Fund performance turns around

In sharp contrast to mutual fund returns reported in Q2 of 2006, when all but three fund indices were in the red, preliminary data on investment fund performance released by Morningstar Canada Tuesday shows that 25 of the company’s fund indices posted gains for the three-month period ending September 30.

Financial services, emerging markets and European fund mandates posted some of the best numbers for the quarter, while science and technology funds, followed by Asia Ex-Japan and U.S. Equity fund indices, posted some of the best returns last month. Funds focusing on resources shares, and those investing in small and mid-cap companies, had a more difficult time.

The Morningstar Canada Financial Services Fund Index had the best performance for the quarter with a gain of 7.8%, followed by the Emerging Markets Equity and European Equity fund indices, which finished in second and third place for the quarter, with gains of 6.4% and 6%, respectively.

“Mutual funds focusing on the financial services sector have had an excellent quarter,” says Morningstar senior fund analyst, Mark Chow. “In Canada, the S&P/TSX Capped Financial Index gained over 9%, driven by robust quarterly earnings registered by all of the big banks. Foreign banks, brokerages, insurers and asset managers have also produced strong results.”

The Natural Resources Fund Index, on the other hand, posted a disappointing loss of 5.5% during the quarter, pulling back after gaining 11.4% in Q1. Since these gains, the funds have been consistently declining over the last five months, thanks to lower oil and natural gas prices and the fact that oil production and refining capacity has not been disrupted by a hurricane season.

Small-cap North American equity funds in the U.S. Small & Mid Cap Equity and Canadian Small Cap Equity indices lost 2.6% and 2.7%, respectively.

During September, 22 of the 31 Morningstar indices moved higher. Equity funds that invest outside of Canada generally outperformed their domestic counterparts. Interestingly, the Science and Technology fund index posted the strongest returns for the month, with a 3.9% gain. The index also delivered a 5.1% gain for the quarter, making it the fifth best performer overall. Year-to-date, however, the science fund index is still in the red with returns of -1.5%. Asia Ex Japan Equity and U.S. Equity funds indices reported the second and third best returns in September, up 3.5% and 3%, respectively.

Income-oriented funds had middling results — the Canadian Dividend fund index gained 0.2% for the month — while the Precious Metals and Natural Resources indices, the worst performers for the month, posted losses of 8.2% and 7.6%. Canadian Equity, pure Canadian Equity, Canadian Income Trust and Canadian Small Cap Equity indices all lost ground, reporting losses of 1.1%, 1.7%, 2.7% and 4.4%, respectively.

“Although the financial services sector kept its head above water in September, the materials and energy sectors took it hard on the chin,” says Chow. “The benchmark S&P/TSX Capped Materials and Capped Energy Indices lost 6.7% and 10%, respectively, while the Capped Gold Index lost more than 11%. With materials and energy making up nearly 50% of the broad Canadian market, it is no wonder that domestic equity and dividend funds performed so poorly.”

Conversely, foreign equity funds generally did well in September. The European Equity fund index returned a solid gain of 1.9%, bringing the index’s year-to-date returns to 15.6%. Global Equity also gained 1.9% during the month, while International Equity funds, those excluding North American stocks, gained 1.5%.

Fund sales expected to top $1 billion

Meanwhile, IFIC reported late Tuesday that based on preliminary estimates from members, net new sales for September are expected to be just above $1 billion, mostly in money market products.

“About 85% to 95% of the new mutual fund sales came in money market funds,” said Joanne De Laurentiis, IFIC’s president and CEO. “Some money market managers are offering very attractive yields.”

IFIC also estimates that net industry assets at the end of September will be in the range of $607 to $612 billion, up approximately 0.2% from last month’s total of $608 billion.

Banks topped the sales list, with RBC leading the way at $472 million, followed by TD at $451 million. On the negative side, AIM Trimark suffered $220 million in net redemptions, while Franklin Templeton and AIC were also in negative territory, off $146 million and $75 million, respectively.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com