Equity funds dragged down by resources

Equity funds in Canada posted negative returns on average in November, dragged down by a struggling natural resources sector, says Morningstar.

Foreign equity funds fared better, though, having posted another month of positive results—particularly those that invest in Asia and Europe.

Overall, 32 of the 42 Morningstar Canada Fund Indices posted gains in November, including 16 of the 24 indices that measure the performance of equity fund categories, according to preliminary numbers released today by Morningstar Canada.

Read: Equity funds post mixed results in October

The best-performing fund index for the month was the one tracking the Financial Services Equity category, which gained 2.2%. This relatively small fund category hinges heavily on the performance of the big Canadian banks, which rose in the second half of November on expectations of positive earnings results.

Read: Canadian banks show resilience and Bank earnings will be solid

Royal Bank of Canada announced its results toward the end of the month, while the other banks are in the process of releasing earnings.

At the other end of the performance spectrum were the Natural Resources Equity and Precious Metals Equity categories, whose representative fund indices lost 4.3% and 9.2%, respectively.

In the days following the U.S. election, renewed fears about the so-called fiscal cliff led to a drop in the markets, from which more volatile sectors like precious metals and natural resources are yet to recover.

Read: Conquer clients’ fiscal cliff fears

Precious metals funds were also hurt by some company-specific news within the gold sector; Barrick Gold Corp. revised its guidance toward the low end of expectations, while results posted by IAMGOLD Corp. missed analysts’ expectations.

Diversified Canadian equity funds benefited from the strength of the financial services sector, which accounts for 31% of the S&P/TSX Composite Index. But the poor showing by the energy and materials sectors—the main components of natural resources funds—resulted in losses for all five of the broader domestic equity fund indices.

The Morningstar Canadian Dividend & Income Equity Fund Index was the best performer in the group, with only a 0.1% loss for the month. This is surprising since its constituent funds are the least reliant on resources.

The Morningstar Canadian Focused Equity Fund Index, with its higher exposure to U.S. equities, also did relatively well with a 0.2% loss. The purely domestic Morningstar Canadian Equity Fund Index was down 1%.

The fund indices that track the Canadian Focused Small/Mid Cap Equity and Canadian Small/Mid Cap Equity categories, whose funds tend to be tilted toward resources, were down 1.2% and 2%, respectively, for the month.

Foreign equity funds performed much better than their Canadian counterparts in November, reflecting solid results in the Asian and European stock markets combined with muted currency effects.

Read: Global trade to rebound: HSBC

The Morningstar Asia Pacific ex-Japan Equity Fund Index gained 1.8%, while Japanese Equity and European Equity were both up 1.6%. The International Equity and Asia Pacific Equity both posted increases of 1.5%.

European stocks were buoyed by Germany’s approval of Greece’s latest rescue deal, which provided some assurance for investors.

Morningstar Canada’s preliminary fund performance figures are based on the change in funds’ net asset values per share during the month. Final performance figures will be published on www.morningstar.ca next week.