TORONTO, Oct. 2 /CNW/ - The third quarter of 2007 was a tumultuous one
for holders of practically all types of mutual funds, but 20 of the 42
Morningstar Canada Fund Indices managed to produce positive returns for the
three-month period ended Sept. 30. The best performer among all fund indices
was the Morningstar Asia Pacific ex-Japan Equity Fund Index with a 7.3% gain,
according to preliminary performance data released today by Morningstar
With the exception of Japan, Asian markets once again produced strong
returns last quarter. In particular, China's continued its phenomenal run,
with the Shanghai Composite Index and Hong Kong's Hang Seng Index surging by
45.3% and 24.7%, respectively. For Canadian fund investors, those returns were
somewhat dampened by the roughly 6% appreciation of the Canadian dollar
against both the Chinese renminbi and the Hong Kong dollar.
"The National Bureau of Statistics in Beijing announced in mid-July that
China's second-quarter GDP came in at an annualized growth rate of 11.9% after
a blistering 11.1% during the first quarter," said Morningstar Canada analyst
Philip Lee. "This provided investors, already optimistic about the Chinese
economy, with a reason to continue bidding up China-related stocks. Despite a
sharp correction in the middle of August and the Chinese central bank's
27-basis-point hike in borrowing rates to curb inflation - its fifth rate
increase this year - things haven't slowed down."
The hot Asian markets also contributed to making Emerging Markets Equity
the second best performing fund index for the quarter with a 5% gain. Asian
equities (excluding Japan) make up about half the assets of the average fund
in that category. Emerging market funds also benefited from double-digit
returns in Brazil, as the country's BOVESPA stock market index gained 11.2%.
Meanwhile, the Morningstar Asia Pacific Equity Fund Index ranked fourth
with a 2.5% quarterly return. Funds in that category have an average exposure
of about 36% to Japanese equities, which struggled over the past three months
and restricted these funds' performance.
The third-best performer among the Morningstar Canada Fund Indices was
Precious Metals Equity, which ended a highly volatile quarter with a 4.5%
gain. In August, the price of gold fell victim to the liquidity crisis that
spread from the U.S. to major markets around the world, as many speculators
including hedge funds sold off the shiny metal. The Precious Metals Equity
fund index was the worst performer that month with a loss of 11.5%. But
following interest rate cuts in the U.S. and the weakening of the U.S. dollar,
gold came back strongly in September and the fund index gained 13.3%,
surpassing all others for the month.
"Gold prices are now hitting multi-decade highs," Lee said. "And with a
still-shaky U.S. economy, the stage is set for possible additional rate cuts.
This has been a boon to bullion producers and their stock prices as the spot
price for gold closed above $740 at the end of September - a gain of more than
11% for the quarter. This also helped to boost prices of other precious
metals, such as silver and platinum."
The Canadian Equity Fund Index had a lacklustre start to the quarter,
losing 0.2% in July and 1% in August. But a solid performance in September by
the Canadian energy and materials sectors, which combined make up 39% of the
average fund in the Canadian Equity category, helped the fund index to a 2.6%
gain, resulting in a fifth-place 1.4% return for the quarter. But while
smaller-cap Canadian equity funds followed the same pattern, their losses were
more severe in August, and the Canadian Small/Mid Cap Equity Fund Index ended
the quarter down 1.9%.
South of the border, the markets took investors on a roller-coaster ride
throughout the quarter, as questions surrounding U.S. sub-prime loans and the
drying up of asset-backed commercial paper liquidity repeatedly sent risky
assets plunging. To try and help alleviate the liquidity crisis, the Federal
Reserve cut the discount rate (the rate it charges to make direct loans to
banks) from 6.25% to 5.75% in August.
"Although cutting the discount rate doesn't have a huge impact on
consumer and business loans, it provided the markets with a bit of good news
after receiving multiple body blows," Lee said. "This fueled U.S. equities to
a mid-August rally. Then, the Fed surprised the markets by reducing the
overnight lending rate by 50 basis points on Sept. 18 to try and re-ignite the
economy. Even though many market observers expected a rate cut, few expected
the aggressive move, which set off a huge rally on that day. Markets are
hoping that cheaper credit, which reduces the burden of consumer loans, will
revive consumer spending."
For Canadian investors, the trouble in the U.S. markets was compounded by
the loonie's 6.7% surge versus the greenback during the quarter, culminating
in the two currencies reaching parity for the first time in more than 30
years. As a result, despite positive returns by the S&P 500 in August and
September, and for the quarter as a whole, the Morningstar U.S. Equity Fund
Index lost 5.1% for the three-month period. Similarly, the Morningstar U.S.
Small/Mid Cap Equity Fund Index lost 7% for the quarter, the second-worst
performance among all fund indices.
The liquidity crisis also hurt the major European economies, with stock
market indexes in the UK, Germany and France suffering losses for the quarter.
The Morningstar European Equity Fund Index lost 5.3%, ranking third from the
bottom. Currency movements also negatively affected these funds' returns, as
the dollar gained 1.5% against the euro and 5% versus the UK pound. Meanwhile
the International Equity and Global Equity fund indices lost 4.8% and 5.1%,
respectively, for the quarter.
"Overall, the ascent of the loonie versus many major currencies continues
to erode the returns of foreign funds with unhedged exposures," Lee said.
"It's difficult to predict which way the Canadian dollar will move going
forward, but it probably makes less sense to hedge foreign currency exposures
back to Canadian dollars now because of the loonie's strong run."
It was a second unfortunate quarter in a row for investors holding
Japanese equity funds, albeit under very different circumstances. During the
second quarter, the Japanese market performed reasonably well, with the Nikkei
225 index returning almost 5%, but those gains were eliminated by the yen's
decline against the loonie. Last quarter, despite some volatility along the
way, net currency effects were negligible, but the Nikkei lost 7.5%, leading
to a decline of 7.1% in the Morningstar Japanese Equity Fund Index, the worst
performance among all fund indices for the quarter. Its 3.4% loss in September
also ranked last among all fund indices for that month.
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
www.morningstar.ca next week.
For more on third-quarter fund performance, go to www.morningstar.ca.
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 Morningstar.ca and MorningstarAdvisor.ca.
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: Philip Lee, Fund Analyst, Morningstar Canada,
(416) 484-7824, firstname.lastname@example.org; Christian Charest, Associate
Editor, Morningstar Canada, (416) 484-7817, email@example.com