Institutional pooled equity investment funds continued to favour financial services stocks during the fourth quarter of 2005.

This sector was the most popular among both Canadian and foreign-focused funds, according to data collected by Morningstar Canada and released through its Principia for Pooled Funds software.

On the performance side, funds focused on foreign equities outperformed their Canadian counterparts for the most part during the three-months ending Dec. 31, 2005. However, Canadian equities were among the top performers for the 2005 calendar year.

The Asian equity pooled fund index gained 12% during the three months ending Dec. 31, the best return among Morningstar’s 15 institutional pooled fund indices. Next best was emerging markets, which rose 7.7% during the quarter.

The Canadian equity (pure) and Canadian equity pooled fund indices gained 2.5% and 2.4% respectively during the quarter, lagging international, global and U.S. Equity, which rose 4.3%, 4% and 2.8% respectively. The two Canadian equity indices also underperformed the benchmark S&P/TSX composite index, which rose 2.9% during the quarter. Canadian small cap equity fared better at 4.5%, producing the quarter’s fourth-best return, just behind third-place real estate’s 4.7%.

Fixed-income pooled funds brought up the rear, with Canadian mortgage, Canadian money market and Canadian bond returning just 0.6%, 0.7% and 0.9% respectively. Foreign bond did somewhat better, returning 1.2%.

The flat Canadian fixed-income returns held the balanced pooled fund index to a 1.8% return, as the average fund in the corresponding asset category decreased its Canadian equity holdings to 32.6% at Dec. 31 from 33.1% at Sept. 30.

For all of 2005, emerging markets equity was the top performer, gaining 27.8%. The next best one-year performers were Canadian equity (pure), up 23.7%; Canadian small cap equity, up 21.7%; and Canadian equity, up 20.6%. The year’s worst performer was foreign bond, which lost 0.6%.

The fourth quarter’s top performing fund overall was AIG Canada Small Companies, which had a three-month return of 20.6%, followed by MCBT Japan Mid-Cap, up 18.6%, and Fidelity Japan MF, up 16.3%. AIG Canada Small Companies was also 2005’s best performer, with a one-year return of 66.3%, followed by Co-Operators Canadian Resource, up 54.7%, and Fidelity Latin American MF, up 52.8%.

Morningstar tracks more than 900 institutional pooled funds.