Another solid month for equity funds in February: Morningstar

Foreign equity markets generally outperformed their Canadian counterpart last month, and as a result foreign equity funds dominated the rankings. The best performer index was the one that measures the European equity category, which rose by 5%. This reflected the impressive returns posted by the major European benchmarks, notably Germany’s DAX Index, France’s CAC40 and the United Kingdom’s FTSE 100, which gained 6.1%, 4.7%, and 3.3%, respectively. Other top-performing foreign fund indices included Japanese Equity (4.6%), Global Equity (4.1%), Asia Pacific Equity (4%), and International Equity (4%).

“In Europe, investors were relieved as Greece received its second tranche of funding,” says Salman Ahmed, Morningstar fund analyst. “And in Japan, a depreciating yen increased investor confidence in the ability of manufacturing firms to competitively price their goods. Even with the yen’s nearly 8% depreciation against the Canadian dollar, Japanese equities were among the best performers globally for Canadian investors.”

Among domestic equity funds, the Canadian equity fund index rose by 1.7% in February, matching the return of the S&P/TSX composite index. Funds in the Canadian focused equity category, which can invest up to half of their portfolios in foreign stocks, did better with an average gain of 2.4%. Funds that invest in smaller Canadian companies outperformed large-cap funds, with the Canadian focused small/mid cap equity and Canadian small/mid cap equity fund indices posting increases of 4.1% and 3.4%, respectively.

The financial services sector was the main contributor to domestic equity portfolios’ positive returns, with the S&P/TSX capped financials index rising 3.6%. Financials represent about 29% of the typical fund in the Canadian equity category. The second largest sector, energy, also did well with a 2.3% return. “Increasing tensions between Iran and Israel pushed up the price of oil during the month. Crude oil was up more than 9% in U.S.-dollar terms. This helped keep the energy sector in the black,” Ahmed says.

The worst performer among all indices, and the only equity fund index to finish the month in the red, was precious metals equity, which decreased by 1.9%. “The precious metals category took a beating in February largely due to the fall in gold and silver prices on the last day of the month. Investors interpreted Ben Bernanke’s comments to the U.S. Congress to mean that the Federal Reserve would not partake in another round of quantitative easing. This reduced inflation expectations and the prices of precious metals that serve as inflation hedges,” Ahmed says.

Final performance figures will be published on later this week.