Twenty-five of the 31 Morningstar Canada Fund Indices posted gains for the three-month period ending on Sept. 30, according to preliminary data on investment-fund performance released today by Morningstar Canada. This is in sharp contrast to the returns of the second quarter of the year, when all but three fund indices were in the red.

The financial services fund index had the best performance for the quarter with a gain of 7.8%, thanks to three consecutive months of solid returns. The emerging markets equity and European equity fund indices also had steady returns throughout the past three months and finished the quarter in second and third place, gaining 6.4% and 6% respectively.

“Mutual funds focusing on the financial services sector have had an excellent quarter,” said Morningstar Canada senior fund analyst Mark Chow. “In Canada, the S&P/TSX capped financial index gained over 9%, driven up by robust quarterly earnings registered by all of the big banks. Foreign banks, brokerages, insurers and asset managers have also produced strong returns.”

At the bottom of the quarterly rankings, the natural resources fund Index posted a disappointing 5.5% loss. These volatile sector funds had posted a collective gain of 11.4% in the first quarter of the year, but they have been consistently declining over the last five months.

“The energy sector has been in tough over the past few months,” Chow said. “Oil has fallen from highs of nearly US$80 per barrel to under US$60 just a short while ago, and natural gas prices are still in the doldrums.”

North-American equity funds that focus on smaller companies also had a hard time during the past quarter. The U.S. small and mid cap equity and Canadian small cap equity fund indices lost 2.6% and 2.7% respectively.

The best performer for the month of September was the science and technology fund index, up 3.9%. The index was the fifth best performer of the quarter with a 5.1% gain. However, it is still in the red for the year to date at -1.5%. The Asia ex-Japan equity and U.S. equity fund indices had the second and third best returns in September, up 3.5% and 3% respectively.

Overall, 22 of the 31 fund indices moved upward in September. Equity funds that invest outside Canada generally outperformed their domestic counterparts, while income-oriented funds had middling results. However the worst performers for the month were two sector fund indices – precious metals and natural resources, which posted losses of 8.2% and 7.6%.

It was not a very good month for funds that invest here at home; the Canadian dividend fund index gained a meagre 0.2% for the month, while all other domestic equity fund indices lost ground: Canadian equity (-1.1%), Canadian equity (pure) (-1.7%), Canadian income trust (-2.7%) and Canadian small cap equity (-4.4%).

“The lone bright spots in Canada last month were the information technology and telecommunications sectors. Research In Motion was upgraded by a slew of analysts and Telus reported that it was converting into an income trust structure. These two developments had a huge snowball effect on each stock’s respective sector,” Chow said.

Conversely, foreign equity funds generally did well in September. The European equity fund index, one of the steadiest performers so far this year, chalked up another solid return, a gain of 1.9%. This brought its year-to-date return to 15.6%, the second best of all fund indices. Among the more geographically diversified fund indices, global equity also gained 1.9% while international equity, whose constituent funds exclude North American stocks, was up 1.5%.

Final performance figures will be published at mid-month.