Equity funds march higher: Morningstar

All Canadian equity fund categories posted gains in March, according to preliminary performance data released today by Morningstar Canada.

In March, Canada’s domestic equity funds enjoyed gains for the second consecutive month. But unlike February, investment funds that focus on foreign equities also did well.

As the financial markets continue to inch their way out of the economic recession, gains like these come as welcome relief to many Canadian companies.

“Signs of broad global growth and improvements in the credit market have been particularly beneficial for many smaller-capitalization companies that may not be as well equipped to navigate through challenging economic conditions as some of their larger counterparts,” said Nick Dedes, fund analyst for Morningstar Canada.

The best performing equity fund group in March came from the Morningstar Financial Services Equity Fund Index, which posted a 6.7% gain. This was driven by an increase in overall banking and trading at major Canadian banks.

“The four largest Canadian banks reported generally solid operating earnings, in part owing to strong results in retail banking and trading,” said Dedes. “Strong inflows into domestic long-term funds — particularly balanced funds, which typically have a generous allocation to financials — have also supported the upward trend for stock prices in the sector.”

The second-best performer was the Morningstar Global Small/Mid Cap Equity Fund Index, which boasted a 5.1% return.

The strong gains in the financial sector helped raise returns for the Morningstar Canadian Dividend & Income Equity Fund Index, which gained 4.9%, earning it the title of third-best overall in fund indexes for the month of March.

Foreign equity fund indexes that posted significant gains last month include Emerging Markets Equity, with a 4.5% return; U.S. Small/Mid Cap Equity, with 3.8%; and International Equity, which gained 3.3%.

One sore point for Canadian investors came from the rising Canadian dollar, which gained strength against foreign currencies, wiping out much of the returns from foreign markets. All major global markets gained during March, with the S&P 500, Japan’s Nikkei 225, the U.K.’s FTSE 100 and Germany’s DAX all posting gains between 6% and 10%.

However, it was not all good news for the month of March. Many investors are choosing to move money away from low-risk investments, such as government bonds, into less-stable investments in the hopes of earning higher profits. This has the potential to cause problems in the future.

“Significantly low yields on government debt continue to incite investors to move away from these securities and into riskier assets,” said Dedes. “Also, since interest rates really only have one way to go from here, more rate-sensitive bonds are a less appealing proposition.”

While equity funds were posting positive returns across the board, fund indexes that track fixed income categories suffered losses.

“The worst performer was the Morningstar Global Fixed Income Fund Index, which suffered from both looming interest rate hikes and adverse currency effects,” said Dedes.

Morningstar Canada will publish final performance figures for the month of March next week. For more information, visit www.morningstar.ca.

(04/05/10)