All equity sectors hit hard in May: Morningstar

With most balanced funds also in negative territory, the best outcomes showed up in fixed-income categories. “Investors continue to ignore the prospect of rising rates and flock to the safety they perceive in fixed income,” Morningstar fund analyst Nick Dedes said in a release. “That popularity is driving yields lower and prices higher.”

The Canadian long term fixed income and Canadian inflation-protected fund indices led the way with increases of 4.1% and 3.9%, respectively, while the Canadian fixed income index ranked third with a return of 1.7%. Also in the black were global fixed income funds, which rose 0.8%, while the Canadian short term fixed income index rounded out the top-five list with a return of 0.5%.

Slight losses of 0.2% and 0.5% by the real estate equity and health care equity indices, respectively, were enough to make those two the best performers among equity fund categories.

Turbulence was pervasive across equity markets and the high volatility of certain other industry sectors was evident. Natural resources equity funds fell 10.2% for the steepest and only double-digit loss among all 42 Morningstar fund indices. That decline reflected a plunge of 14% in the price of Brent crude oil as concerns heightened about weakening economic growth and the slowing demand for fuel.

The precious metals equity index performed only slightly better, declining 8.6% as the second-worst performer in the month. The spot price of gold dropped a steep 6% in May.

The European equity index fell 7.8%, which was the worst regional equity performance in the month. “There’s a plethora of headline news feeding investors’ apprehension. The Spanish banking system is under significant pressure, Greeks are heading back to the polls after a failed attempt to form a ruling government, and there are billions of trading losses out of J.P. Morgan, to name a few,” Dedes said. “It’s not surprising to see capital fleeing riskier assets and, to some extent, we’ve become accustomed to seeing security prices largely influenced by headlines versus company fundamentals.”

Spurred in part by this turbulence, most overseas markets also suffered substantial losses. The Japanese and greater China equity indices decreased 5.7% and 7%, respectively. Similar declines, ranging from 5.7% to nearly 8%, were experienced by the indices that track the more diversified mandates of global equity, emerging markets, international equity, global small/mid cap equity, and Asia Pacific equity funds.

The more advanced economies in North America were also not immune to the turmoil. In Canada, where high levels of household debt and high home prices have been singled out as areas for concern, the equity market fell more steeply than in the United States. The index that tracks the Canadian equity index fell 6%, compared with a decline of 4% for the U.S. equity index.

Final performance data will be published next week.