All but two of the 43 Morningstar Canada fund indices suffered losses in September, according to preliminary performance data released on Thursday by Morningstar Canada. The only exceptions were the indices following the two money market categories.

Equity markets plunged — and investment funds along with them — in the face of the worsening U.S. credit crisis. The collapse of some former U.S. financial services titans, which were either sold at fire-sale prices or taken over by the U.S. government, and the proposed US$700 billion rescue plan that failed to win the House of Representatives approval on Sept. 29 precipitated some of the biggest single-day losses ever for North American stock markets.

By the end of the month, the Morningstar U.S. Small/Mid Cap Equity Index had fallen 11.6%, lagging its broader counterpart, the US Equity Index, which lost 9.9%. In Canada, funds that focus on small- and mid-cap companies also fared worse than those investing in the broader market. The Morningstar Canadian Focused Small/Mid Cap Equity and Canadian Small/Mid Cap Equity indices lost 19.8% and 18.2%, respectively.

“Access to funding continues to be stifled by the credit crunch, and small- and mid-sized companies especially are feeling the lending squeeze,” says Al Kellett, fund analyst for Morningstar Canada.

The worst performer among all categories, however, was the Morningstar Natural Resources Equity Fund Index, which lost 21.4% as energy issues plunged. “Much of the downturn can be attributed to lower demand estimates amid weakening global growth, which led the price of oil to fall by more than U.S.$10 a barrel in September,” Kellett says.

At the same time, weakening resource prices contributed to a loss of 14.5% for the Canadian Equity Index and of 12.1% for both the Canadian Income Trust Equity and Canadian Focused Equity indices.

Equity funds investing in overseas markets proved to be no shelter from the U.S.-centred storm. The newest fund index — Morningstar Greater China Equity — had an inauspicious debut in September, as its 19.8% loss was the worst among regional funds.

By comparison, the Morningstar Emerging Markets Equity Index lost 17.2%, while other funds invested in Asia also reacted sharply to credit-related fears. The Morningstar index that tracks Asia Pacific ex-Japan fell 13.3%, while the Japanese Equity Index fell 9.2% and the Asia Pacific Equity Index lost 10.7%. Meanwhile, the European Equity Index sank 14.8%.

September saw a further decline of 13.5% for the Morningstar Precious Metals Equity Index, which previously fell 11% in August. “Precious metals stocks fell despite a 10% rise in the price of gold bullion, as investors sought a safe haven from plummeting equity prices,” Kellett says.

Other industry-sector equity funds were also caught in the market downdraft. The Morningstar Science & Technology Equity Index sank 15.3%, while both the Real Estate Equity and Health Care Equity indices lost 7.7%. Despite the high-profile corporate collapses in the United States, the Morningstar Financial Services Equity Index had a relatively modest loss of 5.7%.

All indices that track fixed-income fund categories posted negative returns. The Morningstar Canadian Inflation Protected Fixed Income Index, down 8.6%, was by far the worst performer during the month.
A small drop of 0.8% by the Canadian Short-Term Fixed-Income Index made it the leader among fixed-income funds. The two money-market fund indices had near-zero returns, but that was enough to enable them to lead the pack during a dismal month.