Fixed-Income Funds Thrive in May, Morningstar Canada Data Show

TORONTO, June 2, 2011 /CNW/ - Equity markets turned defensive in May, which led to some lacklustre results for equity funds in Canada. However, those same factors contributed to solid performance numbers for fixed-income funds, according to preliminary performance data released today by Morningstar Canada.

"Disappointing economic news from the United States dampened expectations that central banks would raise rates in the imminent future. In Canada, although Bank of Canada Governor Mark Carney did hint at an eventual increase in rates to curb inflation, much of the commentary from the central bank has revolved around ensuring the dollar stays in check. This pushed yields down, making fixed-income categories among the best performers for the month," said Morningstar Fund Analyst Salman Ahmed.

Overall, 28 of the 44 Morningstar Canada Fund Indices had positive returns in May, and most of the top performers were indices that track either fixed-income or balanced fund categories. The Morningstar Long Term Fixed Income Fund Index had the best return among bond fund categories, and was second-best overall, with a 3% gain, while Global Fixed Income, Canadian Fixed Income, and Canadian Inflation-Protected Fixed Income all gained 1.3%. The other two bond fund indices—High Yield Fixed Income and Canadian Short Term Fixed Income—had returns of 0.6% for the month.

Among equity funds, the fund index that tracks the tiny Health Care Equity category had the best overall performance with a 4.4% gain, while the Morningstar Greater China Equity Fund Index—also one of the smallest categories in the Canadian fund universe—came in third with a 1.4% gain. The only other equity fund index to gain more than 1% in May was Real Estate Equity, which was up 1.3%.

All of the major foreign equity markets had negative returns last month, but most of the Canadian funds that invest there benefited from favourable currency effects as the Canadian dollar depreciated against the U.S. dollar, the euro, the UK pound, and the yen, among others. As a result, many of the diversified foreign equity fund indices had flat returns for the month including U.S. Equity (0.2%), Global Equity (-0.2%), European Equity (-0.2%), and International Equity (-0.7%). The worst-performing foreign equity fund index was Emerging Markets Equity, which lost 1.2%.

For domestic equity funds, the main story was the disappointing performance of the natural resources sectors. The S&P/TSX capped sub-indices that measure the energy and materials sectors lost 3.2% and 3.4%, respectively, for the month, which dragged down the broader market benchmarks. As a result, the Morningstar Canadian Equity Fund Index, whose constituent funds allocate, on average, more than 46% of their assets to these sectors, lost 1.1% for the month. Meanwhile, the Morningstar Canadian Small/Mid Cap Equity Fund Index, with nearly 60% in resources stocks, lost 1.3%. The best-performing fund index among domestic equity categories with a 0.4% gain was Canadian Dividend and Income Equity, which has a much more modest exposure to resources.

Not surprisingly, the worst-performing fund indices for the month were Natural Resources Equity and Precious Metals Equity, which lost 3.6% and 5.2%, respectively.

"Oil prices were down for much of the month because of a strengthening of the U.S. dollar and lower expected demand due to poor economic data. The lower price of oil lessened inflation expectations, which also pushed down the price of gold for much of the month. Although these commodities rebounded toward the end of May, it wasn't enough to offset the losses," Ahmed said.

For more on May fund performance, go to

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 on next week.

About Morningstar
Morningstar Research Inc. is a Canadian subsidiary of Chicago-based Morningstar, Inc., a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 390,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 5 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services and has nearly $140 billion in assets under advisement and management as of March 31, 2011. The company has operations in 26 countries.

SOURCE Morningstar Research Inc.

For further information:

Salman Ahmed, Fund Analyst, Morningstar Canada, (416) 484-7821; Christian Charest, Editor, Morningstar Canada, (416) 484-7817

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