Tough to make a buck in July: Morningstar

Nothing lasts forever: it’s a lesson that Canadian mutual fund investors chasing returns in the commodities sector learned in July, according to data from Morningstar Canada.

Tumbling prices for gold, crude and various other industrial inputs pushed commodities-focused mutual funds to the bottom of the heap last month, with the Morningstar Precious Metals Equity Fund Index ranking dead-last, with a loss of 12.5%.

The price of light crude may have reached a peak of $147 per barrel early in the month, but it proved unsustainable and fell to $124 by the end of July. Natural gas prices dropped 30%, resulting in a 12.4% loss for the Morningstar Natural Resources Equity Fund index.

“Fuel consumption in the United States and Canada could continue to fall as consumers feeling squeezed at the pump consider ways to reduce their reliance on increasingly expensive oil products,” said Al Kellett, fund analyst for Morningstar Canada. “As for precious metals, there are a lot of small-cap companies in this space, and many have struggled to keep themselves adequately funded amid the broad credit contraction.”

With the energy sector dominating the Canadian equity universe, the losses spread to more diversified fund groups. The Canadian Equity index lost 6.2%, while Canadian Small/Mid Cap Equity dropped 7.3% and Canadian Focused Small/Mid Cap Equity fell 8.0%.

Of the 42 fund indexes tracked by Morningstar, just eight posted positive returns, and only three of those were in the equity space. The Financial Services Equity index gained 3.4%, while the Real Estate Equity group eked out a gain of 0.1%.

The best performer for the month was the rarely mentioned Health Care Equity index, which was driven 5.9% higher by several consolidation plays in that sector.

“Roche bid almost $44 billion US for the outstanding shares of Genentech, while Teva Pharmaceutical Industries signalled its intention to purchase Barr Pharmaceuticals in a deal worth $7.5 billion US,” says Kellett. “Although the health care sector has struggled during the market downturn of the last 12 months, it is often considered a defensive play that could weather a consumer-led slowdown better than most.”

Assorted fixed income and money market indexes rounded out the group that posted positive returns, with Global Fixed Income posting the best gain, at 0.9%.

Foreign equity fund indexes provided little shelter for investors, with the Emerging Markets Equity index falling 3.2%, while the European Equity index dropped 3.1%. International Equity fell 2.6%, and Global Equity gave up 1.4%.

The Morningstar U.S. Equity Fund index managed to outperform its benchmark, the S&P 500 Index, with a return of 0.6% versus 0.8% in U.S. dollar terms.

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

(08/05/08)