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Equity Funds Continue to Post Strong Gains in Second Quarter, Morningstar Canada Data Show

The performance story for equity funds in Canada in the second quarter of 2014 was very similar to that of the first quarter, with most categories showing positive results and natural resources funds leading the way. Eighteen of the 21 Morningstar Canada Fund Indices that measure the aggregate returns of equity funds were up during the quarter, 11 of which increased by 3% or more. Fixed-income funds also continued to post strong gains during the second quarter, according to preliminary performance numbers today released by Morningstar Canada.

The Morningstar Canada Fund Index that tracks funds in the Energy Equity category was the best performer in the second quarter with an increase of 13.7%, and it was third-best performing index for the month of June with a 6.3% increase. The Morningstar Natural Resources Equity Fund Index, whose constituent funds combine energy and basic materials stocks, including precious metals, was the third-best performer for the quarter with a 10.6% increase, the majority of which occurred in June.

“Fund returns in these two categories benefited from oil and gas stocks that rose with escalating oil prices, as the current conflict in Iraq sent oil prices higher in June in light of uncertainty surrounding the country’s oil supply. Iraq has become an important oil producer over the past few years, pumping more than 3 million barrels each day,” Morningstar Manager Research Analyst Vishal Mansukhani said.

Precious Metals Equity was the second-best performing fund category in Canada with a 12.1% increase in the second quarter of 2014, thanks to its chart-topping 18.9% increase in June.

“Gold stocks and stocks that are positively correlated to the price of gold were helped by geopolitical tensions in Ukraine and Iraq, which continued to spur demand for the metal as a safe haven for investors’ capital,” Mansukhani said.

The five domestic equity fund indices were all among the top 10 performers for the quarter, having posted positive results for three consecutive months in most cases. The purely domestic Canadian Small/Mid Cap Equity and Canadian Equity categories were up 6.2% and 5.8%, respectively, while the Canadian Focused Small/Mid Cap Equity and Canadian Focused Equity categories, which can allocate up to 49% of their holdings in foreign stocks, increased by 4.7% and 3.8%, respectively. The Morningstar Canadian Dividend and Income Equity Fund Index was up 5% for the quarter.

Foreign equity funds were mostly positive but their returns on average were less than those of funds that focus on resources-rich Canada. Notably, the Morningstar Emerging Markets Equity Fund Index increased 3.2% for the quarter; Asia Pacific ex-Japan Equity was up 2.3%; and U.S. Equity increased by 1.5%. These returns were hampered by currency effects, as the Canadian dollar appreciated against most major currencies during this period.

The worst-performing fund indices--and the only ones in the red for the quarter--were Greater China Equity and U.S. Small/Mid Cap Equity, with decreases of 0.3% each, and European Equity, down 1.8%. European Equity was also the worst performer for the month of June with a 1.5% decrease.

“European stocks fell in June after reports and economic indicators pointed toward a slowdown in Eurozone business activity, as well as a decline in UK real estate stocks in anticipation of a change in the country’s mortgage rules,” Mansukhani 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.