Equity and balanced funds in Canada posted strong returns in 2009, recovering a large portion of the heavy losses they incurred in 2008, cording to preliminary performance data released Tuesday by Morningstar Canada. However, none of the equity fund indices have recovered beyond their early 2008 levels.

Five of the fund indices posted calendar-year returns above 50%, all of them tracking categories whose constituent funds are largely affected by commodity prices. The best performer for the year was the precious metals equity fund index with a gain of 57.9%, followed by Canadian focused small/mid cap equity and natural resources equity with gains of 55.9% and 55.1%, respectively. Also in the top five were the fund indices that track the emerging markets equity (53.3%) and Canadian small/mid cap equity (52.5%) categories.

“The strong rebound in natural resource equities last year was a reflection of several developments, including the stockpiling of many key base metals by China, prospective improvements in production growth and demand for energy, and the start of a recovery in G7 nations,” says Nick Dedes, fund analyst for Morningstar Canada. “As investors get increasingly comfortable with holding riskier assets amid improving credit conditions and economic prospects, smaller capitalization equities-particularly in the energy and resource sectors-have gained noticeable traction.”

Along with solid performances from the world’s stock markets, currency effects were a major story in 2009 for Canadian holders of foreign equity funds, with the strengthening loonie detracting greatly from these funds’ returns. Nowhere was this more evident than in the Japanese equity category, where the benchmark Nikkei 225 index’s 19% gain for the year when expressed in Japanese currency was more than wiped out by the Canadian dollar’s 20% appreciation against the yen. “This dragged the category deep into negative territory, with the Japanese equity fund index posting a 9.7% loss,” Dedes said.

Other regions in Asia performed much better despite experiencing similar currency depreciation against the loonie. Notably, the Shanghai Composite Index gained 80% in 2009, while indices in Taiwan, Hong Kong, and Seoul were up 78.3%, 52%, and 49.7%, respectively, when expressed in local currency terms. As a result, the Greater China equity fund index gained 38.6% for the year, ranking sixth among all 43 fund indices, while the Asia Pacific ex-Japan equity fund index finished with an eighth-place 36.3% return.

Funds in the U.S. equity category weren’t so fortunate. Though the benchmark S&P 500 index gained a respectable 26.5% for the year, the loonie’s 17% appreciation against the U.S. dollar limited the U.S. equity fund index’s return to 10.7%.

Among the seven balanced fund categories, only the two that favour fixed-income securities have managed to climb beyond their previous highs. The global fixed income balanced and Canadian fixed income balanced fund indices, which had suffered relatively tame losses of 15.4% and 13.1%, respectively, between May 31, 2008, and Feb. 28, 2009, have since posted gains of 18.9% and 17.7%, respectively, which took them back to positive territory.

Final performance figures will be published on next week.

IE