Bleeding slows in fund performance

Equity mutual funds continued to take a beating in November, as economic fears became more entrenched, according to performance data from Morningstar Canada. But at least the pace of decline seemed to have slowed substantially from the previous two months.

November was the third consecutive month in which almost all equity fund categories fell, although the losses were not as deep as those in September and October. For example, in October more than 20 indexes were down more than 10% on the month. In November, only one index, the Morningstar Real Estate index, held that dubious distinction. It was down 12.9%.

Still, 21 of the 24 equity-based fund indexes were negative. Overall, 34 of the 43 fund indexes Morningstar tracks finished the month down.

“It was looking pretty bleak heading into the last week of the month, with the S&P 500 Index nearly touching 750, a level last seen in 1997,” says Philip Lee, fund analyst for Morningstar Canada. “Notably, shares of Citigroup, once the world’s largest bank by market capitalization, were hammered down to $3 US. Although an announcement of a bailout helped the stock bounce well off that low, it couldn’t recover back to where it started the month.”

Financial services stocks did take it on the chin. Lee notes in Canada, the S&P/TSX Capped Financials index lost 8.1% amid very high volatility. The Morningstar Financial Services Equity fund index was the month’s second-worst performer, down 9%.

“Banks and insurance companies announced that higher asset impairment charges, lower assets under management and weaker capital markets activity were likely to hit their earnings,” he says. “Also, a bleak outlook for the Canadian economy and a weak employment picture has caused banks to increase provisions for loan losses.”

The downturn in financial services had a spillover effect on more broadly diversified domestic equity funds, which on average allocate about a quarter of their assets to financials. The Canadian Focused Equity, Canadian Equity and Canadian Dividend and Income Equity categories lost 5.3%, 5.6% and 7.4%, respectively, for the month.

Precious metals funds made a comeback, though. The Morningstar Precious Metals Equity fund index gained 23.5%. For the year to date, however, the fund index is still down 47.2%.

“Precious metals equity did post a positive gain as well, as (did) the Greater China equity index — which was up as a group about 3.5%,” Lee says. “I don’t know how much we can really look at those as any signs of turnaround. It’s part of the short-term noise really. It doesn’t seem like the economic story has gotten better.”

Fixed-income categories tied to government bonds continued to outperform equities. The Canadian Long Term Fixed Income index, the second-best-performing index of the month, was up 3.8%. Global fixed income was up 3.5%.

“The global fixed income category was largely driven by the increased strength of the U.S. dollar and the Japanese yen,” Lee says. “When credit concerns started to crop up again, there was flight to the U.S. dollar and flight to the yen. It was actually a very similar story to October, where you had almost three weeks of selling bonds in those currencies and then the last week there was some buying there.”

The 2015 Target Date fund index also eked out positive gains. Again, this was largely related to a shift in those funds to heavier weighting in fixed income. In fact, companies like BMO and Mackenzie have moved a number of their guaranteed portfolios to 100% fixed income in order to ensure they can pay guarantees at maturity. The move to fixed income seems to have helped short-term performance.

(12/02/08)