Fueled by a 45% rise in China’s Shanghai composite stock index and a 25% surge in the Hong Kong Hang Seng, Asia Pacific ex-Japan mutual funds led the charge in the third quarter, with average gains of 7.3%, Morningstar Canada reported.

Because Japanese equity funds lost 7.1% in the July-September period, Asia Pacific funds as a whole rose only 2.5%.

By comparison, more than half of equity mutual funds were in negative territory.

The second best-performing category was emerging markets funds, up 5%, followed by precious metals funds, up 4.5%. Much of those gains was due to a surge in gold prices in September.

Funds invested in Canadian stocks rose 2.6%, while the falling dollar caused those invested in U.S. companies to fall 5.1%, even though the Standard & Poor’s 500 index ended in the black.

Because of the strength of the Canadian dollar, also known as the “loonie,” even European equity funds fell, by 5.3%, as did international stock funds, down 5.1%.

“Overall, the ascent of the loonie versus many major currencies continues to erode the returns of foreign funds with unhedged exposures,” said Morningstar Analyst Philip Lee. “It’s difficult to predict which way the Canadian dollar will move going forward, but it probably makes less sense to hedge foreign currency exposures back to Canadian dollars now because of the loonie’s strong run.”

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