Strong returns in Canada’s financial services sector helped push the country’s domestic equity funds to a second consecutive month of healthy gains in March. But unlike February’s results, investment funds that focus on foreign equities also did well last month, according to preliminary performance data released Thursday by Morningstar Canada.

All of the 24 Morningstar Canada fund indices that track equity categories posted gains in March, with the top performers presenting an eclectic mix of domestic and foreign categories, including both large- and smaller-capitalization funds. Returns for most of these categories over the past month ranged between 2% and 5%.

The best monthly return belonged to the financial services equity fund index, which gained 6.7% in March.

“The four largest Canadian banks reported generally solid operating earnings, in part owing to strong results in retail banking and trading,” said Nick Dedes, fund analyst for Morningstar Canada.

“Strong inflows into domestic long-term funds-particularly balanced funds, which typically have a generous allocation to financials-have also supported the upward trend for stock prices in the sector.”

The financial services sector, which on Feb. 28 represented 31% of the S&P/TSX composite index, was also the main driver of returns for more broadly diversified Canadian equity funds, with the S&P/TSX capped financials index gaining 7.3% for the month. One of the main beneficiaries was the Canadian dividend & income equity fund index, which gained 4.9% and ranked third among all fund indices. Funds in that category allocate an average of nearly 37% of their assets to that sector.

Among other sector-diversified domestic equity categories, Canadian focused equity ranked fifth with a 4.2% gain, while Canadian equity ranked seventh with a 3.8% return.

Among foreign equity categories, the best performer was the global small/mid cap equity fund index, which ranked second overall with a 5.1% return.

“Signs of broad global growth and improvements in the credit market have been particularly beneficial for many smaller-capitalization companies that may not be as well equipped to navigate through challenging economic conditions as some of their larger counterparts,” Dedes said.

Other foreign equity fund indices that performed well include emerging markets equity (4.5%), U.S. small/mid cap equity (3.8%), and international equity (3.3%). All of the world’s major markets posted strong returns in March, with indices like the S&P 500, Japan’s Nikkei 225, the U.K.’s FTSE 100, and Germany’s DAX all gaining between 6% and 10%. However, for Canadian investors, a significant portion of those returns was lost to currency effects, as the Canadian dollar strengthened against most of these countries’ currencies.

At the bottom of the performance table, five fund indices lost ground in March, including four that track fixed income categories.

“Significantly low yields on government debt continue to incite investors to move away from these securities and into riskier assets. Also, since interest rates really only have one way to go from here, more rate-sensitive bonds are a less appealing proposition. The worst performer was the Morningstar Global Fixed Income Fund Index, which suffered from both looming interest rate hikes and adverse currency effects.” Dedes said.

Final performance figures will be published on next week.

IE