U.S. Equity Funds on Top in May, Morningstar Canada Data Show

Toronto, ON - 4 June 2013

Solid performance in U.S. stock markets, combined with a surging greenback, produced strong gains for U.S. equity funds sold in Canada during the month of May. This also reflected positively on other fund categories that have heavy allocations to U.S. stocks. Meanwhile, domestic equity funds were back in the black after producing negative returns in April. Twenty-six of the 43 Morningstar Canada Fund Indices had positive results for the month, including increases of more than 2% for 11 of the 22 equity fund categories, according to preliminary performance data released today by Morningstar Research Inc. (Morningstar Canada), a subsidiary of independent investment research provider Morningstar, Inc.

The top-performing fund index in May was the one that measures the aggregate performance of funds in the U.S. Small/Mid Cap Equity category with a 4.9% increase for the month, followed closely by the index that tracks the U.S. Equity category with 4.8%. While the SandP 500 Index of U.S. large-cap stocks did well with a 2.3% return for the month, currency effects had a bigger impact for Canadian investors as the U.S. dollar appreciated 2.7% versus the loonie.

“This marks the seventh straight month of gains for the SandP 500 and its longest streak of monthly gains since 2009,” said Morningstar Fund Analyst Vishal Mansukhani. “Some of the outperformance can be attributed to the increase in U.S. home sales, a higher-than-expected rise in manufacturing for the month, and the highest U.S. consumer sentiment level in nearly six years. But the main engine behind the strong rally in U.S. equities has been monetary policy easing.”

Fund categories that rely on U.S. equities to a large extent were also among the top performers for May. The Morningstar Global Small/Mid Cap Equity Fund Index, of which U.S. stocks are the largest component, increased by 4.4% during the month, while the North American Equity and Global Equity fund indices posted increases of 3.7% and 3.0%, respectively.

Funds that target the health care sector were also among the best performers, with an average increase of 4.3%. Most of the funds in the Health Care Equity category hold the majority of their assets in U.S. stocks.

“Health care has been one of the best-performing sectors in the United States this year. These companies have been cutting costs, and there is speculation of an expansion in insurance programs that will ultimately benefit the sector. Estimates from the Congressional Budget Office indicate that President Obama’s health care legislation may extend insurance over the next decade to approximately 27 million people who are currently uninsured,” Mansukhani said.

After dipping into negative territory in April, all five Morningstar Canada Fund Indices that track Canadian equity categories posted increases last month. The best performers were Canadian Focused Small/Mid Cap Equity and Canadian Focused Equity, up 3.5% and 2.8%, respectively, while Canadian Equity, Canadian Small/Mid Cap Equity, and Canadian Dividend and Income Equity increased by 2.0%, 1.9%, and 0.9%, respectively.

After six consecutive months among the best performers, the Morningstar Japanese Equity Fund Index ranked near the bottom with a 4.6% decrease. Though Japan’s Nikkei 225 Index only lost 0.6% in local currency terms, the Japanese yen depreciated considerably versus other major currencies.

“Recent concerns about a slowdown in China detracted from the performance of Japanese equities in May,” 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.

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