TORONTO, Sept. 2 /CNW/ - Foreign equity funds once again had a strong showing in August, thanks in large part to solid returns in the European and U.S. markets. But it was the Real Estate Equity category-one of the smallest in the Canadian fund universe with just 21 unique mandates-that stole the show. Domestic equity funds had mixed results for the month, while a slumping Chinese market was the only real negative story.

Forty of the 43 Morningstar Canada Fund Indices advanced during the month, led by the Morningstar Real Estate Equity Fund Index and its 8.4% gain. "A string of positive housing data helped underpin strength in real estate equities for August. Results of new and existing U.S. home sales outpaced expectations as buyers took advantage of government tax credits and deep discounts in the foreclosure market to help pare existing inventory and create pricing pressure in the sector," said Neal Brandon, fund analyst for Morningstar Canada. "Building on previous strength, the Canadian housing market showed continued signs of growth with a broadly based advance in prices across major markets."

The second-best performing fund index was the one that tracks the European Equity category, which is up 7.3% on solid gains in major markets like France, Germany and the United Kingdom, combined with a 2.1% pullback of the Canadian dollar against the euro. "Unexpected reports of second-quarter GDP growth in Germany and France contributed to renewed optimism in the eurozone, as the region's two largest economies officially marked an end to the painful recession," Brandon said.

Meanwhile, the Morningstar U.S. Equity Fund Index also had a good month with a 4.7% return thanks to a combination of market performance and currency effects. The S&P 500 Index gained 3.6%, while the U.S. dollar appreciated by 1.6% versus the loonie. The strength of Europe and the United States also benefited broader equity fund categories: the Global Small/Mid Cap Equity, International Equity, and Global Equity fund indices gained 5.9%, 5.6% and 3.9%, respectively.

Among funds that focus on Canadian equities, those that target small-capitalization stocks significantly outperformed their large-cap counterparts. The Morningstar Canadian Small/Mid Cap Equity Fund Index gained 4.8% for the month, ranking fifth among all fund indices, and the Morningstar Canadian Focused Small/Mid Cap Equity Fund Index was up 4.2%. Meanwhile, the Canadian Focused Equity and Canadian Equity fund indices finished much farther down the performance table with gains of 1.4% and 0.7%, respectively. After a highly volatile start to the year, the three largest sectors of the S&P/TSX Composite Index-financial services, energy, and materials-had their most subdued month so far, with each sub-index either gaining or losing less than 1%.

The worst-performing fund index last month was Greater China Equity with a 5.9% loss. However, fund managers in that category were, in large part, able to navigate around the Shanghai Composite Index's 21.8% drop, its largest monthly loss since October 2008. "Chinese equities suffered a meaningful setback in August as speculation persisted over tighter lending conditions in the region. Investor optimism was derailed by reports that Chinese authorities were beginning to rein in credit markets, dimming short-term growth prospects and helping to erase the last three months of gains for that index," Brandon said.

For more on August 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.