The month of October saw positive results for practically all types of investment funds, as 41 of the 42 Morningstar Canada Fund Indices gained ground.

Equity funds were clearly the main beneficiaries of this wave of market generosity, though all portfolio categories also showed healthy gains, according to preliminary data on investment-fund performance released today by Morningstar Canada.

Funds that focus on natural resources had the best returns in October, despite crude oil prices slipping below US$60 per barrel. The natural resources equity fund Index was up 7.4% for the month, while the precious metals equity fund index was second with a 6.3% gain. In third place was emerging markets equity, up 5.3%.

“With buoyant commodities prices and a modest rise in precious metals, materials-heavy funds were the main drivers in October,” said Morningstar Canada senior fund analyst Brian O’Neill, in a news release.

“In particular, Potash (up 20%), Alcan and Teck Cominco (both up 18%) juiced up returns after reporting excellent third-quarter earnings. Within the energy sector, stock selection was key. Notably, Shell Canada was a standout with a 37% gain for the month after Royal Dutch Shell PLC pledged to buy the company’s remaining shares it didn’t already own.”

Last month Morningstar introduced the Morningstar Canada fund categories, which replaced the category system overseen by the Canadian Investment Funds Standards Committee and now serve as the basis for the Morningstar Canada fund indices. An important outcome of that change was the creation of several small/mid cap equity categories.

The four fund indices that represent these categories all performed well in October, occupying the fourth to seventh places in the overall rankings. The Canadian small/mid cap equity fund index – whose constituent funds must invest at least 90% of their equity holdings in Canada – led the group with a 5.5% gain, followed closely by Canadian anchored small/mid cap equity, up 5.4%. The global small/mid cap equity and U.S. small/mid cap equity fund indices were both up 4.7%.

“The global equity category, for example, formerly included a large number of small/mid cap funds, many of which have considerably different risk profiles than their large-cap brethren,” O’Neill said. “With these funds separated under the current schema, the global equity fund index’s year-to-date return of 9.9% is slightly lower than it otherwise would have been.”

Though they lagged their smaller cap counterparts, large-cap equity funds also did very well last month. In fact, all diversified equity categories gained more than 3% in October. Notable winners include the European equity fund index, which jumped 4.6% for the month following strong market performances in the UK and Germany. Its year-to-date return now stands at 20.9%, making it the second best performer among all the fund indices so far in 2006 (behind precious metals equity’s 35.1% gain).

Elsewhere, the Canadian equity fund index was up 4.5%, international equity and Canadian anchored equity (which includes funds that invest between 50% and 90% of their assets in Canada) were both up 3.8%, global equity was up 3.6% and U.S. equity was up 3.5%.

While the adoption of the Morningstar categories brought about several changes to the make-up of the larger equity categories, most sector-focused groupings remained basically as they were under the CIFSC system. An important exception is the real estate equity category, whose fund index gained 3.2% in October and currently boasts the third highest year-to-date return with 20.8%. Real estate funds rarely topped the charts before, with their returns being more akin to those of short-term bond funds. However, the Morningstar Canada Real Estate category is materially different from its CIFSC-based predecessor.

“The current index consists of funds that invest predominantly in equity-based real estate securities, including those that are mostly comprised of real-estate investment trusts (REITs),” O’Neill said. “Meanwhile, it excludes funds that consist mainly of mortgage-backed securities, and those that invest directly in real estate properties. As a result, the year-to-date performance of the current index is notably higher.”

Another important change stemming from the introduction of the Morningstar categories concerns funds that were formerly grouped under the moniker of “balanced” funds. These funds can vary greatly in terms of asset allocation and, therefore, risk/return profile, which is why Morningstar now separates them into 12 groups based on asset mix and geographical criteria.

In a month where equity-based products dominate the rankings, it should come as no surprise that portfolio funds that favour this asset class also performed well. The highest return among portfolio categories in October belonged to the 15+ Year Target Date Portfolio fund index, which includes life-cycle funds that have maturity dates longer than 15 years. These products start out by investing primarily in equities and progressively switch their assets to fixed income as their maturity dates approach. The fund index gained 3.1%.

@page_break@Other portfolio fund indices produced returns ranging between 2.8% and 1.1%. Their ranking mostly followed the overriding trend of the month, with equity-tilted portfolio categories at the top, neutral portfolio categories in the middle and fixed-income-focused portfolio categories bringing up the rear.

Fund indices that represent fixed-income categories were mostly positive in October, though their returns were confined to the bottom of the rankings. The High Yield Fixed Income fund index was the best performer in this group with a 1.2% gain. The only fund index to lose ground in October was Canadian Inflation-Protected Fixed Income, which encompasses the handful of funds that invest primarily in real-return bonds; it lost 0.2%.

Final performance figures will be published next week.