Only 17 of the 42 Morningstar Canada fund indices had positive returns in August as investors felt the fallout from the subprime mortgage lending crisis in the U.S. and other credit-quality concerns.

Bonds outperformed stocks in August, high-quality bonds beat those of lower quality, and large-capitalization equities trumped smaller caps.

“Overall, the meltdown in the asset-backed commercial paper (ABCP) sector that began roiling markets in late July continued to drive extreme levels of volatility throughout August among long-term fund categories,” said Morningstar Canada analyst Jordan Benincasa, in a release.

Money-market returns remained positive, but barely so. The U.S. money market fund index eked out a return of 0.07%, and the Canadian money market fund index returned a mere 0.1%.

A surge in most equity markets in the last week of August came on the heels of the Federal Reserve’s announcement on Aug. 17 that it would cut its discount rate to 5.75%. “The central bank’s decision to lower the rate it charges banks and other qualified lenders is meant to increase liquidity in the market,” Benincasa said.

The worst performer among all fund indices was the precious metals equity fund index, which fell 11.54%.

The second-worst monthly performance was a loss of 6.76% by the natural resources equity fund index.

Domestic equity fund indices fared worse than their U.S. counterparts. The Canadian equity fund index lost 0.15%, while the Canadian small/mid cap equity fund index experienced an even steeper loss of 3.99%.

The effects of subprime mortgage problems were also fell around the globe.

No geographically oriented sector fared worse than Japan. The Japanese equity fund index fell 5.02%.

The Asia Pacific Equity fund index fell 2.49%. Meanwhile, the Asia Pacific ex-Japan fund index fell 2.77% and the emerging markets equity fund index lost 3.41% in the month.

Of the indices that had positive performance in August, all had returns below 2%. The top performers were all industry-specific indices. real estate equity led all other indices with a 1.9% return, followed by science & technology equity with 1.05% and health care equity with 0.8%.

Among fixed-income categories, the Canadian long term fixed income, Canadian fixed income, and Canadian short term fixed Income fund indices rose 0.67%, 0.63%, and 0.57% respectively. By comparison, the global fixed income fund index gained 0.26%, while the high yield fixed income fund index returned 0.18%.

Final performance figures will be published next week.