Fund Performance Review (1Q2008) : Woes dominated

Bulls fought with bears over the just-ended first quarter of 2008 and bears overwhelming won this round. Riding on long-lasting credit crunch, likely recession and re-fuelled inflationary .....

Morningstar Analysts 30 April, 2008 | 0:00
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Bulls fought with bears over the just-ended first quarter of 2008 and bears overwhelming won this round. Riding on long-lasting credit crunch, likely recession and re-fuelled inflationary pressure, bears sent the global equity market a sharp tumble. Last quarter, MSCI World Index lost 8.9 percent, where financials and tech stocks led the down run. Amid the woes, low-risk assets such as bonds earned investors' appeals.

Fed's bail-out campaign under spotlight
Inasmuch as the credit woes spread far beyond public's anticipation, Federal Reserve took some breathtaking gambits to rescue the economy in jeopardy. First of all, the Fed created several unordinary vehicles, like Term Auction Facility, TAF,

and Term Securities Lending Facility, TSLF, to encounter the difficulties in liquidity. These new vehicles aim at offering helping hands to all financial institutions, not bounded to primary dealers, in hot water. Besides, the Fed has slashed the target rate from 4.25 percent to 2.25 percent over the quarter and the 75 basis points deep cut in late January was orchestrated ahead a regular meeting. The Fed's most shocking move was to facilitate JP Morgan Chase's purchase to Bears Stearns, who is unable to obtain sufficient fund in the Repo market for operations, at a fire-sale price of USD 2.0 per share. Although JP Morgan soon adjusted the offer price fivefold to USD 10.0 per share, this bail-out plan still unnerve Bears Stearns investors as the offer price is far below 52-week high of around USD 160 per share in mid 2007. This is the first unofficial action taken by the Fed since the LTCM fiasco in 1998, and coincidentally, Bear Stearns was the one who did not join the bail-out campaign at that time.

What the Fed and Ben Bernanke did partially fit what Alan Greenspan, ex-chairman of the Fed, said in 1994: For monetary policy to foster maximum sustainable economic growth, it is useful to preempt forces of imbalance before they threaten economic stability. However, the Fed's intervention so far has been a mixed blessing since the market is vexing about the after effects of the Fed's expanded role. In sum, mixed blessing sent mixed waves to the U.S. equity market but woes dominated as a result. Over the quarter, according to Morningstar, U.S. Small-Cap equity funds posted a 12.52 percent loss, taking the hardest hit among all U.S. equity funds. U.S. Large-cap equity funds did not perform well either. U.S. Large-cap Value equity funds, which generally possess more financials than other U.S. Large-cap equity fund peers, lost 11.03 percent last quarter.

Greater China reshuffled: Dragon awakes
China Equity funds registered a deep loss of 25.14 percent last quarter, landing behind all funds except India equity funds. China was hurt by the worst snowstorm ever in February and China's lofty growth rate is expected to be stalled accordingly. China's growth is expected to be 9.4 percent in 2008, down from 11.4 percent in 2007, though it's still robust. With CPI up to 8.7 percent yoy in February on the back of 23 percent rise in food price, worst in more than 11 years, inflation is another key concern to investors as well as PRC government, thus further austerity control seems inevitable. Hong Kong equity fund took double hits from both mainland and U.S. market, posting a 19.21 percent loss over the quarter.

Taiwan, known as one of the Asia's Four Little Dragon, has drowsed for a long bout. Taiwan Large-cap equity funds recorded a 18.12 percent 5-year annualized return, lagging behind all other Asian Dragons. However, Ma Ying-Jeou of KMT swept to a landslide victory in the Taiwan presidential election, fuelling the hope that Taiwanese can say goodbye to the economic malaise they have bore for eight years. Over the quarter, Taiwan Large-cap equity funds worked hand in hand with Mr. Ma to win all equity funds in landslide with a shiny 7.35 percent gain.

Emerging market struggled
After five years of exuberance, India market's pullback this quarter sent India equity funds to the bottom of the Morningstar mutual fund category ranking. India's economic growth has slowed from its breakneck pace of 9.6 percent in 2007 and recent data suggests a manufacturing slowdown. Besides, similar to the case of China, the spectre of inflation has kept monetary policy relatively tight. Emerging markets outside Asia also have a rough quarter. Emerging Europe ex-Russia equity funds dropped 23.17 percent, and countries such as Hungary and Turkey suffered from fear of inflation as growth rates slowed. Russia equity funds, however, proved more resilient as the country's oil and gas revenues cheered investors. The average fund in the Morningstar Russia Equity category fell 7.42 percent in the period-- poor in absolute terms, but not bad given the overall tenor of the quarter. Latin America funds remained strong, reflecting in part the dominance of the resource-heavy Brazilian economy. Latin America equity fund fell a relatively svelte 3.95 percent in the quarter.

Sector funds with different destinies
Morningstar Sector Equity Precious Metals category and Morningstar Sector Equity Real Estate Indirect – Europe category gained 5.88 percent and 4.17 percent respectively, and they are two of three Morningstar equity fund categories with positive returns last quarter.

Gold, which is used by investors as a hedge against inflation, peaked at a high north of USD 1,033 per ounce in mid-March. Although it is followed by a sharp correction to around USD 880 per ounce, the run-up in gold price before that is strong enough to propel precious metal funds up. The current rise in gold prices is associated with inflationary fears and a weakening dollar, both of which were issues in the first quarter. Crude oil also surged to over USD 100 per barrel last quarter but the average fund in the Morningstar Sector Energy fund lost 6.76 percent in that period, proving a loose tie between energy price and corresponding fund performance.

After slumping in 2007, UK property plays remain spiritless after the markdowns of assets by some behemoths like British Land. Although property stocks in some non-UK countries performed well last quarter, Europe real estate equity funds available for sale in Hong Kong could only posted thin gains last quarter as they are all UK focused.

On another hand, as the murky outlook for the world economy impact investor perceptions of future growth opportunities, two areas of relative strength in late 2007 —technology and communications funds — lost 15.40 percent and 14.31 percent respectively last quarter.

Bonds: heroes in a choppy market
As one would expect, bonds fared considerably better than equities in the first quarter but credit risk was not rewarded. Thus, government-bond funds roundly outperformed corporate-bond offerings, which in turn beat their high-yield counterparts. The average fund in the Morningstar Dollar Global Bond category and Morningstar Dollar Government Bond category rose 4.10 percent 0.09 percent respectively, but the Morningstar Dollar High Yield Bond category fell 2.22 percent.

The above scenario was repeated across the Euro and Dollar bond categories and Euro bond funds performed much better than Dollar bond funds due to the weak greenback. For the quarter, Euro global bond funds and Euro government bond funds averagely rose 9.18 percent and 10.09 percent respectively. Besides Euro, Japanese Yen and Swiss Franc are other beneficiaries of weakening dollar. For the quarter, CHF bond funds and JPY bond funds posted intriguing returns of 13.53 percent and 12.78 percent respectively, occupying the second and the third place of all Morningstar fund categories.

Editorial &Research Team, Morningstar Asia Ltd. can be reached at hksupport@asia.morningstar.com
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