Canadian equity funds fall flat in May: Morningstar

Fifteen of the 21 Morningstar Canada fund indices that measure the aggregate returns of equity funds were up during the month. One of the indices that failed to achieve a positive return was the one that tracks the Canadian equity category, which decreased by 0.2%. The other four fund indices that measure the diversified domestic equity categories performed slightly better: Canadian focused equity and Canadian small/mid cap equity were up 0.1% and 0.2%, respectively, while Canadian focused small/mid cap equity and Canadian dividend & income equity both increased by 0.5%.

In the first four months of the year, Canadian equity funds were among the best performers because of their large allocations to natural resources stocks, which posted strong gains. But in May, the energy and materials sectors of the Toronto Stock Exchange were both in negative territory, which weighed heavily on the S&P/TSX Composite Index’s return for the month. Similarly, funds in the precious metals equity, natural resources equity, and energy equity categories ended the month with decreases of 6.7%, 2.4%, and 0.5%, respectively.

“Earlier this year, political uncertainty in Ukraine contributed to raising the prices of natural resources and precious metals, which abated last month with signs that tensions were calming between Russia and Ukraine. Gold, which is traditionally seen as a safe haven, saw its price drop by nearly 10% in May,” says Joanne Xiao, Morningstar fund analyst. “However, positive stock performance from the large Canadian banks, backed by strong corporate earnings, somewhat mitigated these losses for diversified Canadian equity funds.”

The top-performing fund index in May was the one that measures the Greater China equity category, which increased by 3.1%. Also performing well were the emerging markets equity and Asia Pacific ex-Japan equity fund indices, up 2.2% and 1.8%, respectively.

“The signs of easing tensions between Russia and Ukraine also helped emerging market equities. Elsewhere, investor confidence in the ability of the newly elected prime minister of India to improve the country’s economic growth, and speculation that the Chinese government may adopt policies that would help its equity market, have also improved the returns of emerging market equities,” Xiao says.

Stock markets in the United States had a strong month, with the S&P 500 Index increasing by 2.3% when measured in U.S. dollars. The appreciation of the Canadian dollar versus its U.S. counterpart diminished that gain, and the U.S. equity fund index posted an increase of 1.6% in May. Currency effects caused more damage to funds in the European equity category, whose fund index decreased by 0.6% despite positive results by most European stock indexes, including those of Germany, France, and the United Kingdom.

All six of the fund indices that track bond categories were positive last month, led by increases of 2.5% and 2.4% for the Canadian long term fixed income and Canadian inflation-protected fixed income indices. The Canadian fixed income and global fixed income fund indices both increased by 1%, while high yield fixed income and Canadian short term fixed income were up by 0.6% and 0.3%, respectively.

“Against the backdrop of a generally strong equity market around the world, both Canadian and U.S. government bond yields continued to surprise market watchers and fell to their lowest levels in almost a year — something we usually see during times of weak economic growth. This drop in bond yields benefited funds with longer durations, which are more sensitive to interest rate changes,” Xiao said.

Morningstar Canada’s preliminary fund performance figures are based on change in funds’ net asset values per share during the month, and do not necessarily include end-of-month income distributions. Final performance figures will be published next week.