Most of the world’s stock markets posted negative returns for a third consecutive month in June, as the focus of investor concern spread from a handful of European countries to a more global scale. This resulted in losses for the vast majority of equity funds sold in Canada for the second quarter of 2010, according to preliminary performance data released Monday by Morningstar Canada.

“Investor apprehension showed signs of shifting from the recurring theme of European sovereign debt to the sustainability of wider economic growth,” says Neal Brandon, fund analyst for Morningstar Canada. “These worries prompted investors to seek the relative safety of precious metals and fixed-income investments.”

All but two of the 24 Morningstar Canada fund indices that track equity fund categories posted negative returns for the quarter. The worst losses came from foreign equity categories, despite the dampening effect of a falling loonie against most major currencies during that period. The worst performer with a quarterly loss of 11.4% was the European equity fund index, which lost ground in April, May, and June. Other losing categories included financial services equity (-10.7%), Japanese equity (-10.3%), and natural resources equity (-10.3%).

Among domestic equity categories, losses ranged from 3.3% for the Canadian income trust equity fund index to 10.2% for Canadian focused small/mid cap equity. “The decline of small- and mid-cap equities highlighted the vulnerability of this sector to a deteriorating economic backdrop,” Brandon says. “Market liquidity and somewhat more concentrated portfolios also contributed to lower monthly returns for this category.”

The main beneficiaries of this market uncertainty were funds that focus on gold and other precious metals, which collectively gained 12.7% during the quarter. The bulk of this upswing occurred in April, when the precious metals equity fund index gained 12.1%, though it was also the best-performing fund index in June with a 2.9% return. “Gold remained a key beneficiary of increased risk aversion in June, helping to drive the S&P TSX Global Gold Index higher by 5.6%. Silver was also up for the month,” Brandon says.

Also profiting from this increased risk aversion were funds in the various fixed-income categories, all of which posted positive aggregate returns. Topping the list was the Canadian long term fixed income fund index with a 5.4% return for the quarter, ranking second overall behind precious metals 3quity. “Canadian fixed-income investments were led higher as investors looked to diversify away from the heightened levels of volatility associated with equity markets,” Brandon says.

Final performance figures will be published next week.

IE