Resource funds make a killing: Morningstar

Last month’s run-up in resource and commodity prices helped investment funds that target those sectors post strong results, according to performance data released today by Morningstar Canada.

The Morningstar Natural Resources Equity Fund Index gained 9.8% for the month, the best return among the 42 Morningstar Canada fund indexes. The Morningstar Precious Metals Equity Fund Index had the second-best return in February with a 6.5% gain as gold prices reached new record highs.

“Rising prices in commodities like oil, gold and copper have helped bolster the returns of natural resources and precious metals funds,” says Jordan Benincasa, fund analyst for Morningstar Canada.

The run-up in commodity prices had a positive spillover effect for anyone invested in domestic equity funds, Benincasa notes. Energy and materials represent about 40% of the holdings of most of the Canadian equity indexes. That “significant amount” helped propel Canadian funds well into positive territory, he says.

The Morningstar indexes for domestic equity funds all had positive returns in February. The Morningstar Canadian Small/Mid Cap Equity Fund Index was up 4.2% for the month, while Canadian Focused Small/Mid Cap Equity and Canadian Income Trust Equity each gained 3.7%. The Morningstar Canadian Equity Fund Index was up 3.2%, falling just shy of the 3.4% return posted by the S&P/TSX Composite Index.

Benincasa says the Canadian funds could have performed even better if it weren’t for their heavy weightings in financial stocks, which took a beating in February. He says the Financial Services Equity category lost 4.8%, the second-worst performing category of all the indexes.

The dubious honour of worst performing index went to U.S. Equity, which showed a 5.3% loss, resulting from poor market performance by the S&P 500 index, which was down 3.2% in U.S.-dollar terms.

“While the Federal Reserve has slashed interest rates in recent months in an effort to prop up the economy, soaring commodity, energy and food prices have fuelled fears that inflation is taking hold just as growth is slowing,” Benincasa says. “Since the spring of 2007, when the markets started to take notice of the severity of the credit crunch, the U.S. Equity Fund Index has lost more than 20% on a cumulative basis.”

Among other foreign equity categories, the Morningstar Emerging Markets Equity Fund Index had the best return, with 3%, due in large part to another solid performance by the Brazilian stock market. The only other positive result went to the Morningstar Asia Pacific ex-Japan Equity Fund Index, which increased a miniscule 0.2% on the strength of stock markets in Taiwan, Hong Kong and South Korea.

All other foreign equity categories suffered losses: European Equity was down 1.6%, International Equity shed 2.4%, and Global Equity dropped 3.4%.

“Global financial institutions continue to report massive write-downs stemming from business in the collapsing U.S. housing market,” Benincasa says. “Exposure to banks and financial-related firms has hurt both domestic and foreign equity funds.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com