Equity funds continue long decline: Morningstar

The vast majority of Canadian equity mutual funds saw declines in February, further adding to the cumulative losses of the past six months, according to data from Morningstar Canada.

The double-digit losses prevalent in previous months subsided, but Morningstar points out that much like in January, almost all of the Morningstar Canada Fund indexes that track equity categories lost between 5% and 10% last month.

The Morningstar Financial Services Equity Fund Index posted the worst return among all fund indexes in February, with a 10.9% loss.

“Though governments around the world continued to pledge more capital to banks in an effort to restore confidence and increase the flow of capital, general economic uncertainty and the threat of higher loan losses have continued to hurt bank valuations,” says Nick Dedes, fund analyst for Morningstar Canada.

Funds in the Real Estate Equity category, which have a strong correlation to the financials sector, also had a tough month as the Morningstar Real Estate Equity Fund Index lost 10.3% for the month. The Health Care Equity Index — usually a refuge sector in down markets — posted the third-worst return, with an 8.9% loss.

Among sector-diversified categories, the Morningstar Japanese Equity Fund Index was the worst performer, with an 8.7% loss, a reflection of both a drop in the benchmark Nikkei Index and a weakening of the Japanese yen relative to the Canadian dollar, Morningstar points out.

Comparatively, Canada as a sector-diversified category did well against other countries. Domestic equity funds slowed their pace of decline from last month, with the Canadian Equity and Canadian Focused Equity Fund indexes losing 5.9% and 5.6%, respectively.

In comparison, European Equity, International Equity and U.S. Equity indexes posted losses of 5.8%, 6.5% and 7.2%, respectively. According to Dedes, global equity indexes continued to be hammered due to a lack of clarity regarding the length and severity of the global economic recession.

“Weak growth data was a common global theme,” Dedes says. “Notably, the month ended with a downward revision to the fourth-quarter drop in the U.S. gross domestic product to 6.2%, a figure far greater than was forecasted and a sign of an even deeper recession.”

Probably not surprising given the run-up in gold prices during the month, the Morningstar Precious Metals Equity Fund Index was one of only two fund indexes to post positive returns last month, with a 1.9% gain.

“The sell-off in global equities drove gold prices to more than $1,000 US per ounce by the latter half of the month, though a pullback in the last week trimmed some of the gains,” Dedes says.

The other positive-return equity fund index was Greater China Equity, which was essentially flat, with a 0.04% increase, mostly due to a 4.6% surge by the Shanghai Composite Index.

The fixed income indexes also appeared to be flattening out after some comparatively decent returns in recent months.

The Morningstar Canadian Money Market Fund Index and the U.S. Money Market Fund Index both had returns of 0%. Global fixed income had a miniscule 0.1% return, and High Yield Fixed Income had a miniscule loss of 0.3%.

(03/03/09)