Oil continues to drive Canadian fund returns

(August 3, 2005) A sustained rally in the price of crude oil and an accompanying rise in oil-patch profits kept natural resource-based funds on top of July’s performance ranking for the second month in a row, according to Morningstar Canada.

In fact, high oil prices have made the Morningstar Canada Natural Resources Fund Index the “runaway year-to-date leader,” with a gain of 24.3% in the first seven months.

“Although the price of oil retreated somewhat from highs of over $62 US a barrel during July, the continued strength in prices has helped many oil-related companies post record earnings,” said Morningstar Canada analyst Mark Chow. “As well, many large energy producers reported big profit gains during July, including natural-gas producer Encana, which more than tripled its second-quarter earnings from the year-earlier period.”

August is already shaping up in favour of energy, as crude futures hit new all-time highs this morning on the New York Mercantile Exchange.

After energy, July second best single-month returns came from the Emerging Markets Fund Index, up 6.8%, and the Canadian Small Cap Equity Fund Index, up 6.2%.

The heavy weighting of the energy sector on the Canadian market boosted returns in all five Canadian equity fund categories. The Canadian Income Trust Fund Index rose 5.5%, while Canadian Equity (Pure), gained 5.3%. Canadian Equity, which requires just 70% in Canadian stock content, was dragged down by its increased foreign exposure, posting a return of 4.5%, while Canadian Dividend rose 3.6%.

The key Canadian Balanced category was held back by weakness in the domestic bond market, lagging the rest of the Canadian equity pack with a gain of 2.5%.

July was a strong month all around, with only four decliners among Morningstar’s 31 fund indexes, all slipping less than 1%. The Precious Metals and Foreign Bond indexes each declined 0.7%, while Canadian Bond lost 0.3% and Canadian Short Term Bond & Mortgage fell 0.2%. Precious metals funds have been the worst year-to-date performers so far, with investors losing nearly 6%.

Canadian equity fund categories have outperformed most foreign equity categories so far this year.

“The Bank of Canada raised its forecast for the economy’s growth rate for this year, and the jobless rate is at a historic low,” said Chow. “As well, inflation continued to remain benign — despite the plight of consumers at the gas pumps.”

Strong returns among U.S. small and mid-cap stocks drove their fund index higher by 5.8%, while the larger-cap U.S. Equity Fund Index gained 3.6%. Most of the global fund indices performed well, with Science & Technology gaining 5.3% and Healthcare was up 4.6%. The Financial Services fund index gained 4.2%, while Global Equity and International Equity rose 3.7% and 3.6% respectively.

The Asia Ex-Japan Equity Fund Index returned 5.4%, while a slow month on the Tokyo Stock Exchange left the Japanese Equity Fund Index with a gain of just 1%. Asia Pacific Rim Equity Fund Index, which includes Japan, was up 3.2%.

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