Fund Performance Review (2007)

Liquidity and credit woes stemming from heavy issuance of subprime mortgages wracked the financial markets in 2007.....

Morningstar Analysts 25 January, 2008 | 0:00
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Liquidity and credit woes stemming from heavy issuance of subprime mortgages wracked the financial markets in 2007. Despite all the turbulence, global equity markets extended their five-year bull run as the MSCI World Free Index went up 7.09 per cent. Regionally, Asia Pacific ex Japan markets led the rise in global stock markets with MSCI AC Pacific ex Japan Index up 30.5 per cent.

Strong performance of Nordic countries as well as Germany, partly offsetting the slump of UK, helped European equities returning 11 per cent in 2007. In the US, the Federal Reserve adopted an accommodating policy by cutting interest rate by 75 bps. The US dollar lost ground against almost all other currencies but US equities ga

ined some support from the easing rate policy. The S&P 500 returned 5.5 per cent while the NASDAQ advanced 10.7 per cent for the year, driven by strong performance of high-tech industries.

Emerging markets continue to boom, owed largely to global resources boom and strong local economic growth. Latin America led the way of general emerging markets with the MSCI Latin America up 46.9 per cent and Emerging Market Index adding 36.5 per cent. The average Latin America equity fund produced an average return of 42.5 per cent.

This year there were disparities in economic growth across emerging markets. The bellwether in Latin America was Brazil while Turkey fared much better than other emerging Europe countries. In consequence, performance differences among emerging market funds can be largely attributed to different country positioning.

This year fixed income portfolios' performance has been improved greatly as investors turned to safe haven assets during the subprime turmoil. The JPM Global Government Bond Index increased 11.2 per cent while JPM EMBI returned 6.45 per cent. US treasury bonds outperformed US stocks during 2007. Australian bond topped the performance chart of fixed income portfolios by returning 17.4 percent for the year, largely thanks to currency appreciation by strong commodity prices. Overall, equity funds posted stronger return than fixed income portfolios and fund performance ranged from 157.2 percent gain of JF China Pioneer A share Fund to JF Japan OTC losing 29.6 percent.

Top Performing Fund Categories
After a stellar year of 2006, China equity funds post a whopping 67.08 per cent average return this year despite last quarter's choppy market conditions. September the higher-than-expected US rate cut bolstered the MSCI China Index by 19.3 per cent, the highest monthly gain over three-year period, and 16.6 per cent for following October. However, MSCI China Index registered its biggest monthly loss ( 13.6 per cent) in November over the three-year period, driven by investors sell-off after Prime Minister Wen JiaBao saying that the Government needed more time to assess the risks of “through train” program, i.e. allowing mainland individuals to directly invest in Hong Kong stock markets, to the stability of Hong Kong's financial system.

Due to affluent liquidity and China's closed capital market, Chinese domestic listed equities performed much stronger than their oversea listings. The Shanghai Shenzhen 300 Index gained 161.5 per cent while Hang Seng China Enterprises Index, the gauge of Hong Kong listed Chinese companies, advanced 55.5 per cent during 2007. The top two performers of China equity funds, JF China Pioneer A Share Fund and iShares FTSE/Xinhua A50 China Tracker are both investing primarily in A share markets.

Strong flows from foreign institutional investors and positive economic and corporate news helped Indian equity markets in closing 2007 with strong gains and major indices scaled fresh highs. The MSCI India Index gained 71.2 per cent and the average India equity fund returned 67.1 per cent. CAAM India Fund C class led the category by returning 83.8 per cent. The ASEAN equities continued to shine in 2007, benefited from both the global commodity boom and solid economic growth. The average Malaysia equity fund added 61.9 per cent while Singapore fund posted a return of 36.3 per cent.

Despite growing new emerging markets like Vietnam, the BRICs continued to outperform with the MSCI BRIC Index up 56.1 per cent for 2007. Russia was the worst performer among the four BRIC countries. Over the first half year of 2007, a hazy mix of politics and oil prices overshadowed Russia's market sentiment. Russian equities were also dragged by the liquidity dry-up due to the record Russian IPO in 2007. In the second half year Russian equities advanced greatly on soaring oil prices. The five BRIC funds available for sale in Hong Kong topped the emerging market category and BNP Parvest BRIC fund gained 57.9 per cent to be the best performer of the category during 2007.

Sector wise, financials and property stocks were among most battered by the subprime while the strong demand for commodities from soaring emerging markets boosted performance of resource funds. Oil prices rallied to about US$100 per barrel while gold prices rose to near 30-year records. The average Industrial Material equity fund registered a return of 44 per cent; energy fund went up 40 percent and precious metal fund returned 27.6 per cent.

Against the backdrop of market turbulence from the credit crunch and subprime mortgage meltdown, investors turned to defensive sectors like health care and utilities. The average Healthcare equity fund gained 13.1 per cent for the year. MLIIF World Health Science A2 USD posted the largest return in this category, up 19.8 percent, followed closely by Janus Global Life Sciences fund's 19.6 per cent gain.

Bottom Performing Fund Categories
Japan equities continued to be the lag and the average Japan large cap equity fund lost 8 per cent while small/mid cap portfolio dropped 16 per cent during 2007. Despite of attractive valuations, international investors remain cautious about the outlook for Japanese equities since data show contracting household spending and less certainty in Japan's emergence from deflation, especially after Bank of Japan hiked its rate by 50 bps during 2007.

The European property funds have seen a dramatic turn of their fortune during 2007. The average European property fund lost 27.3 percent over the year versus a 69.5 percent gain in 2006. The hiking interest rates by both the Bank of England and the European Central Bank, uncertainties in regional economic outlook, overheating property markets, and global credit woes altogether sent European property stocks down. Conversely, Asian property stocks fared much well, helped by strong economic growth and a favorable interest rate environment. The average Asian property stock fund posted a return of 23.8 per cent.

In addition to 'subprime', another most mentioned word in 2007 was probably 'decoupling'. On one hand, there is a decoupling effect happening between some emerging economies and the US. Emerging markets continued to surpass developed markets, thanks to strong economic and earning growth as well as increasing foreign inflows. On the other hand, the sharp declines of emerging markets in August showed that no country could be totally immune to a global liquidity crunch. Looking forward, investors should remain wary as worries about US recession, heightened inflation and credit woes continued to overhang global stock markets.

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Editorial & Research Team, Morningstar Asia Ltd. can be reached at
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