Foreign equity funds once again had a strong showing in August, due in large part to solid returns in the European and U.S. markets. But it was the Real Estate Equity category that stole the show, Morningstar Canada said Wednesday.

Forty of the 43 Morningstar Canada fund indices advanced during the month, led by an 8.4% gain in the real estate equity fund index. That index is one of the smallest in the Canadian fund universe with just 21 unique mandates.

“A string of positive housing data helped underpin strength in real estate equities for August. Results of new and existing U.S. home sales outpaced expectations as buyers took advantage of government tax credits and deep discounts in the foreclosure market to help pare existing inventory and create pricing pressure in the sector,” says Neal Brandon, fund analyst for Morningstar Canada. “Building on previous strength, the Canadian housing market showed continued signs of growth with a broadly based advance in prices across major markets.”

The second-best performing fund index was the one that tracks the European equity category, which is up 7.3% on solid gains in major markets like France, Germany and the United Kingdom, combined with a 2.1% pullback of the Canadian dollar against the euro.

“Unexpected reports of second-quarter GDP growth in Germany and France contributed to renewed optimism in the eurozone, as the region’s two largest economies officially marked an end to the painful recession,” Brandon says.

Meanwhile, the U.S. equity fund index also had a good month with a 4.7% return thanks to a combination of market performance and currency effects. The S&P 500 index gained 3.6%, while the U.S. dollar appreciated by 1.6% versus the loonie. The strength of Europe and the United States also benefited broader equity fund categories: the global small/mid cap equity, international equity, and global equity fund indices gained 5.9%, 5.6% and 3.9%, respectively.

Among funds that focus on Canadian equities, those that target small-capitalization stocks significantly outperformed their large-cap counterparts. The Canadian small/mid cap equity fund index gained 4.8% for the month, ranking fifth among all fund indices, and the Canadian focused small/mid cap equity fund index was up 4.2%. Meanwhile, the Canadian focused equity and Canadian equity fund indices finished much farther down the performance table with gains of 1.4% and 0.7%, respectively. After a highly volatile start to the year, the three largest sectors of the S&P/TSX composite index-financial services, energy, and materials-had their most subdued month so far, with each sub-index either gaining or losing less than 1%.

The worst-performing fund index last month was Greater China equity with a 5.9% loss. However, fund managers in that category were, in large part, able to navigate around the Shanghai composite index’s 21.8% drop, its largest monthly loss since October 2008.

“Chinese equities suffered a meaningful setback in August as speculation persisted over tighter lending conditions in the region. Investor optimism was derailed by reports that Chinese authorities were beginning to rein in credit markets, dimming short-term growth prospects and helping to erase the last three months of gains for that index,” Brandon says.

IE