Trusts fail to deflate fund performance

Despite the massive sell-off among income trusts, the mutual fund industry still managed to post “spectacular” gains in November, according to the latest data from Morningstar Canada.

All but one of the 42 Morningstar Canada Fund Indices posted positive returns on the month, with Canadian High Income Equity Fund Index being the sole loser in the pack. Many of the funds in this category invest in — you guessed it — income trusts.

The October 31 announcement that income trusts would face a new federal tax on their distributions laid the sector out in the first week of November, as investors panicked at the prospect of distribution cuts, even if they were four years off.

The Morningstar High Income Equity index fell 7% on November 1 alone, but the index managed to climb slightly over the following weeks, to record a loss of 4.7% on the month.

“Many institutional investors went bargain-hunting for trusts with strong and stable businesses that may have been oversold at the beginning of the month,” said Morningstar Canada senior fund analyst Mark Chow. “While trusts will eventually be taxed at similar levels to dividends, there is a four-year reprieve for trusts established before November 1.”

At the top of the chart, investing in gold paid off as the Precious Metals Equity index gained 13.2%. A softer U.S. dollar helped boost the price of bullion as well as the shares of extraction companies. The index has managed to gain 53% on a year-to-date basis.

“There continues to be speculation of further consolidation in the industry, which will tend to prop up stock prices,” Chow says.

Developing economies continued to offer up outsized gains, particularly in Asia. The Asia Pacific Rim ex-Japan Equity index posted a gain of 9.6%, making it the second-best performer in November, followed by the broader Emerging Market index, which gained 8.1%.

“Economic growth in countries such as China and India has shown no sign of slowing,” says Chow. “As well, Latin American markets such as Mexico, Argentina and Brazil continue to chug along, helped by relatively tame inflation data coming out of the U.S.”

That perceived weakness in America impacted North American currencies, making gains in foreign investments more valuable when converted to Canadian dollars. The high-flying loonie had its wings clipped in November, falling 5% against the euro, which some see as a possible replacement for the U.S. dollar as reserve currency of choice. The Canadian dollar was also weaker against the U.S., losing 1.7%, and dropped nearly 3% against the Japanese yen.

The weakness against the euro in particular helped Canadian investors, as the European Equity Fund Index gained 4.8% on the month. That index’s year-to-date gain of 26.7% places it in a dead heat with the Asia Pacific Rim ex-Japan Equity and its more rapidly expanding economies.

Among smaller cap equity funds, it again paid to think globally. The Global Small/Mid Cap Equity index gained 5.4%, while U.S. Small/Mid Cap Equity, Canadian Small/Mid Cap Equity and Canadian Anchored Small/Mid Cap Equity were up 4.2%, 3.2% and 2.7%, respectively.

Advisors who have succeeded in diversifying their clients overseas will be happy to know the International Equity Fund index gained 4.1%, while the Global Equity gained 3.7%. Despite being home to so much economic uncertainty, the U.S. Equity index earned 3.5%.

Domestically, the best diversified-fund performers were the Canadian Anchored Equity index and the Canadian Equity index, with gains of 3.3% and 3.2%, respectively.

Although fixed income fund indices trailed equity-based fund groups, fears of an economic slowdown helped to boost them into positive territory. Global Fixed Income was the leader in the group, with a return of 2.7%. The Canadian Long Duration Fixed Income index posted a 1.5% return, with the Canadian High Yield Fixed Income index not far behind, with a 1.3% gain.

With equity-based investments leading the pack and the most aggressive equity funds (Asia, emerging markets) near the top, it should come as no surprise that longer-horizon portfolio funds topped their more conservative short-horizon counterparts. Those with more than 15 years to their target date returned 3.2% as a group. The Global Fixed Income Tilt Portfolio was the worst performer in the portfolio fund subset, finishing November flat.

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

(12/04/06)

Steven Lamb