Fund returns knocked around by rough markets: Morningstar

By Mark Noble | February 4, 2008 | Last updated on February 4, 2008
3 min read

Anyone with even the most casual interest in markets would know that January wasn’t a good month to be in stocks. It didn’t really matter what part of the world you were invested in — virtually all foreign and domestic equity fund categories suffered significant losses for the month, according to preliminary performance data released by Morningstar Canada.

What might come as a surprise, however, is that the worst performers were not those with a large exposure to plummeting financial stocks. That dubious honour went to Morningstar’s Science and Technology Equity Index, which lost 10.7% in January.

Most of the funds in this category still outperformed the Standard & Poor’s Information Technology Index, which dropped 12.5% when measured in U.S. dollars. The loss was lessened by the 1.4% depreciation of the Canadian dollar versus the U.S. dollar.

Bhavna Hinduja, fund analyst with Morningstar Canada, says the decline in tech fund performance is related to apprehension about a looming U.S. recession and slower consumer demand. This apprehension has been given weight by the failure of companies like Google to meet analyst earnings projections. There is speculation other tech companies will struggle as well.

“[Technology] investors are rethinking their growth assumptions,” Hinduja says. “Most tech names have been struggling to stay ahead of consumer spending and behaviour during the economic slowdown. Technology heavyweights such as Apple, eBay, Google and Research in Motion fell 30%, 19%, 17% and 17%, respectively, during the month as investors realized that the growth rates priced into their lofty valuations weren’t sustainable.”

Last year’s best overall index, the Emerging Markets Equity fund index, was January’s second worst performer, with a 10.5% loss. It was closely followed by 2007’s second best category, the Asia Pacific ex-Japan Equity fund index, which incurred a 10.5% loss. Morningstar says the drop in these two categories is directly related to poor stock performance in China, where the Shanghai Composite Index and the Hang Seng lost 16% and 15.7%, respectively.

“Chinese shares have weakened considerably in recent weeks, succumbing to the latest wave of sub-prime turmoil and worries over an economic slowdown in the U.S., which is China’s largest trading partner,” Hinduja says. “These same fears have caused Asian markets to plummet across the board in the past month. For instance, India’s Sensex index sank more than 11% when the market opened on January 22, resulting in a one-hour trading suspension and dropping as much as 13% once trade resumed, only to trim its losses to 4.6% at the closing bell.”

Other foreign categories were also hammered. The European Equity fund index lost 8.9%, mainly due to troubles at European banks, and in particular the massive fraud uncovered at French bank Société Générale.

Continuing problems with sub-prime mortgages and financials in the U.S. resulted in the U.S. Equity fund index losing 5.5% for the month, still a slightly better result than the S&P 500 index, though.

Poor performance in the financial services sector and lower energy prices negatively affected Canadian categories. According to Morningstar, the Canadian Equity index lost 5.6%, and the Canadian Focused Equity category lost 5%.

Only six of the 42 Morningstar indexes had positive performance, with traditionally defensive categories bucking the downward trend. The only equity category with a positive finish was the Precious Metals Equity fund index, which gained 6.1%.

“The two high-profile interest rate cuts by the Federal Reserve in the U.S. provided markets with a clear signal that the U.S. economy was suffering more than a mere slowdown,” Hinduja says. “This raised inflationary pressures and weakened the U.S. dollar even further, which caused the spot price of gold to rise 11% in January, from $835 US per ounce to $925 US.”

The other categories that posted moderate gains were Global Fixed Income, which gained 3.1%, Canadian Short Term Fixed Income, up 1.2%, and Canadian Fixed Income, up 0.5%.

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Mark Noble