Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, released its quarterly review of fund performance for funds domiciled in Europe and Asia today. All performance averages are based on Morningstar Europe and Asia fund categories and are quoted in USD unless otherwise stated.
Highlights of second-quarter 2009 fund performance include:
• Small-cap equity funds outperform large-cap equities in all major regions
• Emerging markets rally strongly, with India Equity delivering the strongest returns
• UK small-caps deliver the best developed economy performance
• Real Estate (Indirect) and Financials top the sector performances
• Defensive sectors post negative performances across the board
• Lower-quality credit funds outperform government debt
• Swiss large-caps deliver the worst of the equity performances across Europe
• First quarter top performer Precious Metals ends the quarter nearly 3% down
• Industry consolidation set to surpass 2008 levels
Second-quarter fund performance for 2009 showed a continued return to risk. Investors found the best performances in emerging markets, particularly in India, Turkey, and Russia; in smaller-cap funds; and in lower-quality credit bonds. Fund flows, to some degree, followed the stronger performers, with large inflows seen in the Emerging Markets and Asia Pacific ex Japan sectors.
India equity funds saw the best performances, delivering an average return in the Morningstar India Equity category of 57.88%. Turkey took second place across the board, with an average quarterly return for equity funds of 55.76%.
Within the developed economies, funds focussed on UK small-cap equities which delivered the best performances, with the Morningstar UK Small-Cap Equity category posting a 40.77% return.
“As was the case late in the first quarter, we have seen higher-risk offerings - particularly single country emerging markets funds - outperform,” said Christopher Traulsen, CFA, director of fund research for Morningstar Europe and Asia. “However, investors need to keep in mind the risks of such vehicles. In the case of single-country emerging-markets funds, we believe few investors need them and if they do need more emerging exposure, should consider a global emerging-markets offering instead. The broader mandate allows more scope for the fund manager to add value and limits country-specific risk.”
Top performers by sector were Real Estate Indirect (Asia), Financials, and Private Equity, delivering returns of 40.13%, 39.80%, and 38.39%, respectively. Conversely, last quarter’s top performer - Precious Metals - rose by just 11.51%. Biotechnology also performed poorly, with an average return of 9.31%, for the quarter. Defensive categories such as Sector Equity - Health Care and Sector Equity - Utilities also fared poorly.
In the United Kingdom, UK Mid-Cap Equities delivered an average 32.52% increase, while UK Large-Cap Equities had an average 29.13% increase.
Swiss equity funds disappointed, delivering some of the lowest performance of all Equity fund categories in Europe. Swiss Large-Cap Equity achieved 19.02% average growth, and the Swiss Small-Mid Cap Equity category returned 27.20%. The domination of three main defensive-stock players, Nestle, Novartis, and Roche - the latter affected by failed drug trials - brought performances down for large-cap funds.
Across Asia, cyclical issues were in favour. The top 20 performing funds held an average of 13% of assets in the consumer discretionary sector and 17% in technology stocks. India Equity funds delivered the best performance, with an average return of 57.88%, and were followed by Singapore Equity funds with an average 47.69% upturn. China Equity funds delivered an average return of 36.21%, solid, but far below the continent's leaders. Funds in the ASEAN Equity category also proved strong, rising 42.17% on average.
Japanese equities dragged Asian regional equity fund performance, with the average fund in the Japan Large-Cap Equity category rising 23.19%.
U.S. equities also performed poorly. The US Mid-Cap Equity, US Large-Cap Growth Equity, and US Large-Cap Blend Equity categories were the worst-performing equity categories worldwide at 18.49%, 17.33%, and 16.87%, respectively, although we note this is partly due to currency - the dollar depreciated significantly versus the pound in the period. The Morningstar US Small-Cap Equity category offered slightly improved returns at 22.97%, and the US Large-Cap Value category rose by 19.79%.
The second quarter showed a clear swing away from government bonds, with funds invested in high-yield bond bonds and corporate bonds performing best. Funds in the Morningstar Dollar High Yield Bond category returned 19.27% on average, whist funds in the Dollar Corporate Bond category returned 12.04%. In contrast, the average fund in the Dollar Government Bond category rose just 0.06%.
Across the industry, fund closures remained extremely high, and a trend of continuing note. Year-to-date for 2009, some 3,821 fund classes have so far merged or liquidated. This compares to 5,223 in 2008, 3,442 in 2007, and 1,565 in 2006, giving a projected annual increase of 46% by year end.
“Based on the consolidation rate we have seen so far this year, we are on track for an industry consolidation rate almost five times the levels recorded in 2006”, said Traulsen. “It’s not uncommon for monies held in merged funds to end up investing in areas that the investor would not originally have intended. We urge Investors to keep tabs on what their funds are investing in, and to check in regularly to make sure those investments are appropriate for them.”
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for approximately 6.5 million individual investors, 260,000 financial advisors, and 3,300 institutional clients. Morningstar provides data on more than 300,000 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. The company has more than 200 analysts around the world and provides independent research and analysis on more than 2,000 funds and exchange-traded funds as well as 2,000 stocks.
About Morningstar Asia
Morningstar Asia was established in April 2000 and has expanded its businesses into Japan, Korea, India, Mainland China, Taiwan, Singapore and Hong Kong. Morningstar Asia not only offer timely information on mutual funds, but also insightful analyses, unbiased fund ratings, and sophisticated analytic tools to help both individual and professional investors make more intelligent investment decisions. Morningstar Asia does not own, operate, or hold any interest in mutual funds, stocks, or insurance products, ensuring its independence and objectivity.
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