Are Canadian mutual funds the place to be?

Balanced mutual funds proved increasingly popular at the end of 2010. As investors grow confident in the economy and markets, experts see Canadians willing to take on more risk for a chance at higher returns.

“I don’t think we’re fully back to where we were (before the financial crisis), but we have started to see the balanced funds coming back, and, now, we are even seeing, in the longer term, equity funds are starting to come on as well,” said Jon Cockerline, director of policy at the Investment Funds Institute of Canada, which tracks monthly mutual fund sales.

Canadians ploughed $11.97 billion into mutual funds last year, up from $5.07 billion in 2009, as they pulled investments out of shorter-term money market funds at a rate of about $1 billion per month since May.

Investors’ renewed their love affair with balanced funds, which promise to give both income and capital appreciation by holding a mix of fixed income and stocks. The balanced fund category attracted $26.1 billion of investments in 2010, almost double the prior year.

Among specific fund categories, the stars of 2010 were as Canadian as maple syrup.

“Resources and Canadian small cap returns were certainly fantastic,” said David O’Leary, manager of fund analysis with Morningstar Canada. The top-performing equity category for the past year was precious metal funds, up 52 per cent over the year, natural resources, which gained on average 26.5 per cent, and Canadian small mid-cap, up 26 per cent.

“Canadian equity (funds) in general did well because of the heavy resource and materials component.”

Losers for the year included European equity funds, down 2.25 per cent, hit by sovereign debt concerns, and China equity funds, down 2 per cent.

O’Leary singled out mutual fund firm Sprott Asset Management as a major beneficiary of market trends due to its focus on resource stocks. Its Gold & Precious Minerals fund shone with a return of nearly 75 per cent, while its Canadian Equity fund rose nearly 58 per cent over the year.

As well as Sprott did, it did not manage to top those categories. Morningstar fund analyst Al Kellett, who recently produced a best and worst list for 2010, fingered Middlefield Precious Metals , up more than 89 per cent, for top spot in the ultra-hot precious metals category.

Kellet’s top performers among Canadian equity funds were First Trust Raymond James Canadian Focused Picks Portfolio, up a whopping 59.4 per cent, and the Bisset Microcap fund, ahead nearly 54 per cent.

Among fixed income funds, the best performer for last year was the Chou Bond fund, which gained 32.7 per cent. High-risk, high-return fund manager Francis Chou “invests with conviction” noted Kellett, and “has been known to play in distressed situations where something has gone awfully wrong and others are running for the exits.”

Morningstar’s O’Leary was hesitant to predict which funds will do well in 2011, but warned against betting on last year’s winners.

“We keep trying to remind investors not to chase returns after a particularly fantastic year. Putting more money into resources and materials at this point, especially given the broad-based Canadian equity funds already have a lot of exposure to those sectors, may not be a great idea at this point.”

The idea that investors should guard against chasing last year’s returns was shared by Steve Geist, president of CIBC Asset Management Inc. Geist referred to a chart showing 15-year returns of various world stock markets which posted stellar returns one year and were followed by dismal results the next.

CIBC’s portfolio managers have a positive outlook for funds generally in 2011, Geist said.

“They are expecting strong double-digit returns in Canadian equities and some strong foreign equity returns, and (are) particularly positive on the U.S.

“I think emerging markets are not going to be as strong as they have been, and the developed world will probably do a bit better.”