Soft greenback has many fund indices seeing red in April

With the shine on gold in April it’s tempting to turn a blind eye to how the falling greenback has cut into Morningstar Canada’s fund indices. But for some sector specific funds, the 4% depreciation of the U.S. dollar meant those cuts were swift and, in some cases, deep.

According to Morningstar Canada’s preliminary figures, sectors that had a hefty holding in U.S. stocks like the Healthcare Fund Index or the ever-volatile Science and Technology category failed to hold-up under the pressure of the loonie’s appreciation. The heath care sector was the hardest hit, dropping 5.3% after five consecutive months of slow, but steady growth, while the science and technology group of funds dropped 3.2% after a healthy 4.7% gain in March.

As one might expect, U.S. Equity and U.S. Small & Mid Cap Equity fund indices also ended in the red, down 2.5% and 2.2% respectively. Without the currency effect, the S&P 500 Index gained 1.2%, but when expressed in Canadian dollars it lost 2.8%. Overall, 18 of the 31 indices tracked by Morningstar were in negative territory last month.

Gold and other precious metal funds helped provided the bulk of the gains. The Canada Precious Metals Fund Index posted a 10.2% gain for the month — its third double-digit gain this year — as gold smashed through the $600 US ceiling. The index returned 13.7% in March and 18.1% in January but stumbled in February with a 3.7% loss.

“It was a great month for precious metals overall,” says Morningstar analyst Mark Chow. “Continued geopolitical tension in the Middle East, supply fears and strong demand for the yellow metal appear to be the drivers.” He adds that the outlook for the gold is good as long as there is concern about the falling greenback.

The Natural Resources fund index was a distant second, posting a modest gain of 4.4%. “Though precious metals stole much of the thunder last month, base metals also fared very well. Copper, for instance, rose by more than 30% in April and hit all-time highs amid fears of a supply shortage, stoked by news of strike action at several mines,” Chow said.

The broadly diversified Canadian Equity (Pure) and Canadian Equity categories basically match the unexciting performance of the S&P/TSX Composite, gaining 0.8% and 0.7% respectively. The Canadian Small Cap Equity fund index, whose constituent funds are generally more concentrated in resources, — did much better, rising 3.4%.

The Bank of Canada decision to raised interest rates for the sixth consecutive time hurt some of the interest sensitive areas in the market such as income trusts and dividend-payers, Chow said. And the impact is evident in the popular Canadian Income Balanced and Canadian Dividend categories, which both lost value for the first time since last October, shedding 0.5% and 0.7% respectively.

The picture was moderately better overseas. The Asia Ex-Japan Equity fund index was up 2.5%, while Emerging Markets Equity gained 2.1%. Meanwhile the European Equity fund index gained 1.1% for the month, pushing its year-to-date gain up to 13% on the heels of a strengthening German economy.

Among other foreign equity fund categories, the International Equity fund index was up 0.3% while Global Equity lost 0.6%. The Japanese Equity fund index, however, continued its volatile tract with a 2% loss in April. “The yen’s rise against the greenback has caused fears that companies that export goods, such as Sony, would be adversely affected,” says Chow. “Things still look good in Japan though, as the economy continues to recover and inflation picks up.”

Fund sales healthy in April

Meanwhile, IFIC reported preliminary net mutual fund sales of approximately $550 million in April, about the same last year. “Mutual fund sales remain strong after RRSP season,” said IFIC president Joanne De Laurentiis in a statement. “Sales are expected to be strongest in long-term funds, reinforcing our belief that mutual funds play an important role in building personal wealth in Canada.”

IFIC estimates that net assets of the industry at the end of April will be in the range of $605 to $610 billion, down approximately 0.1% from last month’s total of $608.6 billion.

Among firms, RBC led the way with $362 million in net sales, but the other big banks didn’t fare as well. TD had $66 million in net sales, but CIBC was off $114 million and Scotia Securities reported net redemptions of $241 million.

Mackenzie Financial topped non-bank firms, at $121 million in net sales, followed closely by CI, at $111. Aim Trimark was down $271 million while AIC lost $99 million.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(05/02/06)