September losses dampen Q3 fund performance

Aside from the three fund indices that track money market categories — the safest type of mutual funds available — the only fund index to post an increase in September was the one that tracks the U.S. equity category, which increased by 0.3%. This was due primarily to a depreciation of more than 3% for the Canadian dollar versus its U.S. counterpart; when measured in U.S. dollars, the benchmark S&P 500 Index of U.S. equities lost 1.4% last month. The U.S. equity category was also the second-best performer for the quarter with a 3.8% increase.

The best-performing fund index for the third quarter was Greater China equity with a 4.6% increase on the strength of its July performance; the fund index decreased by 3.3% in September. Currency effects also helped Canadian investors in this category, as the Chinese renminbi and the Hong Kong dollar both gained about 5% against the loonie during the quarter.

The worst performers for the quarter were the fund indices that measure the energy equity, natural resources equity, and precious metals equity, which decreased by 9.9%, 11.3%, and 16.9%, respectively. The bulk of the losses for these funds occurred in September, when these fund indices were also the worst performers, and were exacerbated by the decline of the Canadian dollar, which had a strong negative impact on commodity prices in Canada.

Slumping natural resources also impacted the broader domestic equity fund indices, which all had negative results in September ranging from -2.6% for Canadian focused equity to -5.2% for Canadian small/mid cap equity. The latter was also the worst-performing fund index over the quarter with a 3.9% decrease, while Canadian dividend & income equity was the best performer with a 0.3% uptick.

“Beyond the effect of natural resources, the decline in Canadian equities was compounded by weaker-than-expected retail data, as well as higher-than-expected inflation figures. If inflation continues to remain above the Bank of Canada’s stated target, this will increase the likelihood of it raising interest rates timed to coincide with a rate hike by the U.S. Federal Reserve sometime next year,” said Shehryar Khan, Morningstar manager research analyst.

“There does seem to be a consensus that whenever rates are raised, they will be at levels lower than we would have seen in previous up-turns, as central banks will balance the need to control inflation with efforts to avoid damaging the delicate levels of growth the market is demonstrating.”

Overall, 28 of the 42 Morningstar Canada fund indices posted quarterly results that ranged between -1% and 1%, including most balanced and fixed income categories. Among major foreign equity categories, the Asia Pacific equity and global equity fund indices increased by 2.7% and 1%, respectively, while international equity and European equity were down 0.9% and 3.6%, respectively.

“European and international equities performed poorly over the quarter as concerns remain about the geopolitical crises that have continued to crop up on a global scale. Although things appear to have become calmer in Eastern Europe, unrest remains in the Middle East, which after seeing a flare-up in tensions and subsequent ceasefire in the Israeli-Palestinian conflict, has now seen UN intervention begin in Iraq and Syria, as well as political unrest in Yemen. Now we are also seeing the beginning of political protests in Hong Kong,” Khan said.

Final performance figures will be published on next week.