Domestic equity rules in April

Canadian mutual fund investors were rewarded for their economic patriotism in April, with domestic equity funds turning in the best performance for the month, according to Morningstar Canada’s monthly performance report.

Considering the S&P/TSX Composite Index fell 1.6% on a single day (April 30), the chart-topping returns of Canadian equity funds may come as a bit of a surprise.

Returns were highest among funds aimed at generating income, as the Morningstar Canadian High Income Equity fund index picked up 3.5% in April alone. That gain was driven by income trust holdings, which have recently become the focus of M&A activity. Bids for UE Waterheater Income Fund and Voxcom Income Fund helped drive the sector higher as a whole.

But Canadian gains were not restricted to the trust sector. The Natural Resources fund index picked up 3.3% as energy stocks regained some lost momentum, thanks to instability in Nigeria’s oilfield and rising demand from China.

“While natural resources continues to charge forward for 2007, investors should continue to expect sharp swings on the upside and downside from this volatile sector,” cautions Morningstar Canada fund analyst Jordan Benincasa.

Canadian Small/Mid Cap Equity was not far behind with a gain of 3.2%, while Canadian Anchored Small/Mid Cap Equity was up 2.5%. The Canadian Equity and Canadian Anchored Equity fund indexes each gained 1.8% but had been as high as 3.1% and 4.3% respectively, prior to the April 30 market sell-off.

The European Equity fund index chalked up a gain of 2.1%, making the group one of the most reliable performers in the past 18 months.

“Most European markets benefited from highly resilient consumer sectors because of an improving labour market,” Benincasa says. “However, inflation continues to be closely watched by central European banks.”

The three major European indexes all posted strong returns — as high as 7.1% on Germany’s DAX — but much of these gains were wiped out by a 2% decline in the euro versus the Canadian dollar.

The loonie also took a toll on American investments. While the S&P 500 picked up 4.3% in April in terms of U.S. dollars, the loonie climbed 4.2% against the greenback. Morningstar’s U.S. Equity fund index gain was limited to 0.5% for the month while U.S. Small/Mid Cap Equity was flat.

“The relationship between the Canadian and U.S. dollar is largely dependent on macroeconomic trends and may not always move in sync with the two countries’ stock markets,” Benincasa said. “Rising doubts about the U.S. economy and strong commodity markets fuelling the Canadian economy contributed to the loonie’s gain over the greenback.”

Japan remained a weak spot, posting the worst return for all 42 Morningstar indexes, falling 6.5%, with currency exchange rates again being the catalyst.

Exposure to the stronger Asian economies helped mitigate the losses on the Asia Pacific Rim Equity fund index, but it, too, declined 2.4%.

As might be expected in a month marked by strong overall equity markets, the fixed-income fund indexes were weak. Inflation fears helped the Canadian Inflation-Protected Fixed Income fund index into positive territory, with a modest gain of 0.6%. Standard Canadian fixed-income mandates tended to be flat on the month, while the Global Fixed Income index dropped 1.3%.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com