October shows its cheery side

October cast aside its reputation as a scary month for investors, with nearly all mutual funds categories posting positive returns, according to Morningstar Canada. Only one of Morningstar’s 42 new fund indices failed to join the rally: the Canadian Inflation-Protected Fixed Income group lost 0.2% on the month.

The top gaining fund group was the Natural Resources Equity index, which soared 7.4% even though the price of oil was in decline. Crude slipped below $60 a barrel during the month, but the category was propped up by gains in other commodities.

“With buoyant commodities prices and a modest rise in precious metals, materials-heavy funds were the main drivers in October,” said Morningstar Canada senior fund analyst Brian O’Neill. “Within the energy sector, stock selection was key. Notably, Shell Canada was a standout with a 37% gain for the month after Royal Dutch Shell PLC pledged to buy the company’s remaining shares it didn’t already own.”

O’Neill points out that huge individual gains were also realized in the mining sector, with Potash Corp. gaining 20%, while Alcan and Teck Cominco both rose 18%.

The Precious Metals Equity Fund Index was second best performer with a 6.3% gain, as the price of gold rose on the instability posed by North Korea’s test of a crude nuclear weapon in October.

Emerging Markets Equity funds rounded out the top three, with a gain of up 5.3%, as a group.

Morningstar’s new fund index structure includes four small/mid-cap categories, all of which managed to outperform their large-cap cousins. The Canadian Small/Mid Cap Equity fund index earned investors a 5.5% return on the month, while Canadian Anchored Small/Mid Cap Equity was up 5.4%. The Canadian Equity index lagged these two, but still posted a respectable return of 4.5%.

The Global Small/Mid Cap Equity and U.S. Small/Mid Cap Equity fund indices were both up 4.7%. The regular Global Equity index earned a return of 3.6%, while the larger-cap U.S. Equity fund index returned 3.5%.

“The Global Equity category, for example, formerly included a large number of small/mid cap funds, many of which have considerably different risk profiles than their large-cap brethren,” O’Neill said. “With these funds separated under the current schema, the Global Equity fund index’s year-to-date return of 9.9% is slightly lower than it otherwise would have been.”

The European Equity index managed to trump the large-cap U.S. and Global indices, with a gain of 4.6% thanks to strong market performances in the U.K. and Germany. On a year-to-date basis, this index is ahead by 20.9%, second only to the 35.1% gain by Precious Metals Equity.

The Canadian Equity fund index was up 4.5%, and International Equity and Canadian Anchored Equity (which includes funds that invest between 50% and 90% of their assets in Canada) were both up 3.8%.

One index that has been dramatically shaken up by the new Morningstar indices is the Real Estate Equity group, which differs from the CIFSC categories in that it excludes funds built mainly around mortgage-backed securities.

Instead, the index contains funds built around REITs and equity-based real estate securities. The shift has catapulted the real estate funds to the upper echelons, on a year-to-date basis, with a return of 20.8%. On the month, they picked up 3.2%.

Among the new Morningstar indices, the long-term life cycle funds benefited from their equity overweighting. The 15+ Year Target Date Portfolio fund index gained 3.1%. The shorter-term life cycle indices lagged, with returns of 2.6%, 2.0% and 1.7% for the 15-Year, 10-Year and 5-Year indices, respectively.

Fixed income funds were mostly positive, but lagged the surging equity fund categories. The High Yield Fixed Income fund index topped the list of these funds, earning 1.2% gain.

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

(11/02/06)

Steven Lamb