Falling loonie props up mutual fund returns

(May 3, 2005) Most foreign equity funds ended in positive territory in April, says Morningstar Canada, as the Canadian dollar lost ground against other world currencies. Still, it wasn’t a stellar month for fund performance in general, with 20 of Morningstar’s 32 fund categories ending in the black.

“Canadians will no doubt be pleasantly surprised by the currency effect, having gotten used to the erosion of foreign content returns due to a rising loonie,” says Morningstar analyst Brian O’Neill.

In addition to the Bank of Canada’s reluctance to hike interest rates, the loonie has been shunned in recent weeks partly because of political issues, O’Neill adds. “International investors have been scrutinizing this country’s embarrassing governmental goings-on with puzzlement, and they are concerned by the threat of a snap election in the wake of alleged Liberal party corruption. Foreign investors are also tentative about the minority government’s apparent inability to implement key budget proposals.

Among the fund indexes, healthcare was the best performer in April, up 5.5%, mostly due to the high level of foreign content in the category. The foreign bond index was a close second, rising 4.2%, again enhanced by the weak loonie.

Emerging markets categories also fared well, with Asia ex-Japan up 3% and Japanese Equity climbing 2%.

At the other end of the scale, the precious metals fund index lost 7.5% last month, despite a modest gain in gold prices. Natural resources slipped 5.9% as crude oil dropped below $50 a barrel.

Canadian and U.S. equity categories were relatively subdued, in keeping with lower stock markets. The TSX lost 2.4% in April — Morningstar’s Canadian equity fund index shed 1.9%.

The U.S. equity fund category was up a modest 0.6%, underperforming the S&P 500 by about 1.3%. Removing currency effects however, the S&P 500 was off 1.9%.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com