May was a dismal month for fund investors, as 26 of the 31 Morningstar Canada Fund Indices suffered losses, according to preliminary data on investment-fund performance released today. The other five fund indices, including those representing Canadian fixed-income categories, barely broke even.

The real estate fund index was May’s best performer, gaining 0.4%. Among the other slight gainers were the Canadian short-term bond and mortgage fund index, up 0.2%, and the Canadian bond fund index, up 0.05%. The Canadian and U.S. money-market fund indices each rose 0.1%. Also near the top but in the red were the high yield bond and foreign bond fund indices, losing 0.3% and 0.4% respectively.

“Stock markets around the world, overheated after months of strong performance, suffered a correction during May,” said Morningstar Canada analyst Brian O’Neill. The global equity fund Index fell nearly 5% during the month.

Canadian stocks fared better than those elsewhere, despite a bad month for energy and mining shares. The Canadian equity (Pure) fund index lost 3.8%, while the Canadian equity fund index, which allows some foreign content, dropped 4.2%. The U.S. Equity fund index fell 4.3%, while the U.S. small and mid-cap fund index fared even worse, losing 6.3%.

The natural resources fund index fell 5.2%, despite heavy merger and acquisition activity in the mining sector, dragging down the resource-heavy Canadian market, which in May otherwise would have benefited from the country’s continuing economic strength. “Oil fell from more than US$75 a barrel to about US$71 during the month, and the price dipped into the US$60s mid-month,” O’Neill said.

However, despite a seventh straight hike in the Bank of Canada overnight rate, to 4.25%, in May, “for the first time in a while, the Bank of Canada hinted that a pause in the rate hike cycle may be warranted,” O’Neill said. “Nonetheless, Canada’s first quarter economic data was stronger than expected, leading some to speculate that another rate hike may be in the cards.”

The Canadian dollar hit a 30-year high against its U.S. counterpart during the month, surpassing 91 cents U.S.

May’s worst performance was produced by the emerging markets equity fund index, which lost 12.3% for the month. These funds were overdue for a pullback, O’Neill said, having enjoyed stellar gains earlier in the year. The resource sector’s poor performance was another factor, he said.

The precious metals fund index, which had enjoyed a spectacular year so far, lost 9.7% in May, despite a run-up in the price of gold, which topped US$700 before pulling back to about US$660 by month’s end. “Although the price of gold rose 3% overall during the month, many gold stocks fell as investors took profits,” O’Neill said.

On a year-to-date basis, precious metals remained the best performing fund index, up more than 28% during 2006’s first five months. Natural resources and Canadian small cap equity were next best, each up about 10%.

Among the big equity-fund sectors so far this year, European and Asian funds generally have outperformed mainstream Canadian equity funds. The European equity fund index was up nearly 8% since Jan. 1, while Asia Ex-Japan rose 6.3%. It’s been a different story in the U.S. and Japan, however. The U.S. Equity fund index fell 2.6% during the first five months, while U.S. small and mid-cap equity fared better, gaining 2%. Japanese equity was the second-worst year-to-date performer, losing 5%. The worst year-to-date performer was the science and technology fund index, down 5.7%.

Final performance figures will be published at mid-month.