Worldwide market correction hurts equity fund returns in February, Morningstar data shows

    TORONTO, March 2 /CNW/ - February was shaping up to be another
spectacular month for equity funds until concerns over the sustainability of
China's growth, coupled with sobering economic news out of the U.S., sent
worldwide markets tumbling on the second-last day of the month. Many of the
world's bourses, including those of China, Canada and the U.S., had already
shown signs of recovery by the following day, but others in Europe and Asia
continued to tumble.
    All 22 of the Morningstar Canada Fund Indices that measure the
performance of the various equity-based categories lost ground on Feb. 27.
Meanwhile, each of the six fixed-income fund indices had above-average one-day
gains, a consequence of investors' fleeing the equity markets for the relative
safety of bonds. The hardest hit fund indices that day were Precious Metals
Equity, Emerging Markets Equity and Natural Resources Equity, down 5.9%, 3.9%
and 3.5% respectively.
    "Gold is normally considered a safe haven during financial and political
instability. However, if the Chinese economy falters, the price of the shiny
metal may follow suit since China is a significant purchaser of gold," said
Morningstar Canada fund analyst Jordan Benincasa. "Also, precious metals funds
don't hold just gold stocks but other metals such as copper, nickel, and zinc.
China buys a lot of these raw materials for infrastructure development, and a
slowing Chinese economy would translate into lower demand."
    Another reason for the pullback in the precious metals fund index is the
fact that these funds tend to hold highly leveraged microcap and small-cap
stocks. "These characteristics can cause them to be quite volatile, on the
upside and downside," Benincasa said. Before the market correction, the
Morningstar Canada Precious Metals Fund Index was boasting a 7.1% gain but
finished the month up 2.1%, according to preliminary data released today by
Morningstar Canada.
    Japanese Equity was one of the least affected equity fund categories on
Tuesday, as the index lost a relatively modest 1.2%. Before then, the fund
index was enjoying a 3.6% return for the first 26 days of the month. However,
the sell-off reached the Tokyo stock exchange on Wednesday, and the Nikkei 225
Index dropped almost 3% for the day. This only had a minor impact on Japanese
equity funds though, since these benefited from a 1.5% increase in the yen
versus the Canadian dollar for the month. The Morningstar Japanese Equity Fund
Index ended February up 2.2%, ahead of all other Morningstar Canada Fund
    The global flight to safety affected small-cap funds more than their
larger sized counterparts, as smaller companies are generally seen as riskier
than blue chip firms. The Canadian Small/Mid Cap Equity and Canadian Anchored
Small/Mid Cap Equity fund indices were down 2.6% and 2.5% respectively on
Tuesday, compared to losses of 2.3% for both Canadian Equity and Canadian
Anchored Equity. Similar trends could be observed in U.S. equity and global
equity fund categories.
    But because the small and mid cap fund indices were enjoying better
returns than large cap funds leading up to Tuesday's events, the losses were
not enough to offset those gains, and small cap categories finished higher in
the rankings for the month as a whole. Canadian Small/Mid Cap Equity had the
third best monthly return among all fund indices, up 1.9%, and Canadian
Anchored Small/Mid Cap Equity finished ninth with a 1% gain. Canadian Equity
and Canadian Anchored Equity both ended the month in the red with losses of
0.3% and 0.7%, respectively.
    The worst performing fund index overall for the month was U.S. Equity,
which lost 2.5%. Even before the Feb. 27 correction, funds in this category
were already in the doldrums, hurt by a 1.7% fall in the U.S. dollar versus
the loonie. The U.S. Equity fund index was one of only two indices (the other
being Health Care Equity) in negative territory at the close of business on
Monday. It dropped an additional 3% on Tuesday, as China-inspired jitters were
compounded by disappointing economic indicators on the home front and by
comments made over the weekend by former Federal Reserve chairman Alan
Greenspan, who warned that a recession was possible before the end of the
year. Both the Dow Jones Industrial Average and the S&P 500 dropped about 3.5%
but made cautious recoveries on the following day after current Fed chairman
Ben Bernanke stated that U.S. markets were "working normally."
    The second worst performing fund index in February was Emerging Markets
Equity, which lost 2%. Meanwhile, the European Equity fund index, whose eight
previous monthly returns were all above 1%, finished fourth from the bottom
with a 1.7% loss for the month. Both of these categories were hit particularly
hard by the correction and, unlike their Canadian and U.S. equity
counterparts, had not recovered any of the lost ground by month-end.
    For the first time since May 2006, fund indices representing fixed income
categories all ended the month in the top half of the performance rankings in
February. The Canadian Long Duration Fixed Income fund index had the best
return of this group, a 1.8% gain that placed it in fifth place overall. The
five other fixed income fund indices had returns ranging from 1.2% for High
Yield Fixed Income to 0.6% for Canadian Short Duration Fixed Income.
    For more on February 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. 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 also produces Principia for Pooled
Funds, a desktop research tool covering the Canadian institutional pooled
funds universe. Morningstar Canada also is a leading provider of web-based
solutions for fund industry websites, and provides consulting services based
on its data and related analysis. Morningstar, Inc. provides data on
approximately 190,000 investment offerings, including stocks, mutual funds,
and similar vehicles. The company has operations in 15 countries and minority
ownership interests in companies in three other countries.

For further information:

For further information: Jordan Benincasa, Fund Analyst, Morningstar
Canada, (416) 489-7074, ext. 384,; Christian
Charest, Associate Editor, Morningstar Canada, (416) 489-7074, ext. 226,

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