Mutual funds that invest in Asia and its emerging markets will be the hottest performers over the next five years, according to portfolio managers surveyed by Morningstar Canada Inc.
Managers polled by Morningstar also believe that equities as an asset class will outperform bonds. The majority expect interest rates to rise moderately, with the U.S. dollar gaining strength while oil prices weaken.
Morningstar Canada conducted the survey of managers at 24 fund companies in late April and early May of this year.
The research firm says managers believe explosive economic growth in countries such as India and China will fuel stock market returns.
"Funds that invest specifically in India and China have begun to gain momentum, thanks to the rapid growth spurts that both countries are currently experiencing," said David O'Leary, senior analyst with Morningstar Canada.
Mr. O'Leary added that, while India's economy expanded at only about 4 per cent a year between 1950 and 1980, it is now growing at more than 7 per cent annually.
In Canada, the only fund specifically devoted to investing in India is the $30.5-million Excel India fund, Mr. O'Leary said.
But the analyst notes that some funds in the Asia Ex-Japan group have considerable exposure to India and he expects to see new offerings.
Mr. O'Leary said investors do appear to be taking more notice of emerging markets.
Visitors to the Morningstar website most often seek information on investing in India, China, gold, biotechnology and hedge funds, he said.
Most respondents to the survey say they believe U.S. and Canadian stock markets are fully valued. As a result, they said, funds such as hedge funds that use alternative strategies are likely to be better positioned to profit from both rising and falling markets.
The fund managers surveyed also believe that energy and health care will lead performance in the next 12 months, while energy and financial services will be the top fund performers over the next five years.
Portfolio managers expect gold to rise in value over the next five years, but they think the price of oil will peak this year.
As for the fund industry itself, many managers expect to see more consolidation. Investors will continue to scrutinize management expense ratios, the respondents believe, and as a result, fees could be reduced.
Many managers believe the fund industry will respond to this scrutiny with more transparent fund costs and that some companies may move toward merit-based compensation.
© 2007 The Globe and Mail. All rights reserved.
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