Strong Gains for U.S., European Equity Funds in November 2014, Morningstar Canada Data Show

Following a very volatile month in October, stock markets around the world posted strong results in November, helped by the accommodative policies of central banks. However, Canadian equity funds continued to be hampered by their large exposure to natural resources, which took another hit last month as oil prices prolonged their decline. Seventeen of the 21 Morningstar Canada Fund Indices that measure the aggregate returns of funds in equity categories had positive performance in November, according to preliminary performance numbers today released by Morningstar Canada.

Among the best-performing fund indices last month were the ones that track the U.S. Equity and U.S. Small/Mid Cap Equity categories, which increased by 3.5% and 3%, respectively. These results reflected both positive performance on U.S. stock markets and an appreciation of the U.S. dollar versus its Canadian counterpart during the month.

“U.S. stock indexes reached all-time highs in early November, fuelled by a positive reaction to the Republican victories in the mid-term elections. The U.S. economy continues to improve, as shown by solid job reports and strong growth numbers for the third quarter of 2014,” Morningstar Manager Research Analyst Achilleas Taxildaris said. “However, central banks in North America have not changed their dovish tone, helping long-term yields to remain low.”

Also among the top performers was the Morningstar European Equity Fund Index, which increased by 3.7% in November. The fund indices that track the International Equity, Global Equity, and Greater China Equity categories were all in positive territory with increases of 2.1%, 2.6%, and 2.6%, respectively.

“Outside of North America, developed economies are struggling. Amid slower GDP growth—or even contraction—and renewed deflation concerns, central banks in Europe, China, and Japan remain accommodative. This has boosted equity markets in these regions, though it has weakened their currencies,” Taxildaris said.

The best-performing fund index in November was Precious Metals Equity with a 5.9% increase. Funds in that category performed exceptionally well during the first three weeks of the month, gaining more than 13% on average. But during the last week of the month, as oil prices tumbled, concerns about global inflation abated, which hurt the price of gold—a traditional inflation hedge—and the fund index dropped by more than 7%.

At the other end of the performance table, the Morningstar Energy Equity Fund Index had the worst showing of the month with a 9.7% decrease as the price of oil dropped below US$70. The Morningstar Natural Resources Equity Fund Index, whose constituent funds allocate approximately half of their assets to the energy sector, was the second-worst performer, down 5.3%.

“Global demand for oil is softening just as production in the United States is reaching record highs,” Taxildaris said. “The Nov. 27 announcement by the Organization of the Petroleum Exporting Countries that it would maintain its oil production at current levels led oil prices to a four-year low.”

Broadly diversified domestic equity funds were hurt by their heavy exposure to energy stocks, which account for 24% of the SandP/TSX Composite Index. Nevertheless, the financial services sector, comprising nearly 36% of the benchmark, did very well during the month and compensated for the energy sector’s poor performance. The Morningstar Canadian Equity Fund Index increased by 1.5% for the month, while Canadian Focused Equity and Canadian Dividend and Income Equity were up 1.6% and 0.9%, respectively.

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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