After four consecutive months in the red, equity funds in Canada with heavy allocations to natural resources offered healthy gains in July, owing in part to encouraging signs from Europe. Meanwhile, most diversified domestic equity funds were modestly positive while foreign equity funds posted slight losses, according to preliminary performance numbers released Thursday by Morningstar Canada.
“The month of July saw investors returning to dollar-denominated assets following strong remarks from European Central Bank President Mario Draghi concerning Europe’s commitment to resolve the banking crisis. Draghi’s comment that the ECB will ‘do whatever it takes’ to keep the common currency intact was enough to raise the price of gold and oil by 3% and 7%, respectively, for the month, effectively reversing oil’s four-month price decline,” said Serkan Altay Morningstar fund analyst.
This turnaround was most beneficial to funds in the natural resources equity category, with the natural resources equity fund index increasing by 2.4% in July following a cumulative decrease of 22.7% in the four previous months. Funds in the Canadian small/mid cap equity and Canadian focused small/mid cap equity categories, which have historically allocated large portions of their portfolios to resources, were also among the best performers last month; the indices that track these two categories increased by 1.1% and 1.3%, respectively. Both fund indices posted decreases in each of the four previous months.
Only seven of the 22 Morningstar Canada fund indices that track equity categories were in positive territory in July. Other winners included the Canadian dividend & income equity, Canadian equity, and North American equity fund indices, which increased by 0.8%, 0.5%, and 0.4%, respectively. The best performer overall was the real estate equity fund index, whose constituent funds invest in large part in real estate investment trusts. The index increased by 3.1%, demonstrating investors’ continued appetite for higher income.
Despite mixed results in the various stock markets around the world, all of the fund indices that measure foreign equity categories decreased last month. Notably, the European equity fund index decreased by 0.3% even though stock market indexes in Germany and France gained 5.5% and 3%, respectively; for Canadian investors, these gains were countered by a steep appreciation of the Canadian dollar versus the euro during the month.
Among other major foreign equity fund categories, the international equity fund index decreased by 0.3%, while the U.S. equity, global equity, and Asia Pacific equity fund indices were down 0.5%, 0.5%, and 0.6%, respectively. The worst performer among all fund indices was Japanese equity, which decreased by 4.3% for the month.
“Asian equity markets were among the worst performers for the month, with the Shanghai Composite Index and Japan’s Nikkei Index down 5.5% and 3.5%, respectively (in local currencies). Weak Japanese industrial production data renewed fears that the economy is losing steam, while China’s top leaders warned that economic growth could slow even further and called for more efforts to boost weak domestic demand,” Altay said.
Final performance figures will be published next week.