Resource funds pump out profit

Resource funds pump out profits in June

by?Mark Chow?|?5 Jul 05?|?E-mail Article to a Friend

O Canada! Domestic funds shine as the S&P/TSX Composite breaks 10,000.

June was an excellent month to be invested in Canadian-focused investment funds. Twenty-two of the 31 Morningstar Canada Fund Indices and all of the predominantly Canadian categories posted positive returns for the month, according to preliminary data. Funds primarily investing outside Canada brought up the rear as currency movements played a large role in performance of several indices. Oil was again the topic of discussion at most water coolers around the world. After ending the month of May slightly above US$52, the price of crude spiked to over US$60 a barrel before retreating at the end of the month. Continued fears of a disruption in supply, as well as questions about world refining capacity, pumped up prices. Coincidentally, another key commodity, gold, also saw its value appreciate in June, moving from US$415 an ounce to roughly US$435. It peaked mid-month above US$440. The strength in the commodities sectors as well as a strong Canadian dollar helped many of the Canadian-centric funds out-perform foreign funds. Running neck and neck for the top spot in June were the Natural Resources and Precious Metals Fund Indices. Natural Resources was up 7.3% for the month, followed by Precious Metals at 7.2%. Natural Resources funds dominated all other fund indices during the first half of 2005 with a 14.8% return for the six months ended June 30. The next closest fund index, Emerging Markets Equity, lagged by nearly seven percentage points. Precious Metals, in stark contrast, has been in everyone's rear view mirror this year, losing 5.2% during the first half of 2005. At the bottom of the performance heap, the Science & Technology Fund Index took investors on another rollercoaster dip in June. It lost 3.2% during the month after being May's top performer at 6.7%. Foreign Bond and Japanese Equity were the next worst performers in June, losing 1.8% and 1.7% respectively. A fear of a disturbance in supply has been driving oil prices higher. Geopolitical instability in the Middle East and Nigeria, potential labour unrest in Norway and even strained U.S.-Venezuela relations are all concerns that continue to be largely unaddressed. OPEC has, for the most part, been unsuccessful at cooling oil prices with its commitments to increase production. U.S. energy producer Unocal Corp. (UCL/NYSE) also received a takeover offer bid from Chinese National Offshore Oil Company (CNOOC) Ltd. (CEO/NYSE) that trumped a previous offer from Chevron Corp. (CVX/NYSE). CNOOC is a Chinese state-owned oil producer. This is the first high-profile takeover attempt from the Chinese in this sector. China wants oil reserves to help supply its fast-growing economy. Gold producers, during the first quarter of 2005, saw their share prices flounder amid rising costs, even in the face of stable or rising gold prices. However, June's gold price rise did boost producers' share prices. The S&P/TSX Capped Gold Index returned 9.8%. Shares of companies such as Barrick Gold Corp. (ABX/TSX) and Goldcorp Inc. (G/TSX) were up over 11% and 14% respectively in June. The commodity and currency fundamentals propelled domestic funds during June, led by Canadian Equity (Pure) and Canadian Income Trust Fund Indices, which had the month's third best performance, each with a 3% return These fund indices also are tied for third place for the year to date, each up 7.6%. In June, the Canadian Small Cap Equity, Canadian Dividend and Canadian Equity indices posted returns between 2% and 3%. It is easy to see why Canadian-centered funds performed so well during June. All the largest sectors of the S&P/TSX Composite Index fared well. Energy, the index's second biggest sector, gained 12.3% during the month, while Materials gained 2.4%. Financials, the Composite's largest component accounting for over 30% of its weight, rose 2.5%. Shares of TD Bank Financial Group (TD/TSX) again reached new all-time highs, trading at over $55 a share after the second-largest Canadian bank announced the sale of TD Waterhouse, its U.S. discount-brokerage business. The domestic categories were among the top 10 spots for the first half of 2005, as the S&P/TSX Composite rose above the 10,000-point mark, its highest level since the third quarter of 2000. The fund indices that lost money in June were all affected by the strength in the Canadian dollar, which rose against all of the major world currencies. More specifically, the loonie rose 2%, 4% and 4.6% against the greenback, euro and yen respectively. Positive comments about future interest rate hikes by Bank of Canada chairman David Dodge buoyed the dollar, as did strong economic growth driven by oil and higher retail store sales. Ironically, Canadian names were the ones that dragged down the Science & Technology Fund Index. The S&P/TSX Capped Information Technology Index lost 7% during June, hurt by the hardships of its largest constituents; Research in Motion Ltd. (RIM/TSX), ATI Technologies Inc. (ATY/TSX) and Cognos Inc. (CSN/TSX) fell 14%, 23% and 11% respectively. RIM continues to be tied up in a court battle, while ATI first warned analysts about lower third-quarter earnings and then subsequently lowered its sales forecast for the current quarter. Early in June, Cognos warned that first-quarter results would fall below expectations due to its inability to close certain transactions during the quarter. In Japan, the Nikkei 225 Average gained about 3% in June, but the falling yen hurt returns for foreign investors. The country continues to struggle with deflation, but consumer and corporate sentiment seems to be on an upswing. Japanese Equity was the second worst performing fund index during the first half of the year, losing 4.3%. Many market analysts had been talking up Japan for 2005, but it has disappointed. The U.S. Equity Fund Index was June's next poorest performer, with a loss of 1.1%, which bettered the S&P 500 Index by about three-quarters of a percentage point. Although very few of the sectors ended June negative, the oil-price rise and a spiralling U.S. current account deficit all weighed on investors in U.S. markets. Fund Indices 1 month 3 months Natural Resources 7.3 2.5 Precious Metals 7.2 -0.4 Canadian Equity (Pure) 3.0 3.3 Canadian Income Trusts 3.0 4.8 Canadian Small Cap Equity 2.7 0.6 Canadian Dividend 2.6 3.6 Canadian Equity 2.0 2.2 Real Estate 1.9 4.2 Canadian Income Balanced 1.8 3.1 Canadian Asset Allocation 1.7 2.9 Financial Services 1.4 3.3 Canadian Balanced 1.4 2.6 Canadian Bond 1.2 4.0 High Yield Bond 1.2 1.4 Emerging Markets Equity 1.1 6.1 U.S. Small & Mid Cap Equity 0.9 4.2 Cdn Short-Term Bond & Mortgage 0.5 1.8 Global Balanced & Asset Allocation 0.3 2.2 North American Equity 0.1 3.4 Canadian Money Market 0.0 0.3 U.S. Money Market 0.0 0.4 Asia ex-Japan Equity 0.0 3.8 Asia/Pacific Rim Equity -0.2 1.1 European Equity -0.4 -0.1 International Equity -0.6 0.2 Healthcare -0.7 7.3 Global Equity -1.0 1.3 U.S. Equity -1.1 2.6 Japanese Equity -1.7 -2.5 Foreign Bond -1.8 1.0 Science and Technology -3.2 2.8 Data as of 06-30-2005