Canadian investment funds that focus on natural resources had another volatile year in 2007, but the month of December was a positive one, with the natural resources equity fund index gaining 3.7%, according to preliminary performance data released today by Morningstar Canada.

This end-of-year surge allowed the fund index to finish the year up 13.1%. Though this is its worst one-year performance since 2001, it is nonetheless the fourth-best return among the 42 Morningstar Canada fund indices for 2007. “The demand for energy remained strong this past year, pushing the price of a barrel of oil closer to the US$100 mark after it started 2007 below US$52,” said Philip Lee, fund analyst with Morningstar Canada.

Also benefiting from the strong resource sector were the Canadian focused small/mid cap equity and Canadian small/mid cap equity fund indices, which returned 5.7% (the best return among all fund indices) and 2.5% (the third-best return), respectively, in December. On average, funds in these two categories hold about half of their assets in the energy and materials sectors. For the year as a whole, Canadian focused small/mid cap equity gained 14.2% and Canadian small/mid cap equity was up 5.7%.

The Canadian dollar’s considerable rise against many of the world’s major currencies – most notably the U.S. dollar — in 2007 had a significant impact on the performance of U.S. equity funds that don’t hedge their foreign currency exposures. The U.S. equity fund index, which is measured in Canadian dollars, lost 10.7% in 2007, despite the S&P 500 rising 5.5% for the year when calculated in U.S. dollars. Similarly, the U.S. small/mid cap equity fund index was down 10% while the Russell 2000 index, which measures the performance of the U.S. small-cap market, lost just 1.5%.

“The slumping housing market in the U.S. doesn’t seem to have hit bottom yet, and the resulting credit concerns and persistent possibility of a recession have really hurt the value of the greenback,” Lee said.

The loonie’s strength affected much more than just U.S. equity funds. It was a major factor in the poor performances of most foreign equity fund indices. The international equity fund index lost 6.6% for the year, while global equity was down 6.4% and European equity shed 4.8%. This happened despite most of the world’s major stock markets ending the year in positive territory when measured in local currency terms.

But while the loonie also made double-digit strides against the currencies of Asian countries (excluding Japan), these had such strong market performances that it was much less noticeable. In China, the Shanghai composite index was up 96.7% for the year, while stock indexes in Hong Kong and Korea gained more than 30%. The Asia Pacific ex-Japan equity fund Index returned 16.3% in 2007, topping all other fund indices.

Asian equities also make up nearly half of the assets of funds in the emerging markets equity category, whose fund index had the second-best return in 2007 with 16.1%.

The Japanese equity fund index was one of the worst performers among the fund indices in 2007, losing 21.9%. Japan suffered from the unfortunate combination of poor market performance and currency depreciation, with the Nikkei 225 losing 11.1% for the year, and the Japanese yen dropping 9.7% versus the loonie. Japanese equity also had the worst return for December with a 5.5% loss.

Final performance figures will be published next week.