Equity funds bounce back

After five disappointing months, equity funds gained ground in October.

All but one of the 22 Morningstar Canada Fund Indices that track equity categories had positive returns for the month, with 14 of them gaining 5% or more, according to preliminary performance data.

“Equity markets had one of their biggest months in years, with the S&P/TSX Composite Index up over 5% and the S&P 500 up nearly 11%. This was due to positive growth numbers at home, and hopes that eurozone leaders had created a workable solution to the Greek debt crisis,” said Morningstar fund analyst Adam Fisch. “However, the month ended on a sour note, as a selloff on Oct. 31 was followed by the surprising announcement of a Greek referendum on the proposed bailout. That news, accompanied by disappointing Chinese manufacturing numbers, sent stocks downward and cast doubts over the prospect of sustained recovery in the equity market.”

Foreign markets outperformed their Canadian counterparts during the month, but for Canadian fund investors these solid performances were tempered by currency effects, with the Canadian dollar appreciating by more than 4 % against the U.S. dollar and many Asian currencies.

As a result, the returns of the Morningstar Canada Fund Indices that measure foreign equity categories were much lower than the corresponding market benchmarks when expressed in local currency.

Among the major diversified foreign equity categories, the Morningstar U.S. Small/Mid Cap Equity Fund Index had the best return with 9%, while the indices that measure the Emerging Markets Equity, Greater China Equity and U.S. Equity categories gained 8.1%, 8.1% and 7.3%, respectively. The International Equity and Global Equity fund indices both gained 5.4% in October. The worst performer, and the only Morningstar Canada equity fund index to lose ground last month was Japanese Equity, which lost 4.1% despite positive results on Japanese stock markets; this was due to the yen’s depreciation of 5.6% against the loonie.

The best-performing fund index overall was Natural Resources Equity, which gained 11.3%.

“As fears subsided throughout the month, oil and precious metals rose on hopes of higher demand, buoyed by optimism in Europe. Production of oil in OPEC countries and in the United States rose in the month to keep up with anticipated increased demand, but the prospect of further instability in Europe could derail those plans and give back many of the month’s gains,” Fisch said.

Among Canadian equity funds, those that focus on smaller companies edged out the large-cap offerings. The Morningstar Canadian Small/Mid Cap Equity and Canadian Focused Small/Mid Cap Equity fund indices gained 7.1% and 6.4%, respectively, while the Canadian Focused Equity and Canadian Equity fund indices were up 5.7% and 5.6%, respectively.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.