All but one of the 42 Morningstar Canada Fund Indices posted gains during the first quarter of 2007, led by three categories that focus on small and mid-cap stocks.

According to preliminary fund performance data released today by Morningstar Canada, the best performer for the three-month period was the global small/mid cap equity fund index, which gained 5.6%.

In second and third place were the Canadian small/mid cap equity and Canadian anchored small/mid cap equity fund indices with returns of 5.1% and 4.4%, respectively.

“The resource run over the past quarter has helped Canadian small- and mid-cap funds,” said Morningstar Canada fund analyst Bhavna Hinduja, in a news release.

“On the global front, despite tightening monetary policies across most European and Asian central banks, global liquidity has been quite robust, which has worked well for global small- and mid-cap funds.”

The fourth-best fund index for the quarter was natural resources equity, up 4.1%. These funds had a slow start to the year, with the index posting one of the lowest returns in January (0%), followed by a 0.9% gain in February. But the resources index came charging back in March with a 3.2% return, the best among all categories for the month.

“This sector has had a great run, primarily on the back of base metals and energy,” Hinduja said. “Fears concerning the Chinese equity market sent tremors around the world last month that impacted all sectors, including gold. But a colder than normal February in North America led to a reduction in oil and natural gas inventories, which boosted the prices of these commodities; this provided resilience to broadly based resource funds.”

Rounding out the top five for the quarter was the real estate equity fund index. Despite losing 1.9% in March — the third worst loss among all fund indices — the index rode out its early gains (including a second-place 3.6% in January) and ended the quarter up 3.4%.

At the bottom of the quarterly rankings, the U.S. equity fund index was the only one in negative territory with a 0.6% loss. “Worries over the U.S. sub-prime mortgage sector that began in mid-February have had a ripple effect across equity markets south of the border,” Hinduja said.

Portfolio funds for the most part had middling returns, with 10 of the 12 portfolio fund indices posting returns between 1% and 1.6%. The two indices that represent target-date funds with the longest maturities — 15 year target date portfolio and 15 Year+ target date portfolio — suffered losses of 0.7% and 1% respectively in March, which dropped their quarterly results to 0.3% and 0.2% respectively. Both of these indices had returns of about 1% in January but were flat in February.

Meanwhile, the high yield fixed income fund index, whose constituent funds often behave more like equity products than like other bond funds, easily outpaced other fixed income categories last quarter. It returned 2.6% while the other five fund indices in that group all gained between 0.2% and 0.9%.

For the month of March, the second-best performer after natural resources equity was the European equity fund index, which managed to gain 2.7% despite losing some ground early in the month. The fund index was the sixth best performer for the quarter with a 3.1% gain.

After leading the pack in February, the Japanese equity fund index was the worst performer in March with a 2.8% loss. It was another roller-coaster ride for the funds in this volatile category as they followed the ups and downs of the Japanese stock market. The Nikkei 225 Index lost more than 5% in the first three business days of the month, and each of its subsequent attempts at recovery was quickly followed by another drop. The Japanese equity fund index returned 0.5% for the quarter, ranking seventh from the bottom.

Final performance figures for March and the first quarter will be published on next week.