Investment funds that target non-Canadian equities had an rocky start to the year. Domestic equity funds were also in the red in January, but their losses were not as severe, according to preliminary performance data released Tuesday by Morningstar Canada.

The international equity fund index had the worst return among all fund indices in January with a 10.3% loss, followed by European equity, down 9.7%. These numbers reflect market losses on almost every exchange in Europe and Asia, as well as a 7.1% depreciation of the euro versus the Canadian dollar. Meanwhile, the fund indices that track the Asia Pacific ex-Japan equity, Asia Pacific equity, Greater China equity and Japanese equity lost 7.8%, 8.2%, 8.3% and 9.2%, respectively.

“Disappointing earnings results and pessimistic guidance from reporting companies weighed on equities in January,” says Esko Mickels, fund analyst with Morningstar Canada. “Dismal employment numbers and a daily stream of layoff announcements stoked fears of a deepening global recession.”

Markets also had it tough in the United States, where the S&P 500 Index lost 8.4% for the month. “Even a new president failed to inspire hope as U.S. indices resumed their decline in January,” Mickels says. “The day of Barack Obama’s inauguration alone, the S&P 500 fell almost 5.3%.”

However, unlike funds that invest in Europe, currency movements had a positive impact on funds in the U.S. equity category, which collectively lost 7.8% for the month. The Canadian dollar shed almost 1% against the greenback as investors sought the relative safety of U.S. dollars.

In Canada, the S&P/TSX composite index had a good run in the first few days of the month but finished with a 3% loss, dragged down by bleak economic news and worries over worsening conditions in both Canada and the U.S. The Canadian equity fund index lost 3.6%, while the Canadian focused equity fund index was down 4.8%. Bucking a recent trend, small-cap funds outperformed their large-cap counterparts last month; the Canadian small/mid cap equity fund index lost just 0.3%, while Canadian focused small/mid cap equity was down 1.2%.

Only five of the 43 Morningstar Canada Fund indices had positive returns in January. Topping the list were the indices that track the precious metals equity and natural resources equity fund categories, with gains of 8.4% and 5.8%, respectively. “Global economic woes chopped demand for resources, keeping prices at depressed levels. Nevertheless, these sector funds posted gains as investors nibbled at companies trading at significant discounts to their mid-summer prices, while some companies are beginning to benefit from takeover speculation,” Mickels says.

Final performance figures will be published next week.

IE