Mutual funds in Canada that invest in foreign stocks posted healthy gains in January, in large part because of the Canadian dollar’s sharp drop against most major world currencies. The falling loonie was also indirectly responsible for the strong results of fixed-income funds during the month.

Thirty-seven of the 42 Morningstar Canada fund indices, which measure the aggregate returns of funds in various standard categories, increased for the month of January, according to preliminary data Tuesday released by Morningstar Canada.

Among the best performers last month were the indices that track fund returns in the Asia Pacific ex-Japan equity, Greater China equity, and Asia Pacific equity categories, which increased by 12%, 10.6%, and 10.3%, respectively. These results are significantly better than the market returns of Asian stocks when measured in local currencies; for example, the Nikkei 225 Index of Japanese stocks increased by 1.3%, while Hong Kong’s Hang Seng Index and South Korea’s KOSPI Index were up 3.8% and 1.8%, respectively. However, the Canadian dollar depreciated by more than 8% against the Hong Kong dollar, Japanese yen, and Chinese yuan, which boosted Canadian unhedged funds that invest in these markets.

Similarly, funds in the U.S. equity category collectively increased by 3.8%, despite the S&P 500 Index falling 3% when measured in U.S. dollars. The loonie dropped 8.8% versus its U.S. counterpart in January. In Europe, stock markets in France, Germany, and the United Kingdom posted strong results, which were also helped by currency effects, albeit to a lesser extent, and the European equity fund index increased by 8.9% for the month. Meanwhile, the international equity and global equity fund indices increased by 8% and 6.3%, respectively, while the emerging markets equity fund index was up 9%.

“The Canadian dollar has continued its dramatic decline so far this year, falling below US$0.80 for the first time since early 2009 because of falling oil prices and a weakening economic outlook that led to the Bank of Canada to cut interest rates,” said Shehryar Khan, Morningstar manager research analyst.

The interest rate cut in turn was the catalyst for strong positive results in fixed-income categories in January. The Canadian long term fixed income and Canadian inflation-protected fixed income fund indices increased by 8.3% and 7.3%, respectively, while the more broadly diversified Canadian fixed income fund index was up 3.8%.

By comparison, domestic equity fund performance was much more muted last month, though the aggregate numbers understate the wild ride that individual sectors experienced. The Canadian equity fund Index increased by a modest 0.2%, closely tracking the S&P/TSX Composite Index’s 0.5% uptick. However, these returns included an increase of 15.7% for the Canadian basic materials sector as well as decreases of 2.2% for energy and 7.7% for financials. The fund indices that measure the energy equity and financial services equity categories were among the month’s worst performers with decreases of 1.8% and 7.9%, respectively, while the precious metals equity fund index was the best performer overall with a 25% increase.

Final performance figures will be published next week.