Investment funds that target foreign stock markets suffered heavy losses during the first quarter of 2008, according to preliminary performance data released today by Morningstar Canada.

Many of the world’s markets had double-digit losses, but for Canadian investors the blow was softened by the Canadian dollar’s steep drop against most major currencies during the quarter

In the United States, the S&P 500 lost 9.4% for the quarter. However, because the U.S. dollar appreciated by 4% versus the loonie, the damage wasn’t as severe for funds in the U.S. Equity category. The fund index that measures the aggregate performance of these funds lost 7.9% during that time. All other major foreign equity fund categories followed the same direction, including the global equity and international equity Indices, which lost 7% and 8% for the quarter, respectively.

“One of the biggest stories of the quarter was J.P. Morgan’s announced proposal (with guarantees from the U.S. Federal Reserve) to purchase troubled investment bank Bear Stearns,” says Philip Lee, fund analyst for Morningstar Canada.

“Also, continued waves of liquidity injected by many of the world’s central banks and the lowering of interest rates in the U.S. sent mixed messages. Many investors took this as a sign that the U.S. financial system is in rougher shape than predicted. Naturally, this was bearish for equities around the world, particularly financials,” Lee adds.

Market losses were the most severe in Europe and Asia. For example, the UK’s FTSE 100 Index was down 11.7% for the quarter, while France’s CAC 40 and Germany’s DAX indexes dropped 16.2% and 19%, respectively, when measured in local currencies. But the loonie’s woes again played a large part in mitigating these losses for Canadian fund unitholders; the euro gained 12.6% against the dollar, and the pound was up 4.1%. As a result, the European equity fund Index was limited to a 6.4% loss for the quarter.

Similarly, the Japanese equity fund index’s loss of 6.7% reflects the combination of an 18.2% drop by the Nikkei 225 Index and the yen’s 16.4% gain against the dollar.

Among the more broadly diversified Asian equity categories, the Asia Pacific equity fund index lost 9.2% while the Asia Pacific Ex-Japan equity fund index was down 10.4%. These two indices were dragged down by tumbling markets in China, where the Shanghai composite index lost 34% and Hong Kong’s Hang Seng index lost 17.8%.

Final performance figures will be published next week.