Resource funds hit by pause in commodity rally

Softer commodity prices in the energy and minerals sectors pummeled investment funds focused on natural resources in February, making them the worst performing group, according to Morningstar Canada.

Investors in resource funds probably should have expected a correction at some point, as the fund group gained 46.1% in 2005, and 11.6% in January of this year alone. Past gains like these might have made the 7.8% decline in February a little easier to take.

“Oil prices fell roughly $10 per barrel in February to under $60 as high crude inventories in the U.S. and lowered demand forecasts from both the International Energy Agency and OPEC drove markets downward,” said Morningstar analyst Mark Chow. “Meanwhile, natural gas prices have nearly halved since December thanks to the relatively warm winter North America has experienced thus far.”

Base metal prices were weaker in February as well and an initial spike in the price of gold early in the month was soon blunted by a bullion pull-back in the second week. The Precious Metals fund index was the second worst performer, following a 9.2% decline in the S&P/TSX Capped Gold Index. Managers must have built in a little more safety, however, as the fund index dropped by “only” 3.9% for the month.

Overall, February was a poor month for many fund investors, with negative returns in 20 of the 31 Morningstar Canada fund indices. The Financial Services fund index topped the performance table, with a return of 3%, while Real Estate and High Yield Bond fund indices gained 1.2% and 0.8%, respectively.

The poor performance of the resource sectors spilled over into most of the Canadian equity fund groups, thanks to the huge presence resource stocks have in the Canadian stock markets. The Canadian Dividend fund index was the only other Canadian equity-based group which managed a gain, picking up 0.4%.

The Canadian Equity index fell 1.4%, while Canadian Small Cap and Canadian Equity (Pure) declined 1.9% and 2% respectively. Fixed income funds were mostly flat to lower, with the Canadian Short Term Bond & Mortgage index squeaking out a gain of 0.1%, while the Foreign Bond group fell 0.6%.

The middling performance in the Canadian fixed income market was not enough to counter-balance the losses in equities for the Canadian Balanced, which declined 0.5%, while the Canadian Tactical Asset Allocation fund group fell 0.7%.

Foreign equity funds fared a little better, though most were still in negative territory. The European Equity index gained 0.2% and was the only gainer in the group. The International Equity index was lower by 0.4%, U.S. Equity fell 0.5% and Global Equity dropped 0.6%.

“It has been a while since the domestic funds trailed many of the foreign offerings,” Chow explains. “The extremely poor performance of energy and materials stocks masked some excellent returns that came from the financial and healthcare sectors. Consumer stocks also showed some strength this month.”

Not all foreign funds groups were so lucky as to post such flat performance, as falling equity prices on the Tokyo Stock Exchange led to a loss of 3.2% for the Japanese Equity index.

“Japan has seen some of the hot money leave its market as the Bank of Japan toys with the idea of allowing interest rates to rise,” Chow said. “The country has shown further signs of economic growth and is getting closer to banishing deflation.”

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