May was another strong month for equity funds, especially for Canadians investing close to home, according to preliminary fund performance data released today by Morningstar Canada.

Resources equities set the pace. The natural resource equity fund Index — in which Canadian listings are heavily represented — led all 42 Morningstar Canada fund indices with a 4.5% return for the month, after gaining 3.3% in April.

Merger and acquisition activity and a strong Canadian economy buoyed the domestic stock market generally, as the S&P/TSX composite index rose by 640 points — or 5% — during the month.

The Canadian equity fund index ranked second in May with a 4.3% return on the strength of the broader markets, as eight out of 10 S&P/TSX sectors posted gains.

Overall, six Canadian-focused categories — including natural resources — owned the top six spots in the fund indices rankings. The Canadian small/mid cap fund index gained 3.7% and the Canadian high income equity fund index rose 3.2%, to rank third and fourth, respectively. In fifth place was the Canadian anchored small/mid cap fund index, returning 2.7%, followed by the Canadian anchored equity fund index with 2.6%.

Funds invested mainly in U.S. equities also produced positive returns, though the gains measured in terms of the Canadian dollar were eroded because of currency depreciation. The Canadian dollar fetched US93.5¢ at the end of May, up 3.4% during the month as it reached its highest level in more than 30 years.

The US small/mid cap equity and US equity fund indices gained 2% and 0.6%, respectively. “Investors pushed stocks higher in the belief that a weaker economy sets the stage for a more benign interest rate environment, which bodes well for stocks,” said Morningstar Canada analyst Philip Lee, in a release.

Overseas, Asian markets also produced positive returns despite the Chinese market’s 6.8% plunge on May 30, in response to the announcement that China will triple the stamp duty on securities trades from 0.1% to 0.3%. For the month, the Asia Pacific Rim ex-Japan equity fund index gained 2.3% and the Asia Pacific Rim equity fund index gained 0.6%.

The European equity markets showed broad advances, in part thanks to merger and acquisition activity, as the German DAX gained more than 6% while London’s FTSE 100 and Paris’s CAC 40 gained roughly 2.7% and 2.4%, respectively. However, currency depreciation left the European equity fund Index with a 0.8% loss.

For a second consecutive month, May was a poor month for investors in fixed-income funds. The worst performance, due to currency losses, was by the global fixed income fund index. It was down 2.8%, ranking at the bottom of the 42 Morningstar Canada indices. Broadly based Canadian-focused bond funds didn’t fare as badly, as the Canadian core fixed income fund Index dropped 1.6%.

Final performance figures will be published next week.