Equity and balanced funds in Canada once again posted positive returns in 2010, adding to their strong gains of 2009.

All but two of the 44 Morningstar Canada fund indices had positive returns for the year, according to preliminary performance data released Wednesday by Morningstar Research Inc.

As was the case in 2009, the best performing categories of the past year were those whose constituent funds are the most affected by commodity prices. The best performer was the precious metals equity fund index with a gain of 52.1%, followed by the indices that track the natural resources equity, Canadian small/mid cap equity, and Canadian income trust equity indices with gains of 27.1%, 26.6%, and 21.5%, respectively.

“Concerns over sovereign debt issues in Europe, and the U.S. government’s asset purchases helped fuel another strong year for the price of gold,” says Nick Dedes, fund analyst for Morningstar. “In addition, other precious metals that also serve an industrial role, such as palladium and silver, were big contributors with gains that far outpaced gold’s ascent in 2010. Robust results out of the more volatile resources and small-cap equity categories suggest that, by and large, investors have maintained an appetite for risk that began to build in the spring of 2009. This is likely based on a combination of mounting optimism on the back of a thus-far sustained recovery, and frustration with the low-yielding alternatives in the fixed-income space.”

Sector-diversified domestic equity funds had double-digit gains, but they significantly lagged their benchmark for the year. The Canadian equity fund index posted a one-year gain of 12.9%, compared to a 17.6% return for the S&P/TSX Composite Index, indicating that some of the larger funds in the category may have missed out on some of the market’s push.

South of the border, the U.S. equity fund index gained 9% in 2010. This also represents an important lag relative to these funds’ benchmark, the S&P 500, which gained 15%. However, a large part of the difference in this case can be explained by the Canadian dollar’s 5.2% appreciation versus the U.S. dollar for the year. The fund index that tracks the riskier U.S. small/mid cap equity category did better with a 16.5% gain.

The worst performer among all fund indices was the one that measures the European equity category, which lost 2.9% for the year. “The severity of the debt problems that several European countries face came to the forefront in 2010, weighing on the region’s equities as well as its currency,” Dedes said. While some of the region’s powerhouses such as Germany and the United Kingdom actually finished the year with healthy market gains, the 11.2% decline of the euro relative to the loonie was enough to send Canadian funds investing in the region into negative territory.

The only other fund index to post a loss in 2010 was greater China equity, down 1.5%. “While China’s relatively robust GDP growth has played an important role in the context of a broader economic recovery, it has also prompted the country’s policymakers to take action to ward off inflationary pressures. These actions have weighed considerably on Chinese equity valuations in 2010,” Dedes said.

Final performance figures will be published on next week.

IE