Recent accounting scandals at three U.S. companies had little direct impact on Canadian mutual funds, according to Morningstar Canada research, but fund performance was hit hard by the resulting stock-market fallout in June.

Morningstar’s analysis shows few of 4,800 mutual funds available in Canada had significant portions of their portfolios in shares of Qwest Communications International Inc., WorldCom Inc. or Xerox Corp. However, with the exception of fixed-income sectors, virtually all fund categories lost money during June, as the latest round of reported bookkeeping irregularities triggered a sell-off in stock markets that has severely shaken investor confidence.

“Although mutual fund ownership in these three stocks was far from widespread during the first half of the year, the ripple effects on equity valuations because of these challenges to the validity of earnings reporting have been significant,” said Iain Giles, a Morningstar analyst.

Morningstar says that after adding to their positions during the first quarter, Canadian-based funds trimmed their positions in Qwest, WorldCom and Xerox by May 31, the most recent date for which accurate holdings data is available. However, preliminary data indicates that managers added to their WorldCom positions again in June but dumped shares of Qwest. The overall Xerox position was flat.

“What is most disturbing about the recent sell-off from a fund investors’ standpoint is the scope and depth of the retreat,” Giles said. “The impact in the stock market has touched all equity categories.”

Accounting issues took their toll on U.S. stock prices, and funds fell in tandem. The Standard & Poor’s 500 Composite index fell 7.2% during June, and was off 17.5% during the second quarter.

The median Canadian fund overall produced a negative 5% return during June, while more than 84% of funds lost money, according to Morningstar.

Among mutual funds with major exposure to U.S. markets, those in the science and technology category were pummeled during June, as the median fund fell 13.4%, bringing the group’s median loss for the second quarter to 30.5%. U.S. small and mid cap equity and U.S. equity funds were not far behind, retreating 8.1% and 7.7%, respectively.

Not surprisingly, two sector funds that focus exclusively on the battered wireless and telecommunications industries led the June retreat. Sentry Select Wireless Communications lost 25.3% of its value, while ING Global Communications was down 24.9%.

The widely-held Canadian equity category also fell in June as the foul play touched Canadian valuations, although not to the same extent as U.S. focused offerings. The depth of the retreat was substantial, with the median Canadian equity fund falling 5.7% in June and 7.4% over the quarter. Less than 1% of funds in the category were in positive territory, with Floyd Growth leading the way down, retreating 14.2%, while Caldwell Canada slid 11.6%. The Asia/Pacific Rim equity and Japanese equity categories fell in excess of 6% on the month, as funds with a specific sector or country concentration led the retreat.

Fixed-income funds provided some relief in June. Foreign bond funds provided one of the few safe havens from the losses, rising 2.7%, while Canadian income trusts also gained some ground, rising 2.3%.

Two offerings in the alternative strategies category had the best one-month returns overall. Friedberg Currency, a fund that has dropped 44.7% over the past six months, surged 13.8% during June. Also, the bearishly positioned StrategicNova Managed Futures gained 12.6% in June and was up 5.6% during the first half of the year.

Three more funds from Mackenzie Financial Corp. were awarded five star ratings from Morningstar in June, bringing the firm’s total to 17. Two insurance-based fund sponsors made significant advances, as Manufacturer’s Life Assurance Co. added five five-star funds this month, increasing its five-star-fund total to seven, and Clarica Mutual Funds added three five star ratings to bring its total to seven. Fidelity Investments Canada Ltd, AIM Funds Management Inc, TD Mutual Funds, Franklin Templeton Investments Corp., and Investors Group Inc. each dropped one five-star fund from its roster during the month, while Great West Life Assurance Company lost two five-star offerings.