TORONTO, July 3, 2013 /CNW/ - Equity funds in Canada did poorly in June, but 12 of the 22 Morningstar Canada Fund Indices that measure the performance of equity fund categories still had positive results for the second quarter of 2013. As was the case in the first quarter of 2013, funds that target U.S. and Japanese markets posted strong gains, while natural resources-focused funds continued to suffer disastrous losses, according to preliminary performance numbers released today by Morningstar Research Inc. ( Morningstar Canada), a subsidiary of independent investment research provider Morningstar, Inc. The index that measures the aggregate returns of funds in the Japanese Equity category was the best performer for the quarter with an increase of 8.7%. Despite a severe correction in early June for Japanese stocks, the fund index managed to post a 5.5% increase for the month of June that also topped all other fund indices, thanks to a partial market recovery in the subsequent days, and to favourable currency effects for Canadian investors. Despite a slightly negative result in June, the Morningstar U.S. Equity Fund Index remained among the leaders for the quarter with a 5.4% increase, thanks to its solid performance in May. The Morningstar U.S. Small/Mid Cap Equity Fund Index—one of only two equity fund indices, with Japanese Equity, to increase in June—also did well with a 4.4% increase for the quarter, while the indices that track the Global Equity and North American Equity categories—which are heavily dependent on U.S. equities—increased by 3.6% and 3.1%, respectively. For the month of June, 20 of 22 equity fund indices were in the red, along with all 11 indices that track balanced fund categories, as well as the seven fixed-income fund indices. This was largely the result of comments made in late May by U.S. Federal Reserve Chairman Ben Bernanke hinting that the U.S. economy has improved to a point where the Federal Reserve could start slowing the pace of its bond-buying program later this year. Those comments not only sent global equity markets tumbling, but also pushed interest rates higher, which in turn drove bond prices lower. With Japan as the notable exception, Asian equity funds were among the worst performers, both for the month and the quarter. Chinese equities were hit particularly hard, with the Shanghai Composite Index dropping 14% in June and 11.5% for the quarter in local currency terms. For Canadian investors, this was partially offset by a depreciating dollar, but the Morningstar Greater China Equity Fund Index still posted decreases of 5.3% and 2.2% for the month and quarter, respectively. The Asia Pacific ex-Japan Equity and Emerging Markets Equity fund indices were also among the bottom performers with decreases of 4.2% and 6.6%, respectively, for the quarter. "In an unexpected move, China's central bank allowed interbank lending rates to spike, causing fear of a possible cash crunch in China's banking sector," said Morningstar Fund Analyst Joanne Xiao. "The market subsequently recovered some of its losses after the central bank showed there is sufficient liquidity in the economy and that its earlier action was intended to fight off-balance-sheet nonbank lending." For Canadian equity funds, the story continued to be the slumping natural resources sector—particularly the price of gold, which lost another 16% in June. The falling commodity dragged funds in the Precious Metals Equity category, which posted an average decrease of 17.5% for the month and 34.9% for the quarter. The Natural Resources Equity fund index was the second-worst performer for the quarter with an 11.6% decrease, while the more broadly diversified Canadian Equity fund index was down 2.8%.