After posting mostly negative returns in 2013, mutual funds in Canada that invest in fixed-income securities performed well in the first month of 2014 amid heightened volatility in equity markets around the world.
Most of the world’s stock indexes ended the month in negative territory, but a steep depreciation of the Canadian dollar meant several foreign-equity fund categories were able to eke out positive returns in January, according to preliminary performance numbers released Tuesday by Morningstar Canada.
“The first two weeks in 2014 were quiet for global equity markets, but negative headlines in late January increased volatility. The flight to safety started with poor economic growth data from China, combined with concerns about the country’s government debt,” said Achilleas Taxildaris, Morningstar fund analyst “This in turn adversely affected developing market currencies, some of which depreciated sharply in a matter of days, forcing central banks to raise interest rates in an effort to stop their fall.”
All seven fund indices that measure the aggregate returns of bond funds were up in January, led by the Canadian long term fixed income and Canadian inflation-protected fixed income fund indices, which increased by 5% and 4%, respectively. The Canadian fixed income fund index, whose constituent funds are the most diversified among the domestic-bond categories, increased by 2.4% for the month.
Funds in the precious metals equity category, which were the biggest losers last year, also benefitted from the month’s volatility; the fund index that tracks that group increased 16.4% in January.
Among domestic-equity categories, the best performer was the Canadian focused small/mid cap equity fund Index with an increase of 0.7%. The Canadian equity fund index increased 0.2%, while Canadian focused equity, Canadian small/mid cap equity, and Canadian dividend & income equity decreased by 0.2%, 0.3%, and 1%, respectively.
Though the Canadian stock market significantly outperformed those of the United States and other developed economies, Canadian funds that target foreign equities had returns that were comparable to those of domestic-equity funds due to currency effects. The European equity fund Index increased 0.4% for the month, despite major stock indexes in Germany, France, and the United Kingdom losing between 2.6% and 3.5% in local currencies. Similarly, funds in the U.S. equity category averaged no return while the S&P 500 Index decreased 3.5% when measured in U.S. dollars.
“Canadian equity funds faced a strong headwind versus their international counterparts because of the depreciating Canadian dollar. While the loonie has quietly depreciated during the past year, it lost more than 4 cents to the U.S. dollar last month, reaching its lowest point since July 2009. Weak data on the Canadian economy along with the more dovish tone of Bank of Canada Governor Stephen Poloz drove the Canadian dollar down,” Taxildaris said.
Asian equity fund categories found themselves at the bottom of the performance table last month. The Asia Pacific equity, Asia Pacific ex-Japan equity, and Greater China equity fund indices decreased by 0.6%, 1.5%, and 1.8%, respectively, while the Japanese equity fund index dropped 3.4%. Among the more regionally diversified categories, the global equity fund index increased 0.2%, while international equity was down 1.4%.
Final performance figures will be published next week.