Asian equity funds led the charge in 2017: Morningstar Canada

The best performer the Greater China equity category, with a 35.9% increase, mirroring the 36.0% increase of Hong Kong’s Hang Seng index. Funds in this category that hedge their currency exposure will likely outperform their peers that do not, since the Hong Kong dollar depreciated by 7.3% against the Canadian dollar during the year.

Other market indices in the Asia/Pacific region also performed well last year, including South Korea’s KOSPI, Japan’s Nikkei 225, and the Taiwan Stock Exchange weighted index, which increased 21.8%, 19.1%, and 15.0%, respectively.

As a result, the fund indices that track the Asia Pacific Equity and Asia Pacific ex-Japan Equity categories finished 2017 among the top performers with increases of 24.9% and 25.7%, respectively. The strength of Asian stocks also helped funds in the emerging markets equity category, which collectively increased 24.3%.

European equity funds benefited from a combination of strong market performance and favourable currency movements, and the European equity fund index posted a 14.6% increase for the year. Germany’s DAX Index increased 12.5% in 2017 when measured in local currency, while France’s CAC 40 and the United Kingdom’s FTSE 100 were up 9.3% and 7.6%, respectively. Meanwhile, the euro and U.K. pound appreciated by 6.2% and 2.4%, respectively, against the Canadian dollar.

In the United States, the S&P 500 index posted a total return of 21.8% — its ninth consecutive calendar year in positive territory and best performance since 2013. However, Canadian fund investors only captured a fraction of this gain as the U.S. equity fund index increased 13.2% for the year, hampered by the loonie’s 7% appreciation against the U.S. dollar.

Domestic equity funds had positive results for the year but trailed their foreign counterparts. The Canadian equity fund Index increased 7.7%, underperforming the benchmark S&P/TSX composite index, which had a total return of 9.1%, while the fund indices that track the Canadian dividend and income equity and Canadian small/mid cap equity categories were up 7.9% and 3.2%, respectively. Among Canada’s three largest stock sectors, financial services and basic materials both contributed positively with total returns of 13.3% and 7.7%, respectively, while energy was a detractor, falling 10.6%.

The worst-performing equity fund indices were natural resources equity and energy equity, which decreased 3.4% and 13.1%, respectively. Though they partially recovered in the second half of the year, funds in these two categories suffered substantial losses in the first six months as oil prices tumbled.

Despite the interest rate hikes enacted by central banks in many countries including Canada and the U.S. seven of the eight fund indices that track fixed-income categories increased in 2017. By far the best-performing fund index in this area was preferred share fixed income with a 14.1% increase. Second-best was Canadian long term fixed income, one of the categories most sensitive to interest rates, which finished the year with a 6.3% increase, suggesting that the market may have been expecting more meaningful rate hikes from the Bank of Canada. The only fixed income category in the red was Canadian inflation-protected fixed income, down 0.03%.

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 next week.