Market jitters spoil a promising month for mutual funds in July, Morningstar data shows

    TORONTO, Aug. 2 /CNW/ - Mutual funds from across most categories,
particularly those that invest in domestic equities and emerging markets,
seemed headed for a very solid month in July. But on July 20, and during the
ensuing week, worries gripped world markets and caused several stock indices
to decline - many by more than 6%. As a result, most of the Morningstar Canada
Fund Indices that focus on equities ended the month in the red, according to
preliminary fund performance data released today by Morningstar Canada.
    "Investors were spooked by a stream of bad news during that week, and
that sent the markets on a white-knuckle ride," said Morningstar Canada
Analyst Bhavna Hinduja. "A weakening U.S. housing market, spreading sub-prime
mortgage problems, high crude oil prices and concerns over a slowdown in the
world economy were the primary drivers of the negative sentiment that led to a
sell-off in most equity markets."
    In an unusual twist, precious metals funds were hit hardest by the
correction, with the Morningstar Canada Precious Metals Equity Fund Index
losing 7% between July 20 and July 27. But because the fund index had already
accrued a 9.8% gain before the correction, and thanks to a rebound on the last
two days of the month, it ended July with a gain of 4.3%, the second best
return among the 42 Morningstar Canada Fund Indices.
    "Historically during periods of economic uncertainty, gold has been seen
as a safe haven, and such mass exodus from the equity markets typically
resulted in outperformance in the precious metal sector," Hinduja said. "But
that wasn't the case this time. In addition to the wave of risk aversion
sweeping across financial markets, several hedge funds liquidated their gold
positions, putting a downward pressure on gold prices. A strengthening in the
U.S. dollar may also have led to a sell-off in the gold sector since the metal
has traditionally been considered an alternative currency when the greenback
is depressed."
    For the second month in a row, the Asia Pacific ex-Japan Equity fund
index was the best performer among all fund indices in July, with a gain of
5.3%. China and South Korea were the main contributors to this performance
with monthly returns of 17% and 10.9% respectively for the Shanghai Stock
Exchange Composite Index and the Korea Composite Stock Price Index. The
Shanghai index even gained 11% between the 20th and the 27th, while all other
major markets were dropping.
    China's strength also buoyed the Emerging Markets Equity and Asia Pacific
Equity fund indices, which finished the month in third and fourth place with
returns of 4.2% and 2.3% respectively. Rounding out the top five was the
Japanese Equity fund index, which gained 1.3% despite the Nikkei 225 Index
losing 4.9% for the month. Funds in that category that don't hedge their
currency exposures benefited from a 3.6% appreciation of the yen versus the
Canadian dollar.
    In Canada, the week-long correction essentially nullified the gains that
the stock markets had accumulated in what was shaping up to be a very
promising month. The S&P/TSX Composite Index dropped 5.9% from July 20 to July
 7 and finished the month down 0.1%. This was reflected in the performance of
the Canadian Equity fund index, which was looking at a 4.5% month-to-date gain
on the morning of July 20 but closed the month down 0.4%. Similarly, the
Canadian Small/Mid Cap Equity fund index was up 5.1% before the correction but
ended up losing 0.2%.
    During that fateful week, Canada's three major sectors - energy,
financials and materials - lost 6.5%, 4.9% and 6.7%, respectively. But for the
month as a whole, the S&P/TSX energy and materials sub-indices were able to
recover while the financials sub-index ended up losing 2.9%. As a result,
funds in the Natural Resources Equity category, most of which invest
predominantly in Canada, collectively gained 1.1% in July. Meanwhile, the
Financial Services Equity fund index finished third from the bottom with a
3.7% loss.
    But Canada's woes in the financial sector pale in comparison to those
currently afflicting the U.S., particularly in the real estate industry. As of
June 30, the average Financial Services Equity fund had 29.4% exposure to the
U.S. while the average Real Estate Equity fund invested 17.5% of its assets
south of the border. The Real Estate Equity fund index was the worst overall
performer for the second month in a row in July with a 4.8% loss, on the heels
of its 7% drop in June.
    "Wall Street was in mayhem as heightened concerns over credit markets
battered stocks," Hinduja said. "U.S. markets also reacted negatively to the
losses reported by several hedge funds as investors remain uncertain about
when the turmoil in the credit markets will end or how much damage it will
ultimately cause."
    While no U.S. sector lost more than financials, eight of the 10
sub-indices that make up the S&P 500 were in the red in July, and the index
itself lost 3.1% for the month. But broad-based U.S. equity funds fared even
worse, with the U.S. Equity and the U.S. Small/Mid Cap Equity fund indices
shedding 3.5% and 4.1% respectively, ranking fourth and second from the
bottom. Between July 20 and July 27, these two indices lost 4.9% and 6.3%.
    The European equity markets also suffered from the mid-month correction,
as the German DAX lost 6.8% during that week and 5.3% for the month. London's
FTSE 100 and Paris's CAC 40 suffered similar losses. The euro's appreciation
versus the loonie during the month curbed some of the damage, but the European
Equity fund index still ended the month down 2.7%.
    For more on July fund performance, go to
    Morningstar Canada releases preliminary fund performance figures at the
beginning of each month, giving investors an early indication of how fund
categories fared during the previous month. The preliminary numbers are based
on the change in funds' net asset values per share during the month, and do
not necessarily include end-of-month income distributions such as dividends,
interest, or capital gains. Final performance figures will be published on next week.

    About Morningstar Canada

    Morningstar Canada is the Canadian subsidiary of Chicago-based
Morningstar, Inc., a leading provider of independent investment research.
Morningstar Canada produces the popular PALTrak and Morningstar Advisor
Workstation investment-fund research tools, and is a major source of Canadian
investment fund information through and
Morningstar Canada is also a leading provider of Web-based solutions for fund
industry Web sites, and provides consulting services based on its data and
related analysis. Morningstar, Inc. provides data on approximately 250,000
investment offerings, including stocks, mutual funds and similar vehicles. The
company has operations in 16 countries and minority ownership positions in
companies based in three other countries.

For further information:

For further information: Bhavna Hinduja, Fund Analyst, Morningstar
Canada, (416) 484-7815,; Christian Charest,
Associate Editor, Morningstar Canada, (416) 484-7817,

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