Equity fund returns fall in October: Morningstar

The leaves on Canada’s maple trees weren’t the only things turning red in October. Stock markets ended their seven-month growth streak, sending the monthly returns of most equity funds into the red as well, according to data from Morningstar Canada.

Only nine of 43 mutual fund indexes tracked by Morningstar turned in a positive performance, with just two of those being equity-focused categories. The Greater China Equity Fund Index posted a 5.2% gain on the month, while the Emerging Markets Equity Index eked out a gain of just 0.4%.

Were it not for the positive returns provided by the Chinese component, the emerging markets category would not have managed even that paltry gain.

The remaining seven fund groups that were in the black track money market or fixed income funds.

“Concerns about a pullback likely led to some profit-taking and coincided with investor interest returning to the fixed income space,” said Nick Dedes, a fund analyst with Morningstar Canada.

Within the fixed income space, some of the best returns were among real return bond funds, with the Canadian Inflation-protected Fixed Income Fund Index gaining 2.2%, second only to the Chinese equity group.

“This was despite the current deflationary environment, suggesting that concerns about rising prices going forward are once again top of mind for investors,” said Dedes.

Investors who opted to keep their cash in Canada saw some of the worst returns. Old standbys such as the Canadian Dividend & Income Equity posted a loss of 4.1%, while the Canadian Equity Fund Index lost 4.2%, and the Canadian Focused Equity Index dropped 3.3%. These losses mirror the 4% decline in the S&P/TSX Composite Index.

The best domestic equity fund returns were in the Small/Mid Cap Equity category, which lost only 0.3%.

Overseas, stock market declines were mitigated by the appreciating Canadian dollar, and fund losses were generally smaller.

“The Canadian dollar depreciated against all major currencies in October, following a period of relative strength against the U.S. dollar,” Dedes said. “Bank of Canada Governor Mark Carney expressed concerns over the loonie’s sharp ascent…[and] issued a reminder that despite maintaining its target overnight rate at 25 basis points, the Bank still has considerable flexibility with respect to monetary policy.”

The Asia-Pacific Ex-Japan Equity category dropped 0.6%, with its losses limited by the positive Chinese market returns. Asia-Pacific Equity, which includes Japanese stocks and therefore a lesser exposure to China, was down 1.2%.

Global Equity, U.S. Equity and International Equity lost 1.3%, 1.4% and 1.5%, respectively.

(11/03/09)