March proves a tough month for funds

(April 4, 2005) Demonstrating the “what goes up, must come down” theory, the majority of mutual funds provided negative one-month returns in March, coming on the heels of a positive February.

All but three of the 32 Morningstar Canada Fund Indices were in the red in March, with the biggest losers being the big winners from the previous month, as Latin American equity funds dropped 10.6% as a group.

“Funds in the Latin American Equity category have been on a tear over the last couple of years, but their volatility is very real because their constituents are vulnerable to periodic sell-offs,” said Morningstar Canada analyst Brian O’Neill. “Many of the region’s larger stocks, such as Mexico’s America Movil and Brazil’s Companhia Vale do Rio Doce, had double-digit decreases in March in reaction to increased speculation of accelerated rate hikes in the United States.”

The Emerging Markets Equity and the Precious Metals indices rounded out the top three losers, plunging 8% and 7.2%, respectively.

The Asia-ex-Japan Equity Fund Index, which has also been one of the leading groups over the previous few months, fell 6.1%. Negative market performance showed littler regard for national boundaries as the Japanese Equity index lost 4.1%, while European Equity gave up 4.3%. Global Equity and International Equity each lost 3.6%.

The good news for conservative Canadian investors is that funds focused on domestic large-cap stocks and domestic fixed-income securities were the best performers among the declining fund indices. The U.S. Equity Fund Index fell 3.2%.

While three fund indices avoided slipping into the red, it was a close call in each case. The Real Estate Fund Index was the top gainer with a gain of 0.09%. The Canadian Money Market index earned just 0.04%, while its American counterpart was essentially flat, gaining 0.01%.

In a month of widespread sell-offs, domestic fixed-income funds appeared relatively strong, with the Canadian Bond, Canadian Short-term Bond and Canadian Mortgage Fund Indices each losing less than 1%.

One of Canada’s favourite sectors over the past year, the Natural Resources Index, posted negative returns of 3.5%, falling from its market-leading role in February, when it gained 12.1%. Resources remain the top performer for the first quarter of 2005, though, with a cumulative gain of 12.5%.

“Looking at the first quarter in its entirety, commodities have continued to be the dominant story, particularly oil stocks,” says O’Neill. “Although the Natural Resources fund index gave up 3.5% last month, these funds are still miles ahead of the pack year-to-date.”

The Canadian Equity (Pure) index and Canadian Small Cap Equity both gained 4.2% in the first quarter, with Canadian Equity picking up 3.5%.

Morningstar’s Science & Technology index was the worst quarterly performer, losing 6%, while Precious Metals dropped 4.9% and Healthcare fell 4.8%.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com