Equity returns bounce back: Morningstar

By Mark Noble | May 2, 2008 | Last updated on May 2, 2008
3 min read
It’s too soon to call it a full-fledged comeback, but after an abysmal first quarter this year, virtually all of Morningstar Canada’s equity-based mutual fund indexes had positive growth in April.

All but one of the 23 Morningstar Canada fund indexes that track the performance of equity fund categories showed positive returns for the month, with 10 of the indexes gaining 4% or more. According to Bhavna Hinduja, fund analyst for Morningstar Canada, it was the most positive month for equity fund indexes since January of 2007.

The positive performance follows a very volatile first quarter that saw most of those same indexes suffer losses. Hinduja says about half of the equity indexes still remain in negative territory on their year-to-date performance.

Hindjua adds that it’s too early to tell if April’s strong results are a sign that equity funds in Canada are in the midst of a turnaround.

“We’ve only just seen a quarter, it will be interesting to see how everything plays out,” she says. “It’s really too soon to say, quite frankly, because I don’t think the Bank of Canada is done cutting rates — at least that’s not what they have indicated.”

The best performer in April was the Morningstar Emerging Markets Equity Fund Index, with a 6% gain. According to Morningstar, strengths in the markets of Brazil and Hong Kong were the main drivers, with Sao Paulo’s BOVESPA Index and Hong Kong’s Hang Seng returning 11.3% and 12.7%, respectively, when measured in local currencies.

“Brazil is being seen as the perfect way to play the commodity boom,” says Hinduja, “Brazilian companies like Vale and Petrobras have become increasingly important internationally. And the recent upgrade in the country’s credit rating further buoyed positive sentiment about the nation’s economy.”

Commodities also gave wings to the Morningstar Canadian Equity Fund Index, which gained 5.4% and had the second best return for the month and the best monthly return for that fund category since December 2005.

“Canadian equity markets were boosted by the energy sector as oil prices reached new records due to worries over supply disruptions from major producers and OPEC’s announcement that it wasn’t considering raising output to curb prices. Notable mentions in the sector include Suncor Energy, which rose 14% in April, and Canadian Natural Resources, up more than 20%,” Hinduja said.

The Morningstar Asia Pacific ex-Japan Equity Fund Index ranked third for the month, with a 5.2% return. Science & Technology Equity and Japanese Equity tied for fourth with a 5% return each.

Even funds heavily weighted in the battered financial sectors pulled out decent growth.

“Surprisingly, financials did have positive returns during the month of April,” Hinduja says. “For example, the S&P capped financial returned 4% for April. However, year-to date it is still -8%.”

The only equity category that was unable to finish in positive territory was Precious Metals Equity. That index sustained a sizable 10.7% loss resulting from falling gold prices during the month.

“The spot price of gold fell by roughly 5% in April due to the appreciation in the U.S. dollar. This caused severe market losses for some industry heavyweights such as Barrick Gold (-11%) and Kinross Gold (-17%),” she says.

Hinduja also stresses that because performance is generally measured in local currency, there were some indexes that had positive growth but still ended up losing money for Canadian investors.

For example, the S&P 500 Index of large companies in the United States was up 4.9% for the month when measured in U.S. dollars, but that currency’s 1.8% depreciation against the Canadian dollar reduced the returns for Canadian investors.

Canadian Focused Equity (4.1%), International Equity (3.9%), Global Equity (3.4%) and U.S. Equity (2.8%) also all had positive equity market gains, but currency movements had a detrimental effect on them all.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com


Mark Noble