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Financial, resource sectors lead fund train wreck


All stock and balanced funds were in the red in 2008, but those targeting the financial services and natural resources sectors got hit the hardest, according to preliminary figures from Globefund.

Financial services and natural resource funds, respectively, plunged an average of 47 per cent and 45 per cent.

The financial services funds, which typically include U.S. stocks, were affected by the global credit crisis. And natural resource funds were hurt by the sudden collapse in the price of oil to below $50 (U.S.) a barrel recently from a high of $147 last July.

"There was a bubble in energy stocks, and anything commodity-related," independent fund analyst Peter Loach said in an interview.

But "mean reversion really explains a lot of what was happening last year" whether it was emerging markets or Canadian stock funds, he said.

Mean reversion is a theory suggesting that prices and returns eventually move back toward the historical mean or average return.

Canadian equity and Canadian-focused equity funds, respectively, shed an average of 34.5 per cent and 30.8 per cent.

The latter category, which allows funds to invest up to almost 50 per cent in foreign stocks, likely got some help from currency gains as the Canadian dollar weakened against the U.S. dollar.

Canadian small to mid-capitalization equity and Canadian-focused small to mid-cap equity funds, respectively, lost an average of 40.6 per cent and 39 per cent.

Greater China equity funds, which had been posting eye-popping returns in recent years, shed an average of 42 per cent.

While retail venture capital funds, which invest mainly in private companies, lost an average of only 14.1 per cent, Mr. Loach dismissed this figure as highly unrealistic.

If these funds - more commonly known as labour-sponsored investment funds - liquidated their portfolios, the returns would be sharply lower, Mr. Loach suggested.

"A lot of their investments would be no bid, and they are probably pricing them at cost."

Global fixed-income funds, however, were the stars last year with an average gain of nearly 17 per cent.

These funds "always come up on top" during major stock market or financial crises, Mr. Loach said. "The one safe haven other than cash has been global bonds."

"Currency explains the majority of the returns," he said, referring to the strong U.S. dollar relative to the Canadian loonie. "Global investors perceive more safety in the U.S. dollar than their home currency or the stock market."

Certain Canadian bond funds were also in the black. They ranged from an average gain of 3 per cent for Canadian fixed-income funds to 5 per cent for Canadian short-term fixed-income funds.


The best and worst average returns

As of Dec. 31, 2008
TOP 10
Global Fixed Income16.9%
Canadian Short Term Fixed Income5.0%
Canadian Long Term Fixed Income3.8%
Canadian Fixed Income3.0%
Canadian Money Market1.9%
U.S. Money Market1.8%
Canadian Inflation Protected Fixed Income-3.5%
Canadian Fixed Income Balanced-7.7%
2010 Target Date Portfolio-9.7%
Global Fixed Income Balanced-11.2%
Financial Services Equity-46.9%
Emerging Markets Equity-46.5%
Natural Resources Equity-44.5%
Greater China Equity-42.0%
Canadian Small or Mid Cap Equity-40.6%
Precious Metals Equity-40.2%
Canadian Focused Small/Mid Cap Equity-39.0%
Global Small/Mid Cap Equity-38.8%
Real Estate Equity-38.6%
Asia Pacific ex-Japan Equity-36.7%

Average for all funds regardless of asset class: -22.9%


© 2007 The Globe and Mail. All rights reserved.

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