Volatility clips equity funds

By Vikram Barhat | June 3, 2010 | Last updated on June 3, 2010
2 min read

The vortex of volatility that characterized markets in May took a toll on mutual fund returns, according to Morningstar Canada.

None of the 43 Morningstar Canada Fund Indices was spared the financial contagion, as they all posted losses owing to mounting concerns over the growing Europeans debt crisis.

“Joint efforts by European finance ministers, the European Central Bank, and International Monetary Fund served to shore up financial aid and help stave off the risks of sovereign default,” said Neal Brandon, fund analyst for Morningstar Canada. “However, investors remained wary that the focus on subsequent austerity measures would largely subdue any prospects for regional growth.”

A loss of 9% made Morningstar European Equity Fund Index the worst performer of the lot, extending the previous month’s loss of 2.5%.

The second worst performer, the Morningstar International Equity Fund Index, lost 7.7%, while the Morningstar Global Small/Mid Cap Equity Fund Index fell 7.3%.

The Morningstar Global Equity Fund Index and the Morningstar Emerging Markets Equity Fund Index completed the rout, with each down 6.3%.

Also among the 10 worst performers of the month was the Canadian Focused Small/Mid Cap Equity category, which fell 6.2%, matching the loss by the U.S. Equity group. The less-concentrated Canadian Small/Mid Cap Equity fund index dropped 5.3%.

Canadian investors were not only pummeled by declining European security prices, but also by the sagging euro.

“The Canadian dollar continued to gain ground on the euro in May, rising 4.8% to reach multi-year highs and further weighing on the performance of unhedged European equities,” said Brandon.

Resource funds were not immune to the impact of the month’s economic uncertainty. The months-long positive run of the Morningstar Natural Resources Equity Fund Index ended in May. The index that gained of 3% in April nosedived in May to register a loss of 7.6%, thus becoming the third-worst performer of the month.

“The ascent of oil prices witnessed early in the month quickly came under pressure as doubts surrounding European solidarity and the pace of Chinese demand threatened to derail the global recovery,” said Brandon.

Although few and modest, there were some positive results. Only five indices posted gains, all of them are in fixed-income categories and four are focused on Canadian markets. The Morningstar U.S. Money Market Fund Index and the Morningstar Canadian Money Market Fund Index broke even.

Canadian fixed-income markets provided a measure of safety to investors seeking a more defensive positioning for the month. The best performer was the Canadian Long Term Fixed Income index (+2.1%), followed by the Canadian Fixed Income index (+0.9%) and the Canadian Short Term Fixed Income index (+0.6%).

Rounding out the top five, the Short Term Fixed Income Global Fixed Income index gained 0.5% and the Canadian Inflation-Protected Fixed Income rose 0.4%.


Vikram Barhat