Morningstar Canada’s 2002 survey of nearly 4,500 mutual funds found that the specialty Precious Metals category continued to outshine all others with a December Morningstar Index return of 28.4% and one-year return of 94.2%.

“December mirrored the pattern for the year,” says Morningstar analyst Iain Giles. “Gold funds rallied sharply higher along with good performances from resources and bonds. Equities in most categories continued to be sharply negative.”

For 2002, Morningstar’s holdings data shows that the Precious Metals category returns were boosted by dramatic performance among junior gold companies such as top holdings Eldorado Gold Corp and FNX Mining Co. “Gold, in a specialty position, continues to be a very important element of a well-diversified portfolio,” says Giles. “However, the phenomenal short term results shouldn’t sway investors from their long term investment strategy nor compromise their risk profiles.”

Coming a distant second behind the Precious Metals Fund Index, for the month and the year, was the Natural Resources Fund Index with an 8.6% return for December and 16.1% for 2002. The Foreign Bond Fund Index occupied the third position with a 4.9% return in December and 14.1% for the year.

Among Canadian equity categories, the Canadian Small Cap Equity Fund Index was on top for December with a 1.4% gain (-6.8% for 2002), the Canadian Dividend Fund Index returned 1.1% (-3.5% for 2002), the Canadian Large Cap Equity Fund Index was third at 0.6% (-12.6% for 2002). The more diversified Canadian Equity Fund Index lost 0.3% (-12.2% for 2002).

At the bottom of list, the Science and Technology Fund Index lost 11.7% in December. The index for Asia Ex-Japan Funds was next at -5.7% and the U.S. Small and Mid Cap Equity Index was third worst at -5.3%. For the year, the Science and Technology Fund Index was again at the bottom, losing 41.9% for the year. Next were the Healthcare Fund Index (-29%) and U.S. and Mid Cap Equity Fund Index (-26.1%).

Morningstar’s historical data shows that chasing hot categories doesn’t pay off. The top category in 1999 was Science and Technology with a median calendar year return of 99.7%. But, an investment of $1.000 on Jan. 1, 2000 would have been worth just $271 on Dec. 31, 2002. Likewise Asia/Pacific Rim returns hit the stratosphere in 1993 with a 90.4% median return. A Jan. 1, 1994 investment of $1,000 in that hot category would have left $570 on Dec. 31, 2002.

Also, Morningstar reported Mackenzie Financial Corp. ended 2002 as the fund company with the most five-star rated funds, adding one more to up its total to 29. The last month of 2002 saw no change in the ranking of the top four companies in terms of the number of five-star funds.

CI Mutual Funds Inc. maintained its second place position with 21 five-star offerings, two fewer than the previous month. AIM Funds Management Inc. gained two five-star funds to hold on to the third spot with 14 top-rated funds, while Franklin Templeton Investments Corp. remains in fourth by adding one more five-star fund to up its total to nine.

By adding two top-rated funds to its line-up, Canada Life Assurance Company vaults from eighth place in November to a tie for fifth with TD Mutual Funds. Each has a total of seven five-star funds.

I.A. Michael Investment Counsel spent all of 2002 as the fund company with the highest percentage of its funds at the five-star level (including firms with at least three five-star rated funds). All three of the firm’s ratings-eligible funds received a five-star rating throughout last year.

Howson Tattersall Investment Counsel took the second spot with three out of four rated funds attaining the highest level, while Mawer Investment Management ranked third with five of nine rated funds receiving five stars. Rounding out the top five firms were McLean Budden Limited (3 of 7 funds) and Franklin Templeton Investments Corp. (9 of 33 funds).