TORONTO, Sept. 4, 2013 /CNW/ - Mutual funds in Canada that invest in domestic equities posted gains in August, while those that target foreign markets saw generally flat or negative performance. Twelve of the 22 Morningstar Canada Fund Indices that measure the performance of equity fund categories increased in August, according to preliminary performance numbers today released by Morningstar Research Inc. ( Morningstar Canada), a subsidiary of independent investment research provider Morningstar, Inc. For the second consecutive month, the best-performing fund index was Morningstar Precious Metals Equity, which increased by 12.1% in August. This followed its 9.6% increase in July as the gold rally continued, with low prices boosting demand for jewellery, bars, and coins in Asia. Despite these two solid months of performance, precious metals funds are still deep in negative territory for the year to date after a 46% decline in the first six months of 2013. "The Precious Metals Equity category is sensitive to actions by central banks; any reduction in stimulus would have a negative impact on the price of gold because investors use the metal to hedge against inflationary risk arising from the stimulus," Morningstar Fund Analyst Vishal Mansukhani said. "Negative U.S. economic data reports would positively impact this category, as it would reduce the likelihood of central banks reducing stimulus." Also among the top performers was the Morningstar Natural Resources Equity Fund Index with a 3.7% increase. "This is an asset class that can be significantly impacted by geopolitical happenings around the world. Oil prices hit a six-month high because of the possibility of western countries' involvement in the Syrian conflict. Though Syria is not a major oil exporter, prices are affected by concerns that violence may spread to larger oil exporters and possibly disrupt transport routes," Mansukhani said. A third sector-specific fund index, Financial Services Equity, was also a top-five performer with a 1.6% increase for the month. With financials and natural resources (including gold) making up the bulk of the Canadian equity market, it is not surprising that diversified domestic equity funds also did well in August. The Morningstar Canadian Equity Fund Index increased by 1.2%, while the Morningstar Canadian Small/Mid Cap Equity Fund Index increased by 1%.