All the fund indices that track either equity or balanced fund categories posted losses in May, as the month marked the return of volatility levels not seen in financial markets since the depths of the credit crisis in early 2009.

With the eurozone remaining a major source of global instability, other equity markets also retrenched in the month, according to preliminary performance data Wednesday released by Morningstar Canada.

With concerns mounting about liquidity and insolvency for Greece and some of its neighbours, the European equity fund index gave up 9%, the worst performance in May among all 43 Morningstar Canada fund indices. The decline in May compounds a month-earlier drop of 2.5%.

“Joint efforts by European finance ministers, the European Central Bank, and International Monetary Fund served to shore up financial aid and help stave off the risks of sovereign default,” says Neal Brandon, fund analyst for Morningstar Canada. “However, investors remained wary that the focus on subsequent austerity measures would largely subdue any prospects for regional growth.”

The common currency for the 27-nation bloc also remained under pressure. “The Canadian dollar continued to gain ground on the euro in May, rising 4.8% to reach multi-year highs and further weighing on the performance of unhedged European equities,” Brandon said.

At the same time, contagion developments were widespread, with few markets immune to Europe’s troubles. The Morningstar International Equity Fund Index was second from the bottom, losing 7.7%, while the Morningstar Global Small/Mid Cap Equity Fund Index fell 7.3% to take fourth place for losses among all indices. Meanwhile, the Morningstar Global Equity Fund Index and the Morningstar Emerging Markets Equity Fund Index were each down 6.3%.

Also among the 10 worst results in May was the Morningstar Canadian Focused Small/Mid Cap Equity Fund Index, which fell 6.2%, matching the loss by the Morningstar US Equity Fund Index and nearly 1% worse than the 5.3% loss by its less-concentrated counterpart, the Morningstar Canadian Small/Mid Cap Equity Fund Index.

Resources also felt the impact of economic uncertainty in May. “The ascent of oil prices witnessed early in the month quickly came under pressure as doubts surrounding European solidarity and the pace of Chinese demand threatened to derail the global recovery,” Brandon said.

In a stark reversal from a months-long positive trend, the natural resources equity fund index ended May with a loss of 7.6% — the third-worst performance of all indices in the month. The index gained 3% a month earlier and was up 53.9% in 2009 for the year’s best performance.

Positive results were few and modest in the month. While the U.S. money market fund index and the Canadian money market fund Index broke even, only five indices posted gains. All of the positive-performing indices are in fixed-income categories and four are focused on Canadian markets.

“For investors seeking a more defensive positioning, Canadian fixed-income markets proved to be a source of relative safety during the month,” Brandon says.

The best performer was the Canadian long term fixed income fund index, which gained 2.1%, while the shorter-term mandates of the Canadian fixed income fund Index and the Canadian short term fixed income fund index led to gains of 0.9% and 0.6%, respectively. Rounding out the top five, the Morningstar short term fixed income global fixed income gained 0.5% and the Canadian inflation-protected fixed income rose 0.4%.

Final performance figures will be published on next week.

IE