Christian Charest: For Morningstar I'm Christian Charest. 2017 was a good year for just about every category of mutual funds in Canada, with energy stocks being the lone exception.
Asian equity funds were the top performers, led by those in the Greater China Equity category, which returned an average 35.9% for the year. Most of those gains can be attributed to the strong performance of stocks listed on the Hong Kong Stock Exchange, which provided a return of 36%, though Shanghai and Taiwan stocks also did well, returning 6.6% and 15%, respectively.
One thing to note, however, is that the Canadian dollar had an almost 8% appreciation against the Hong Kong dollar during the year, which will detract from the performance of funds that don't employ currency hedging. This means that funds that do hedge their currency exposure will likely have outperformed those that don't.
Chinese stocks were also the main drivers for funds in the Asia Pacific Equity and Asia Pacific ex-Japan Equity categories, which are both up about 25%. But other markets in that region also did very well. The Nikkei Index, the main benchmark for Japanese equities, went up by 19.1% in 2017, while South Korea's KOSPI Index gained 21.8%, when measured in local currencies, and currency effects were minimal for those two countries.
Asian equities make up a big portion of funds in the Emerging Markets Equity category, which also did well with an average return of 24.3%. These funds also benefited from a strong showing by Brazilian stocks, where the BOVESPA Index gained almost 27% for the year.
The U.S. market also had a solid year, with the S&P 500 posting its ninth straight calendar year of positive performance with a 21.8% total return. However, Canadian investors only captured part of that gain because the Canadian dollar appreciated by 7% against the U.S. dollar, finishing the year just under the 80-cent mark. As a result, funds in the U.S. Equity category gained 13.2% on average. As with Asian funds, the actual performance of individual funds in this category will depend greatly on their currency hedging policy.
In Canada, most stock sectors did well; financials in particular were up more than 13% for the year. But as has been the case for several years, the wild card is the energy sector, namely oil. The price of oil dropped by about 20% in the first half of the year, and so did energy stocks, and because the sector makes up about a fifth of the Canadian stock market, diversified Canadian equity funds also suffered. Energy stocks recovered somewhat in the second half but still ended the year down more than 10%. Despite the drag, the S&P/TSX Composite Index had a total return of 9.1%, which translated to a 7.7% gain for funds in the Canadian Equity category.
Finally, fixed income funds also had positive returns last year. This may come as a surprise considering that central banks in many countries including the United States and Canada have started to increase interest rates, which normally has a negative effect on bonds. Even more surprising is that one of the best performing categories in that group, Canadian Long Term Fixed Income, is also one of the most sensitive to interest rate movements. Despite two rate hikes in July and September by the Bank of Canada, these funds still managed to gain 6.3% for the year, which suggests that bond investors may have been expecting more tightening by the central bank. Other fixed income categories had more muted but still positive results; the largest category in the group, Canadian Fixed Income, had an average gain of 1.7% for the year.
