Weak loonie boosts fund returns, sales sag

The slow stock market rally did little to dampen mutual fund performance in June following strong returns in April and May, according to preliminary data from Morningstar Canada.

The vast majority of fund indices — 40 out of the 43 that Morningstar tracks — managed to end the month in the black, thanks in part to a weakening Canadian dollar. That boosted foreign equity funds to some of the top slots on the performance charts.

But the best returns were found in one of the narrowest sectors, with the Morningstar Health Care Equity Fund Index posting a 10% gain. It’s the first time in nine years that the index has served up a double-digit gain, which came largely from the U.S. Senate debate over healthcare.

“Within the sector, we saw pharmaceuticals advance meaningfully, likely at the prospect of millions of currently uninsured individuals eventually gaining access to prescription drugs under the proposed reform plan,” says Nick Dedes, fund analyst for Morningstar Canada.

The Japanese Equity Fund Index took second place on the table, with a return of 8.7%. Asian focused funds in general did well, with the Greater China Equity index earning 8.4%, Asia Pacific Equity rising 5.8%, and Asia Pacific ex-Japan climbing 5.5%.

Again, the rapid decline in the Canadian dollar helped drive these fund indices higher. The Japanese yen climbed 5.1% against the dollar, contributing more to returns than the actual stock market performance, as the Nikkei 225 index gained 4.6%. China’s renminbi rose 6% against the loonie.

Science and technology funds, which are largely invested outside of Canada, ranked third as a category returning 8.5%.

“A reversal in commodity prices alongside cautionary comments from the Bank of Canada weighed on the loonie in June,” says Dedes. “The governor of the central bank suggested that the country will continue to need policies that will stimulate the economy as rising unemployment is increasing financial stress among households.”

The loonie turned an otherwise flat performance on the U.S. markets into a 5% gain for the U.S. Equity index and a gain of 6.6% for the U.S. Small/Mid Cap Equity index. Foreign exchange rates worked similar magic on the European Equity fund index, which gained 3.7% despite negative returns on the three major benchmark stock indices.

Outside of the pure equity groups, the Global Fixed Income Balanced group ranked the highest, with a return of 4.7%, while High Yield Fixed Income earned 3.5%.

With no help from the currency markets, Canadian equity funds had to rely on the talent of their managers.

The Canadian Dividend & Income Equity fund index gained 2.7% and the Canadian Equity index crept higher by 0.1%. Meanwhile the S&P/TSX Composite Index benchmark gained 0.3%.

Investors who wanted to keep their money in Canada would have been better served in the bond market, as the Canadian Long Term Fixed Income index returned 3% and the Canadian Inflation-Protected Fixed Income index earned 2.6%.

The worst performing fund index in June was Precious Metals Equity, losing 6% as the U.S. dollar reasserted itself as the dominant store of wealth.

Slumping commodity prices near the end of the month dragged down the Natural Resources Equity index (-2.4%) and the Canadian Small/Mid Cap Equity index (-0.3%), which is heavily tilted toward resources.

Despite improving markets, sales of mutual funds were mired in net redemptions, according to preliminary data from the Investment Funds Institute of Canada. IFIC estimates net redemptions of between $1.3 billion and $1.8 billion for the month.

“After a small decline in assets under management in the first quarter of 2009, assets grew by $48 billion in the second quarter, an increase of 9.7%. This is certainly good news for mutual fund investors,” said Pat Dunwoody, vice-president of member services and communications with IFIC. “We are continuing to see a re-balancing of assets, as investors are moving back into long-term fund categories. In addition, we are seeing investors move to other interest bearing securities as money market yields have come down over the past few months.”

IFIC estimates that net industry assets for the month of June will be between $542.9 billion and $547.9 billion, up approximately 1.43% from May’s total of $537.8 billion.

It was a rough month for RBC Asset Management which announced net redemptions of $872 million. Investors pulled $1.3 billion out of money market funds, amply offsetting $386 million in net sales in long term funds. Assets under management increased by $600 million or 0.6% in June.

“We are encouraged by the continued positive momentum in sales of long-term funds,” said Doug Coulter, president of RBC AM. “This trend is being driven by a return of investor confidence – a trend that has seen investors begin to deploy their money market assets.”

CI Financial reported net sales of $472 million. Assets under management grew by $1.4 billion or 2.3%. Net sales of $500 million in long-term funds offset the $28 million in short term fund redemptions.

Investors Group also posted net redemptions overall, with net long term fund sales of $2.6 million being over-shadowed by $6.4 million in net redemptions from money market funds. Total assets under management dropped to $52.5 billion, compared with $59.0 billion at June 30, 2008.

Mackenzie Financial, posted a net outflow of $45 million from long-term funds, with another $24 million coming out of money market funds. Assets under management at the end of June were $57.8 billion, down from $61.2 billion at end of June 2008.

Dundee Wealth Management reported net sales of $262 million, which helped boost mutual fund assets under management to $21 billion.

AGF Management reported total $44.1 million in net redemptions of long-term mutual funds, compared with long-term fund net redemptions of $327.5 million in June 2008. Mutual fund assets increased 1.5% to $21.2 billion over the month.

Investment Planning Counsel reported net redemption of $9.1 million for long term funds and $400,000 from money market funds. Total assets under management were $1.84 billion at the end of the month, compared to $2.14 billion at June 30, 2008.

At Mavrix Fund Management, positive market affect helped to boost assets under management to by 2.03% in June to $313.8 million, despite net redemptions of $1.3 million.

(07/03/09)