April showers bring returns: Morningstar

Those investors who have kept a resolve not to sell out of their mutual funds are seeing some reward. For the second month in a row, investment funds brought strong returns, according to preliminary performance data released by Morningstar Canada.

The rally, which began in March, extended through much of April. As in March, 20 of the 24 Morningstar Canada Fund Indices that track equity categories gained 5% or more last month, with four of them posting double-digit returns.

The Morningstar Global Small/Mid Cap Equity Fund Index had the best return with a 16.5% gain, while Emerging Markets Equity ranked fourth with a 10.6% gain. This is a very good sign, since these two asset classes tend to lead sustainable market recoveries.

Funds in these two categories got a boost following the G-20 meeting earlier in the month, where world leaders outlined a plan for the recovery and committed to boosting the International Monetary Fund’s resources by US$750 billion, says Esko Mickels, a fund analyst with Morningstar Canada.

“Despite a still-gloomyeconomic outlook, risk-taking returned to the markets as investors pushed up the prices of smaller companies and emerging market equities, and rotated out of defensive areas such as gold and healthcare,” Mickels says.

Number three and four performers were the asset classes that led the downturn. Financial services equity and real estate equity were up 16.1% and 12.9%, respectively, for the month.

Financials were once again the main drivers of performance for the North American equity markets. In Canada, the S&P/TSX Capped Financial Index rose 16.7%, while in the United States the financials sub-index of the S&P500 had a 22.2% gain.

“Bank earnings largely surprised analysts and provided a catalyst for the sector,” Mickels says. “Net income at the combined Bank of America and Merrill Lynch was $4.2 billion, the combined operations of Wells Fargo and Wachovia generated $3 billion, and Citigroup managed $1.6 billion.”

The Science and Technology Equity Index gained 8.8% last month, after posting a 9.2% return in March.

“Smart phone makers Apple and Research In Motion (RIM) reported year-over-year increases in profits of 15% and 26%, respectively, as sales pushed higher, particularly at RIM where revenue was up 84%,” Mickels said.

Unfortunately, Canadian investors were not able to take advantage of the resurgence in foreign equity markets, Morningstar data show. Many major stock indices such as Germany’s DAX, Hong Kong’s Hang Seng and Brazil’s BOVESPA all had returns of more than 14%. Canadian fund investors saw these returns rolled back by currency fluctuations, which saw the Canadian dollar rise by more than 5% against the U.S. dollar, the euro, the Hong Kong dollar and the Japanese yen.

The European Equity, International Equity, U.S. Equity and Global Equity Fund Indices only posted gains of 6.9%, 6.9%, 5.4% and 4.9%, respectively.

(05/04/09)