Fund returns affected by rising dollar: Morningstar

While some clients will likely head to the States this weekend for some cheap shopping, others will be sifting through their investment portfolios, wondering how they can stop losing money due to the rising loonie.

Morningstar Canada’s October fund report details just how difficult it’s been for some fund indexes to generate positive returns because of the soaring Canadian dollar, which hampered returns on eight of the 40 Morningstar fund indexes.

The U.S. Equity fund index lost 2.7%. Year-to-date, the index has lost 9.5%. “The falling dollar has definitely hurt most of the foreign funds, be it U.S. Equity, Global Equity or international emerging market funds,” says Bhavna Hinduja, a fund analyst with Morningstar Canada. “This is the time it would have paid to hedge your portfolio.”

Hinduja says if we were to look at the S&P 500 in U.S. dollar terms, we’d see a positive return of 1.6% for the month of October. Now put that in Canadian dollars and there’s a 2.7% loss. “That’s how much bearing currency can have over the short term,” she says.

The dollar’s appreciation also hurt those who invested in Japanese equity funds. Morningstar reveals the Nikkei 225 Index lost 0.3% in October, while the Japanese yen dropped 5.2% against the loonie. That caused the Japanese Equity fund index to post a 5.2% loss, making it the worst performing fund index last month.

R elated Stories

Oct: Emerging, Asian funds lead third quarter Sept: Funds hammered by credit crunch: Morningstar

Besides Japan’s dollar difficulties, Hinduja says the yen carry-trade is still affecting the markets there. However, she adds that some value managers are finding opportunities in the sagging market. “They believe the market is oversold, so some managers are going shopping there,” she says.

The loonie wasn’t the only thing that appreciated in October — the price of oil shot up as well, giving the resource sector another huge boost.

Thanks to rising oil prices and market uncertainty, the Morningstar Precious Metals Equity fund index was the top performer of the month with an 8.6% gain. Hinduja says investing in gold has become a way for some investors to protect themselves against a turbulent market, which is why the precious metals index shot up.

The second best performing fund index was the Asia Pacific ex-Japan Equity, which saw a 5.7% gain. It would have seen higher returns if the Chinese, Hong Kong and South Korean currencies didn’t depreciate 4% against the Canadian dollar.

“Investments in this region benefited from the U.S. Federal Reserve’s easing of interest rates,” Hinduja explains. “Stocks of Asian exporters were boosted by the cuts, and strong growth data eased concerns about the impact of a housing slump on the U.S. economy, which is Asia’s main export market.”

Thanks to Asia’s strong returns — and growth from Mexico and Brazil — the Emerging Market Equity fund index gained 5.3%.

Natural resource funds also fared well in October — the Morningstar Natural Resources Equity fund index saw a 5.1% return, while resource-rich Canadian equity funds saw positive gains as well. The Focused Small/Mid Cap Equity and Canadian Small/Mid Cap Equity fund indexes rose 4.9% and 4% respectively, and the large cap Canadian equity category had a 3.5% return.

With rising oil prices and the dollar’s upswing not expected to abate anytime soon, this is a particularly volatile time for investors. Hinduja says that it’s “difficult to predict when this will stop” but that, in the long term, it is likely to slow down. Until that happens though, she says, investors “just have to be very careful and very cautious right now.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(11/02/07)

Bryan Borzykowski