TORONTO, Aug. 5 /CNW/ - Strong performance in the financial services sector led Canadian equity funds to a fifth consecutive month of positive results in July, according to preliminary performance data released today by Morningstar Canada. Most foreign equity funds also made gains. However, their returns were significantly reduced by a strengthening Canadian dollar, despite all major European, Asian, and Latin American stock markets outperforming the Canadian market.

Forty of the 43 Morningstar Canada Fund Indices advanced during the month, led by the Morningstar Financial Services Equity Fund Index and its 9.8% gain. "The financial services sector showed renewed signs of life in July as corporate earnings reports helped drive speculation that the industry may be starting to turn a corner," said Neal Brandon, fund analyst for Morningstar Canada. "Major U.S. banks including Goldman Sachs and JP Morgan Chase reported better-than-expected earnings during the month, benefiting from common themes of strong underwriting fees and increased trading revenues. In Canada, life insurers and asset managers were buoyed by the renewed confidence and positive performance in the equity markets."

Financials were also the main contributor of returns for sector-diversified domestic equity funds. The Morningstar Canadian Dividend & Income Equity Fund Index, whose constituent funds, on average, allocated 42.5% of their assets to the sector at the beginning of July, posted the second-best return among fund indices with a 5% gain. The Canadian Equity and Canadian Focused Equity fund indices, which both hold more than a quarter of their assets in financials, were up 4.1% and 3.9%, respectively, ranking third and fifth. Rounding out the top five was the Morningstar Canadian Equity Balanced Fund Index, which ranked fourth with a 4% return.

Among foreign equities, the best-performing fund index in July was the one that tracks the Asia Pacific Ex-Japan Equity category, which gained 3.8%. Many stock market indices in that region, boosted by indications of further economic growth, posted double-digit returns when measured in local currencies. Notably, the Shanghai Composite Index gained 15.3%, supported by further government stimulus spending and improving investor sentiment. However, the sharp appreciation of the Canadian dollar against the Chinese yuan (7.8%), the Hong Kong dollar (7.7%), and the South Korean won (3.3%), among others, detracted from those returns.

The situation was similar for funds that focus on U.S. and European equities, as well as the broadly diversified International Equity and Global Equity categories. In the United States, the S&P 500 Index's 7.6% gain was virtually wiped out by the U.S. dollar's 7.2% drop against the loonie, resulting in a modest 0.6% gain for the Morningstar U.S. Equity Fund Index. Meanwhile, returns of 8.5%, 9.1%, and 10.9% by market indices in the UK, France, and Germany, respectively, were coupled with the loonie's rise of 5.8% against the euro and 6% versus the UK pound. The European Equity, Global Equity, and International Equity fund indices were up just 1.6%, 1.9%, and 2%, respectively.

"The Canadian dollar rebounded sharply in July, supported by a run in commodity prices and a return of risk appetite in the equity markets," Brandon said. "The commodities rally was driven by the prospect of increased demand from emerging markets and increased optimism that the economic downturn may be easing. The Bank of Canada helped to reinforce this optimism with its forecast for moderate growth over the quarter, drawing a line under the recession and setting the tone for economic growth."

For more on July fund performance, go to www.morningstar.ca.

Morningstar Canada's preliminary fund performance figures are based on the change in funds' net asset values per share during the month, and do not necessarily include end-of-month income distributions. Final performance figures will be published on www.morningstar.ca next week.

About Morningstar

Morningstar Research Inc. is a Canadian subsidiary of Chicago-based Morningstar, Inc., a leading provider of independent investment research. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on nearly 325,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 19 countries and minority ownership positions in companies based in three other countries.