Mutual Fund Returns Slump in August in Response to Credit Crunch, Morningstar Data Shows

    TORONTO, Sept. 5 /CNW/ - Only 17 of the 42 Morningstar Canada Fund
Indices had positive returns in August as investors felt the fallout from the
subprime mortgage lending crisis in the U.S. and other credit-quality
    As is typical during periods when investor confidence has been shaken,
bonds outperformed stocks in August, high-quality bonds beat those of lower
quality, and large-capitalization equities trumped smaller caps.
    "Overall, the meltdown in the asset-backed commercial paper (ABCP) sector
that began roiling markets in late July continued to drive extreme levels of
volatility throughout August among long-term fund categories," said
Morningstar Canada Analyst Jordan Benincasa.
    Money-market returns remained positive, but barely so. The U.S. Money
Market Fund Index eked out a return of 0.07%, and the Canadian Money Market
Fund Index returned a mere 0.1%. It was one of the worst one-month
performances for the domestic category over the past 25 years.
    Money-market yields have declined since fund managers and other buyers
have bid up prices on risk-free Treasury bills. The yield of a 90-day
Government of Canada Treasury bill, for example, fell in August to 3.99%, down
55 basis points from a month earlier.
    U.S. money markets were also hurt by the shift in investor preference
from commercial paper to Treasury bills and traditional bank deposits. "As the
housing slump in the U.S. continues, short-term securities backed by
residential mortgages are being increasingly shunned, and the stigma has even
spread to short-term debt from businesses in unrelated industries," Benincasa
    A surge in most equity markets in the last week of August came on the
heels of the Federal Reserve's announcement on Aug. 17 that it would cut its
discount rate to 5.75%. "The central bank's decision to lower the rate it
charges banks and other qualified lenders is meant to increase liquidity in
the market," Benincasa said.
    "This move raised hopes that policymakers might intervene even further to
mitigate the crisis around delinquent high-risk mortgages," he added. But it
wasn't enough to allay fears of a slowing global economy, and most equity
markets lost ground in the month.
    Far from providing shelter from tempestuous stock market movements, the
Precious Metals Equity Fund Index fell 11.54% as the worst performer among all
fund indices.
    "These funds can provide diversification for a portfolio and serve as a
hedge against inflation. But investors should keep in mind that hedge funds
are playing a more significant role than usual in stock and commodity prices.
Hence, this so-called safe haven is becoming awfully crowded with players who
can sway the market one way or the other, at least over the short term,"
Benincasa said.
    The second-worst monthly performance was a loss of 6.76% by the Natural
Resources Equity Fund Index. This was partly due to a build-up in North
American natural gas inventories that proved unfavourable for oil and gas
    Unsurprisingly - given their hefty weightings of resource stocks -
domestic equity fund indices fared worse than their U.S. counterparts. The
Canadian Equity Fund Index lost 0.15%, while the Canadian Small/Mid Cap Equity
Fund Index experienced an even steeper loss of 3.99%, for the fourth-worst
performance among all categories.
    The effects of subprime mortgage problems were also deeply felt in Asia,
based on concerns that a tighter U.S. credit market could lead to a global
economic slowdown that would hurt Asian exporters.
    No geographically oriented sector fared worse than Japan. The Japanese
Equity Fund Index fell 5.02%, beating only the Natural Resource Equity and
Precious Metals Equity indices. Unfortunately, the "boom-bust" tendency of
that country's stock market - a behaviour typical of emerging markets -  has
prevailed in spite of a developed economy that boasts world-class businesses.
    By comparison, the Asia Pacific Equity Fund Index fell 2.49%, a stark
reversal of the previous month's results when it rose 5.3% to be the top
performer. Meanwhile, the Asia Pacific ex-Japan Fund Index fell 2.77% and the
Emerging Markets Equity Fund Index lost 3.41% in the month.
    The European equity market also was not immune from the subprime
contagion. In fact, credit-related problems in this region have mirrored those
in the U.S. Here too, banks - including French banking giant BNP Paribas,
which blocked redemptions from internal hedge funds with exposure to
asset-backed securities - have struggled to find funding. And investments in
U.S. subprime mortgages also led to a bailout of regional German lender IKB.
    Of the Morningstar Canada fund indices that had positive performance in
August, all had returns below 2%. The top performers were all
industry-specific indices. Real Estate Equity led all other indices with a
1.9% return, followed by Science & Technology Equity with 1.05% and Health
Care Equity with 0.8%.
    Among fixed-income categories, the Canadian Long Term Fixed Income,
Canadian Fixed Income, and Canadian Short Term Fixed Income fund indices rose
0.67%, 0.63%, and 0.57% respectively. By comparison, the Global Fixed Income
Fund Index gained 0.26%, while the High Yield Fixed Income Fund Index returned
    For more on August 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: Jordan Benincasa, Fund Analyst, Morningstar
Canada, (416) 484-7821,; Christian Charest,
Associate Editor, Morningstar Canada, (416) 484-7817,

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