Mixed but mostly positive performance by the world equity markets, combined with a weakening Canadian dollar, produced a fourth consecutive month of solid returns for most equity fund categories in June.

Forty of the 43 Morningstar Canada fund kndices posted gains for the month, with foreign equity categories dominating the top of the rankings, according to preliminary performance data released Friday by Morningstar Canada.

However, the top-performing fund index for the month was one that tracks a sector-specific fund category; the health care equity fund index posted a 10% gain — its first double-digit monthly return in nearly nine years. “Health care equities appreciated in the latter half of the month, coinciding with U.S. Senate discussions on health care reform,” says Nick Dedes, fund analyst for Morningstar Canada. “Within the sector, we saw pharmaceuticals advance meaningfully, likely at the prospect of millions of currently uninsured individuals eventually gaining access to prescription drugs under the proposed reform plan.”

All 12 fund indices that track foreign equity categories posted above-average gains in June, with returns ranging from 8.7% for the Japanese equity fund index (which ranked second overall) to 3.7% for European equity (in 16th place). Foreign equity funds — particularly those that focus on Asia — benefitted from strong market returns in China and Japan, but it was the loonie’s steep depreciation against virtually all major currencies that contributed the bulk of their returns.

This created an ideal combination for funds in the Japanese equity category, as the yen’s 5.1% appreciation compounded the Nikkei 225 index’s 4.6% gain. The situation was similar in China, where the Shanghai composite index’s 12.4% gain was coupled with the renminbi’s 6% increase against the Canadian dollar. The greater China equity fund index gained 8.4% in June, ranking fourth among all fund indices.

In the United States, the S&P 500 was mostly flat when measured in U.S. dollars, gaining just 0.2%. But the U.S. dollar’s 6% increase against its Canadian counterpart resulted in gains of 5% and 6.6% for the U.S. equity and U.S. small/mid cap equity fund indices, respectively. Meanwhile in Europe, major benchmarks in France, Germany and the United Kingdom posted losses of 4.2% (CAC 40), 2.7% (DAX), and 3.8% (FTSE 100), respectively, but these were offset by gains of 5.2% for the euro and 8% for the UK pound against the loonie, resulting in positive returns for European equity funds.

Domestic equity funds did not have the benefit of currency effects, but most indices had positive results, led by the Canadian dividend & income equity fund index (up 2.7%). The more broad-based Canadian equity category returned 0.1% reflecting the minimal gain of the S&P/TSX composite index (0.3%) for the month.

The worst-performing fund index in June was precious metals equity, which lost 6%. “The greenback strengthened during the month, which weighed on U.S. dollar-denominated precious metals such as gold, platinum, and silver and lessened their attractiveness as a store of value,” Dedes says. The other two fund indices in the red were natural resources equity and Canadian small/mid cap equity, with losses of 2.4% and 0.3%, respectively.

Final performance figures will be published next week.

IE