Oil fuels strong Canadian fund returns

(July 5, 2005) Renewed strength in the commodities markets helped boost Canadian mutual fund investment returns in June, according to Morningstar Canada’s monthly fund performance report.

The top-performing fund categories in June were those with a resource-specific mandate, giving them a hefty exposure to soaring oil and precious metals prices. The Morningstar Canada Natural Resources Fund Index posted a single month gain of 7.3%, followed closely by the Precious Metals Fund Index with 7.2%.

“Crude oil passed the US$60-a-barrel mark in late June, amid concerns over supply disruptions and worldwide refining capacity,” said Morningstar Canada analyst Mark Chow. “Geopolitical instability in the Middle East and Nigeria, potential labour unrest in Norway and even strained U.S.-Venezuela relations are all concerns that continue to be largely unaddressed. OPEC has, for the most part, been unsuccessful at cooling oil prices with its commitments to increase production.”

Strong demand for Canadian commodities helped to drive the dollar higher, accentuating gains at home and losses abroad. Currency considerations, paired with the heavy weighting of the resource sectors on the TSX, gave a boost to all five Canadian equity fund categories, with each posting a return of more than 2%.

“The strength in the commodities sectors as well as a strong Canadian dollar helped many of the Canadian-centric funds outperform foreign funds,” said Chow. “The S&P/TSX Composite Index moved into five-digit territory for the first time in nearly five years, on the back of oil’s surge and strong retail-store sales, as well as an encouraging interest-rate outlook from the Bank of Canada.”

The Canadian Equity (Pure) and Canadian Income Trust fund indices each rose 3% in June, followed by Canadian Small Cap Equity, Canadian Dividend and Canadian Equity, up 2.7%, 2.6% and 2% respectively. While precious metals funds had a strong month in June, they remain one of the worst performers on a year-to-date basis, dropping 5.2% in the first six months.

Balanced and fixed income investors were in the black as well. Morningstar’s new Canadian Income Balanced Fund Index rose 1.8% in June, while Canadian Asset Allocation gained 1.7%. Canadian Balanced and Canadian Bond rose 1.4% and 1.2% respectively.

It was not all good news for fund investors, however, as nine of the 32 fund indices posted negative returns. Most of the largest losers were concentrated in foreign markets, with the worst performance coming from the science and technology index, which dropped 3.2%.

In May, this index was the top performer, turning in a gain of 6.7%. Tech stocks were the primary source of weakness on the Canadian market, as shares in Research in Motion, ATI Technologies and Cognos dragged down the global-oriented tech index. The tech-fund index lost 3.4% during the first half of the year.

The foreign bond and Japanese equity indices lost 1.8% and 1.7%, respectively. The U.S. Equity Fund Index lost 1.1%, while International Equity and Global Equity fell 0.6% and 1% respectively.

Foreign fund indices which did manage a positive return included: Emerging Markets Equity, up 1.1%; U.S. Small & Mid Cap Equity, up 0.9%; and Global Balanced & Asset Allocation, up 0.3%.

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