Resource spike drives strong returns: Morningstar

By Mark Noble | June 3, 2008 | Last updated on June 3, 2008
2 min read
Strong growth in energy and materials prices helped boost returns in resource- and precious metals-oriented funds, making them the top performers in May, according to preliminary performance data released by Morningstar Canada.

Skyrocketing energy prices helped the Morningstar Natural Resources Equity Index gain 8.5% last month. Crude oil, which peaked at a record $135 U.S. a barrel in May, finished the month at $127.35, up 12.2% from the end of April. Natural gas prices also rose, gaining 7.9 %.

“Energy was the story for the month of May,” says Philip Lee, fund analyst for Morningstar Canada. “Potential supply disruptions arising from armed conflicts and fears of political instability in some of the major oil-producing nations were among the main drivers for the monthly advance.”

The Morningstar Precious Metals Equity Index was the second best performing index, up 6% in May.

“Higher energy prices helped bolster the demand for gold because it’s often a vehicle of choice for investors to protect their assets against an increase in inflation,” Lee says. “The rise in the price of bullion gave a boost to gold stocks.”

Canadian-oriented mandates rounded out the top five indexes, as the Morningstar Canadian Equity Index, whose S&P/TSX Composite Index benchmark has roughly half of its market capitalization devoted to resources issues, gained 5.7%.

Meanwhile, the Canadian Focused Small/Mid Cap Equity and Canadian Small/Mid Cap Equity indexes rose by 4.7% and 4.3% respectively.

Even non-resource-related portions of the Canadian indexes did well; for instance, the information technology weighting of the Canadian index had a return of 8.8%. Lee says this was mainly the result of the strong performance of market heavyweight Research in Motion. Lee says that outside of financials and resources, the effects of other sectors have a minimal impact on overall performance.

Overall, it was a fair month for funds, with 33 of the 42 Morningstar Canada fund indexes finishing with positive returns. That result could have been higher if not for a resurgent Canadian dollar, which gained on all of the other major world currencies, Lee notes.

The rising loonie eroded the returns of foreign equities; the Morningstar Global Equity Index was essentially flat, with a 0.1% return. The top-performing foreign equity index was the Morningstar U.S. Small/Mid Cap Equity Index, up 3.5%.

The worst-performing fund indexes were the two devoted to Asian equity markets. The Morningstar Asia Pacific ex-Japan Index lost 2.4%, while the Morningstar Asia Pacific Equity Index was down 1.9%. The third worst performer was the Morningstar Global Fixed Income Index, down 1.7%, due primarily to currency-related losses.

“The demand for Canadian commodity stocks pushed the loonie higher,” Lee says. “Any one of those funds that were unhedged would have had some of their fund returns subtracted due to currencies.”

Financials were another sector that didn’t fare well. The Morningstar Financial Equities Index was down 1.5%, placing it fourth from last among all fund indexes tracked.

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Mark Noble