Europe Leads Equity Funds Down in August, Morningstar Canada Data Show

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Equity funds suffered the worst of their now four-month-long slump in August, as weak economic data and a historic debt downgrade in the United States pushed world markets downward. All but one of the 23 Morningstar Canada Fund Indices that track equity categories posted losses for the month, with 12 of them losing more than 5%, according to preliminary performance data released today by Morningstar Canada.

The worst-performing fund index was the one that measures the European Equity category, which lost 8% in August. “The tribulations in Europe started a few years ago with the peripheral countries of Iceland, Ireland and Greece. Now there is fear that troubles may be spreading to the core as Italy and Spain came under pressure, prompting the European Central Bank to step in and purchase the government bonds of these countries,” said Morningstar Fund Analyst Salman Ahmed.

“These fears worsened when Germany, considered the stalwart in the region, released disappointing GDP growth numbers due to a slowdown in exports,” Ahmed said. Germany's DAX stock index lost 19.2% for the month, while major indexes in France (CAC 40) and the United Kingdom (FTSE 100) lost 11.3% and 7.2%, respectively, when measured in local currencies. For Canadian fund investors, these losses were tempered by currency effects, with the Canadian dollar depreciating against both the euro (2.6%) and the pound sterling (1.4%).

Things weren’t much better on this side of the Atlantic, where the SandP 500 Index lost 5.4% in August. “There was a sharp decline at the start of the month due to consistently poor economic news and an unprecedented downgrade of U.S. debt by rating agency Standard and Poor’s from the AAA to AA+. This prompted the Federal Reserve to commit to two years of low rates to try to help markets. Investors reacted positively to the news, but markets still ended this volatile month deep in negative territory,” Ahmed said. Canadian investors in this segment once again benefited from the weakening loonie, which dropped 2.5% against the U.S. dollar, and the Morningstar U.S. Equity Fund Index closed the month with a 4.8% loss.

Among the major diversified foreign equity categories, the Morningstar Global Equity Fund Index lost 5.5%, while the indices that measure the Asia Pacific Equity, Emerging Markets Equity and International Equity categories lost 5.2%, 6% and 7.4%, respectively.

Domestic equity funds generally outperformed their foreign counterparts, with the Morningstar Canadian Equity Fund Index posting a relatively tame 1.9% loss for the month. This result reflected both a sharp drop in one of Canada's major sectors—energy—and a significant gain in another: materials. The SandP/TSX sub-index that tracks the latter sector gained 5.1% for the month, boosted by solid performances from the major gold producers.

The best performer among the 43 Morningstar Canada Fund Indices—and the only equity-based index with a positive return—was the one that tracks the Precious Metals Equity category, which gained 4.8% in August. Only four other fund indices produced gains for the month, all of them tracking fixed income categories, with returns ranging from 0.5% to 1.7%. “As is usually the case during times of market uncertainty, investors flocked to the safe havens of gold and government bonds,” Ahmed said.

For more on August fund performance, go to www.morningstar.ca.

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 www.morningstar.ca next week.