Resources help boost small/mid cap funds

Continued strong demand for resources helped to drive positive returns across the Canadian mutual fund universe, with all but one of Morningstar’s 42 Canada Fund Indices saw gains in Q1 2007.

The biggest gains came in small/mid cap funds, with the Morningstar Canada Global Small/Mid Cap Equity Fund Index coming out on top with a 5.6% increase over last quarter. The Canadian Small/Mid Cap Equity and Canadian Anchored Small/Mid Cap Equity fund indices also posted big returns, at 5.1% and 4.4%, respectively.

“The resource run over the past quarter has helped Canadian small- and mid-cap funds,” says Bhavna Hinduja, a Morningstar Canada fund analyst. “The energy and materials sectors represent about half the holdings of both Canadian small-cap fund indices.”

After a slow start, the Natural Resources Equity fund bounced back to post a 4.1% gain, placing it fourth. The index had one of its lowest returns in January at 0% but improved slightly to 0.9% in February. Last month, the index saw a 3.2% return, making it the best gainer in March.

“This sector has had a great run, primarily on the back of base metals and energy,” says Hinduja. He adds that the weak performance in the first two months of Q1 was due to the February 27 stock market drop. “Fears concerning the Chinese equity market sent tremors around the world last month that impacted all sectors, including gold. But a colder than normal February in North America led to a reduction in oil and natural gas inventories, which boosted the prices of these commodities.”

The next best performer was the European Equity fund index, which gained 2.7%, despite a harrowing few days early in the month. According to Morningstar, the stock market drop significantly affected European equity funds, forcing a 1.5% loss in the first couple days of March.

Last month’s best performing index, the Japanese Equity fund index, was hit with a 2.8% loss in March, making it this month’s worst performer. Again, the fallout from the late-February market correction is to blame, as the Nikkei 225 index lost more than 5% in early March, and any attempt at bouncing back was preceded by another drop.

On a quarterly basis there was also only one index in the red, as the U.S. Equity fund index took a 0.6% hit. The stock market sell-off coupled with the troubled sub-prime mortgage sector were two reasons the fund underperformed.

“Worries over the U.S. sub-prime mortgage sector that began in mid-February have had a ripple effect across equity markets south of the border,” says Hinduja. Making matters worse is “the U.S. Federal Reserve’s bias toward raising rates to curb higher inflation,” says Hinduja, and the faltering U.S. dollar, which depreciated against the loonie by 0.8%.

Portfolio funds faired a bit better, as 10 of the 12 fund indexes posted gains between 1% and 1.6%. Two indexes — the 15 Year Target Date Portfolio and the 15 Year+ Target Date Portfolio — weren’t so lucky, however, dropping their quarterly finish to 0.3% and 0.2%, respectively. The poor performance was a result of a lackluster March, which saw the indexes falling 0.7% and 1%, respectively.

In the fixed-income category, the Morningstar High Yield Fixed Income Fund Index was the top performer, returning 2.6%. The other five indexes in that category gained only between 0.2% and 0.9%.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com