.3% return in foreign currencies; that became a loss of 10.2% in C$.

Graham Anderson, head of investment opportunities with AIM Funds Management Inc. in Toronto, says the current market is characterzied by sector momentum. If there’s a recession and investors start viewing energy and oil price prospects negatively, AIM’s funds will do better — particularly as that will probably be accompanied by some decline in the C$. AIM doesn’t normally hedge currency risk. Anderson notes that the deterioration in the fund family’s performance was most marked in the Trimark funds, which are value funds; most of those are in net redemptions. Some AIM funds, for which investment style is tilted toward growth, are still in net sales.

Some firms that didn’t post eye-popping performance last year are looking forward to better times in 2008. Executives of Brandes Investment Partners & Co. of Toronto are excited about the opportunities to pick up stocks, including shares of financial services companies, at bargain prices. Brandes started dollar-cost averaging when stock prices were still falling, which depressed 2007 returns. None of its equity or fixed-income funds were in the first quartile for the year ended Dec. 31, 2007. But Brandes believes its DCA strategy is setting the company up for excellent results this year.

“This is why people hire firms like ours. Normal investors can’t do this,” says Leah Brock, Brandes’ senior vice president of marketing. “It has been a long time since we’ve had this many choices.”

Jonatham Wellam, president of AIC Ltd. in Burlington, Ont., agrees with Brock that it’s tough for ordinary investors to find the best companies at a time like this: “It’s hard enough for us.”

AIC, which had only 12.5% of long-term AUM in funds with above-average returns, is focusing on the financial services sector, in which it specializes. Wellum points to major sector players, such as UBS AG, based in Switzerland; Citigroup Inc. and Merrill Lynch & Co. Inc. in New York; Bank of America Corp. in Charlotte, N.C.; and Wells Fargo in San Francisco, as having great wealth-management franchises, which is why they have been able to raise the money they need. Their stock prices have been so beaten up that, in essence, all their non-wealth businesses can be had for free.

Phillips Hager & North Invest-ment Management Inc. in Vancou-ver echoes these sentiments. Says Chris Dotson, manager of corporate development and communications: “The volatility and irrational short-term behaviour of the markets is creating opportunities for disciplined managers such as PH&N to find attractive opportunities in the market.” IE