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Equity funds seeing red on fallout from European debt crisis

INVESTMENT FUNDS REPORTER

Stock funds were swimming in red ink in May as markets climbed a wall of worry over Europe's sovereign debt crisis that has the potential to slow global growth.

European equity funds were hit the hardest, falling an average of 8.9 per cent, according figures from Globe Investor. AGF European Equity Class, which has a heavy financial weighting, tumbled 12.4 per cent. Mackenzie Universal European Opportunities Class fell 11 per cent, while Investors European Mid-Cap Equity lost 10.9 per cent.

Financial services equity funds were the second-biggest losers last month, shedding an average of 8.5 per cent. AIC American Advantage Fund fell 10.4 per cent, while Investors Global Financial Services fell 9.6 per cent and AIC Global Advantage was off 8.7 per cent.

"The European debt crisis is going to take a bit longer to work itself out," said Greg Placidi, a portfolio manager with Portland Investment Counsel Inc. "Its impact is going to mean slower European growth than what might have been anticipated six months ago."

Still, it doesn't look like there is going to be massive writedowns of sovereign debt because the European Union and International Monetary Fund have agreed to create a $1-trillion (U.S.) rescue package to backstop countries burdened by debt, Mr. Placidi said in an interview yesterday.

"The positive thing is that we have seen austerity measures that Spain and Italy have come out with, and they are extremely stringent."

Europe's financial woes have not only "seriously impacted the European financials," but have also spilled over to the U.S. financial sector because of concerns about slower economic growth, said Mr. Placidi, who co-runs the AIC American Advantage and AIC Global Advantage funds.

AIC American Advantage, which invests in U.S. financial stocks, took a hit because of uncertainly arising from the euro zone woes as well as the U.S. financial reform package aimed at tighter government regulations, he said.

"Because the financial reform bill was changing every hour, there was a lot of speculation about what the final bill would look like and how that would impact the financials. That drove down U.S. financials significantly."

In addition, AIC American Advantage also suffered because it is 50-per-cent hedged to the Canadian dollar, and did not benefit from the dramatic drop in the value of the loonie last month, he said.

Looking at the U.S. economic data released in the past couple of weeks, the figures are still showing a strong U.S. economic recovery, Mr. Placidi said. "I think the only thing holding back the U.S. financials was the reform bill. Once people get a view of the final bill after it comes out of committee, then I think you'll see a nice a nice leg up on financials."

***

How investment funds fared in May

Group Avg. Group Avg.
TOP 5 1 mo. return YTD return
Canadian Long-Term Fixed Income2.8%7.0%
Canadian Fixed Income0.8%2.1%
Global Fixed Income0.3%0.0%
Canadian Short-Term Fixed Income0.3%0.3%
Canadian Inflation Protected Fixed Income0.2%2.2%
BOTTOM 5
European Equity-8.9%-13.7%
Financial Services Equity-8.5%-6.6%
International Equity-8.2%-10.8%
Natural Resources Equity-7.6%-0.9%
Global Small/Mid Cap Equity-7.4%-2.9%
Average for all fundsregardless of asset class -3.8% -1.8%
S&P 500 Composite ($ Cdn)-5.1%-2.3%
S&P/TSX Small Cap-5.4%1.6%
S&P/TSX Total Return-3.5%1.2%
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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