Canadian equity funds underperformed in June, but 12 out of the 22 Morningstar Canada find indices still had positive results for the second quarter of 2013.
As was the case in the first quarter of 2013, funds that target U.S. and Japanese markets posted strong gains, while natural resources-focused funds continued to suffer disastrous losses, according to preliminary performance numbers released by Morningstar Research.
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The index that measures the aggregate returns of funds in the Japanese equity category was the best performer for the quarter, with an increase of 8.7%. Despite a severe correction in early June, the funds managed to post a 5.5% increase.
This was thanks to a partial market recovery, and to favourable currency effects for Canadian investors.
Despite a slightly negative result in June, the Morningstar U.S. Equity Fund Index remained among the leaders for the quarter, with a 5.4% increase. The Morningstar U.S. Small/Mid Cap Equity Fund Index also did well, with a 4.4% expansion for the quarter.
Indices that track the global equity and North American equity categories—which are heavily dependent on U.S. equities—rose by 3.6% and 3.1%, respectively.
Fed sent indices spiraling
For the month of June, the majority of equity fund indices were in the red. This included all 11 indices that track balanced fund categories, as well as the seven fixed-income fund indices.
This was largely the result of comments made in late May by U.S. Federal Reserve Chairman Ben Bernanke. He hinting the U.S. economy has improved to a point where the Federal Reserve could start slowing the pace of its bond-buying program.
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His comments not only sent global equity markets tumbling, but also pushed interest rates higher, which in turn drove bond prices lower.
With Japan as the notable exception, Asian equity funds were among the worst performers, both for the month and the quarter.
Chinese equities were hit particularly hard, with the Shanghai Composite Index dropping 14% in June and 11.5% for the quarter in local currency terms.
For Canadian investors, this was partially offset by a depreciating dollar, but the Morningstar Greater China Equity Fund Index still posted drops of 5.3% and 2.2% for the month and quarter, respectively.
The Asia Pacific ex-Japan equity and emerging markets equity fund indices were also among the bottom performers, given they slipped 4.2% and 6.6%, respectively, for the quarter.
“In an unexpected move, China’s central bank allowed interbank lending rates to spike, causing fear of a possible cash crunch in China’s banking sector,” says Morningstar fund analyst Joanne Xiao.
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She adds, “The market subsequently recovered some of its losses after the central bank showed there is sufficient liquidity in the economy, and that its earlier action was intended to fight off-balance-sheet nonbank lending.”
On the home front
For Canadian equity funds, the story continued to be the slumping natural resources sector—particularly the price of gold, which lost another 16% in June.
Falling commodities dragged funds in the precious metals equity category, which posted an average decrease of 17.5% for the month and 34.9% for the quarter.
The natural resources equity index was the second-worst performer for the quarter, with an 11.6% slump. The more broadly diversified Canadian equity index was down 2.8%.
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“Gold is traditionally seen as a hedge against inflation,” says Xiao. “But the Federal Reserve’s stimulus program injected large quantities of cash into the U.S. banking system, which devalued the U.S. dollar and caused concerns of possible inflation.”
Due to this and “with the new fears these stimulus measures may be withdrawn, the conditions for the previous gold rally no longer exist, hence the drop in gold prices.”
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