Fixed income weathers storm: Morningstar

The so-called “smart money” — institutional money — has not fared much better than the rest of the industry. Nearly three out of every four pooled funds in Morningstar Canada’s database lost money during the first quarter of 2008, with the best returns coming from fixed-income funds.

It should be noted that the institutional pooled funds universe is very small compared to the retail space, with a handful of names occupying a given category. Therefore, it’s not always the best indicator of an asset category. Nevertheless, these funds represent a significant chunk of money since they are included in many institutional portfolios and defined contribution plans.

Overall, 10 of the 41 pooled fund categories had positive median returns in the first quarter of 2008. The worst performer was the Science & Technology Equity category with a 16.3% median loss. Two categories are tied for second-worst return of the quarter: Asia Pacific Equity and U.S. Small/Mid Cap Equity, which both lost 9%.

The only equity-based categories to post positive median returns were Precious Metals Equity (which contains just one fund) with 1.3% and Natural Resources Equity (four funds) with 1.2%.

In some of these categories, like the Canadian Equity category, which had a median loss of 3.9%, there was not a single fund that had positive returns, according to Morningstar Canada’s associate editor Christian Charest.

Charest says the best Canadian equity performer was Manulife/Fidelity Canadian Large Cap at -0.7%, and the Fidelity Canadian Large Cap version not sponsored by Manulife was second with -0.8%.

“In the International Equity category there are 83 funds and there are only three that are positive,” he says. “The best return is CIBC EAFE Equity and it had 3.5%; the second-best performance is a tie between Trimark International Equity and Trimark International Companies, both with 0.8%.”

The European Equity, International Equity and Global Equity categories had median losses of 4.6%, 5.3% and 5.4%, respectively, and the U.S. Equity category had a median loss of 6.1%.

According to Morningstar Canada, the best-performing pooled fund category for the quarter, as measured by the median return of its constituent funds, was Canadian Inflation-Protected Fixed Income with a gain of 4.4%. The category contains only two funds: Standard Life Real Return Bond, which had the best return with 5.9%, and Goodman Real Return Bond, which was up 3.7%.

The second-highest median return was the 3.1% gain posted by the Canadian Short Term Fixed Income category. Three other bond fund groups rounded out the top five: Global Fixed Income (2.9%), Canadian Fixed Income (2.8%) and Canadian Long Term Fixed Income (1.7%).

Among individual funds, the best performer for the quarter was SEI Enhanced Global Bond, which returned 15.8%. Global bond funds, which derive a large portion of their returns from currency fluctuations, accounted for eight of the top 10 individual fund performances for the quarter.

Charest says this was largely assisted by the Canadian dollar’s sharp drop against most major world currencies during those three months. Six of the 27 funds that comprise the Global Fixed Income category posted double-digit returns for the quarter.

Goodman & Co., Investment Counsel, a division of Dundee Wealth Management, continues to be Morningstar’s top-rated pooled fund sponsor, with the most distinct mandates earning the highest Morningstar Rating of fives stars. Three firms share second place with four top-rated pooled funds each: Desjardins Financial Security, Industrial Alliance Insurance and Financial Services Inc., and RBC Asset Management Inc.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com