Equity funds in Canada followed up their strong September showing with another month of positive returns in October, as currency wars pushed global markets higher ahead of the U.S. Federal Reserve’s next meeting on November 3.

All 24 Morningstar Canada Fund Indices that track equity fund categories produced gains for the month, according to preliminary performance data released by Morningstar Research Inc., the Toronto-based subsidiary of Chicago’s Morningstar, Inc.

“Expectations that the Fed will agree on a second round of quantitative easing set the stage for a second month of strong equity gains,” says Esko Mickels, fund analyst for Morningstar. “With markets expecting roughly US$500 billion to US$1 trillion in additional bond purchases, virtually all assets felt the impact of the looming U.S. government move to boost its economy by devaluing its assets.”

Among the winners in this environment were commodities and resources, many of which are priced in U.S. dollars. “Since the market expects that quantitative easing will lead to a further U.S. dollar devaluation, commodity prices were adjusted upward in order to maintain their value,” Mickels said.

This resulted in the natural resources equity fund index posting the best return last month among all fund categories with a 5.2% gain. The fund index that measures the resource-heavy Canadian small/mid cap equity category also did well with a second-place 4.3%, while Canadian focused small/mid cap equity ranked fifth with 3.8%.

The materials sector was also the main driver of performance for larger-cap domestic equity funds; both the Canadian equity and the Canadian focused dquity fund indices gained 2.3% in October, trailing the benchmark S&P/TSX composite index’s return of 2.7% for the month. The Canadian dividend & income equity fund index, whose constituent funds are more heavily skewed toward the financials sector, gained 1.6%.

Almost all equity markets around the world were up in October as countries battled to keep their currencies low to boost exports and growth. Among sector-diversified foreign equity funds, the best-performing categories were European equity and U.S. equity with gains of 3.5% and 3.4%, respectively. The fund indices that measure the international equity, global equity, and Asia/Pacific ex-Japan equity categories gained 2.8%, 2.4%, and 2.2%, respectively.

Among major markets, the only exception to the upward trend was Japan, where the Nikkei 225 Index lost 1.8%. “Japanese stocks fell as the yen’s appreciation had investors worried about the competitiveness of Japanese exporters,” Mickels saus. However, currency effects also worked in favour of Canadian investors, since a stronger yen increased the value of Japanese stocks when expressed in Canadian dollars. The net result was a positive return of 0.8% for the Japanese equity fund index — the lowest return among all equity fund categories.

Final performance figures will be published next week.

IE