Fund Performance Review (3Q2006)

Energy and commodity prices continue to be headline-catching during the third quarter. Oil prices dipped over 20 percent from $77 in July to less than $60 per barrel recently ....

Morningstar Analysts 15 October, 2006 | 0:00
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Energy and commodity prices continue to be headline-catching during the third quarter. Oil prices dipped over 20 percent from $77 in July to less than $60 per barrel recently. Other commodity prices, including natural gas and gold, plummeted too. The softening oil prices were certainly welcomed to central banks because the pressure of inflation was reduced. The US Federal Reserve paused its seventeen consecutive inertest-rate increase in the past two years.

Sluggish oil and gold prices, and the Federal Reserve's decision to halt interest rate hikes have together buoyed the stock market worldwide except Japan. The Dow Jones industrial average hit record high, advancing around 4.74 percent during the thir

d quarter. Major European bourses except Norway advanced on the positive news from the US market and energy market.

Asian markets were booming over the third quarter. Seven of the top ten performing fund categories are Asian equities. Despite the military coup in Thailand, lower energy costs boosted ASEAN countries such as the Philippines and Indonesia. The MSCI Philippines Index advanced 26.18 percent and Indonesia Index gained 17.03 percent. India market rebounded strongly after falling heavily in the second quarter with the MSCI India index adding 17.59 percent. The Hong Kong market continued its uptrend with the Hang Seng index rising 7.84 percent in the third quarter, reaching a six-year high.

Overall, fund performance was satisfactory: 42 of the 50 Morningstar Categories posted positive returns, while fund performance ranged from the 23.24 percent gains of the JF Philippine to the 15.52 percent loss of JF Japan OTC Fund.

Top 10 Performing Fund Categories
The strong performance of IT sector as well as sustained foreign buying helped India market to recover from the sharp fall in the second quarter. According to JF Asset Management, foreign inflows into Indian equities were just under USD 2.4 billion in the third quarter. The macroeconomic environment is also very supportive to market sentiment. The GDP is growing at 9 percent; the export growth remains strongly; and the corporate earning growth is also higher-than expected. India Equity funds ranked the best performing category for the third quarter with an average 16.69 percent gain. Seven of the top 10 performing funds are India Equity funds. In addition, the performance of India Equity fund far surpassed the other categories, around 86 percent higher than the second best performing category- the Emerging Asia Single Country Equity. The top performer in this category, Aberdeen Global-India Opportunities Fund posted a 19.49 percent gain when the India Bombay SE100 index rose around 17.4 percent for the third quarter.

Thailand military coup increased uncertainty in surrounding area, which rattled the Asian financial market in September. However, Asian markets, especially the ASEAN countries, benefited from the widespread view of an end to the tightening cycle in the US and moderated inflation data due to subdued energy cost. All ASEAN markets outperformed the MSCI AC Asian Pacific ex Japan index in USD terms for the third quarter. Indonesia macroeconomic data so far this year were very supportive of a strong economy: national deficit was narrowed to one percent of the GDP, the benchmark interest rate has been cut for five times, and the GDP grew at around 5.4 percent for the third quarter. The Singapore market has been advancing over the third quarter as the government revised its economic growth forecast and the property market showed continued strength. Asian single country funds have outperformed under favorable Asian market conditions. The JF Philippine Fund, the best performing fund over the third quarter recorded a 23.24 percent gain for the third quarter and JF Singapore Fund posted a 10.23 percent gain. The Allianz GIS RCM Philippines Fund advanced 19.46 for the third quarter, ranking the third of the top 10 performing funds, and the Invesco ASEAN Equity Fund, the top performer of the ASEAN Equity category, recorded a 10.64 percent gain.

China markets continue growing strongly for the third quarter. China Equity category maintains its position as one of the top 10 performing categories. In fact, for the first three quarters this year, China Equity remained outperforming other categories and the Hang Seng China Equity Fund gained 51.24 percent as the top performer of China Equity funds over the same period.

The volatile market in the second quarter added the appeal of a high, stable yield of property sector in the third quarter. An expectation of the end of the US tightening cycle boosted the property sector. Office sector was improving greatly in Japan and Europe. REITS in Europe are growing steadily and rapidly with the expected introduction of REITs in the United Kingdom and Germany next year. The Morgan Stanley SICAV European Property Fund leads the category by gaining 14.56 percent for the third quarter and Henderson HF-Pan European followed by a return of 12.4 percent.

Bottom 10 Performing Fund Categories
As oil and other commodity prices dropped sharply in the third quarter, Natural Resources Equity posted an 8.74 percent loss on average as the worst performing category. There is nothing better for Gold and Precious Metal equity, losing 5.4 percent for the quarter. Energy is by all means a speculative investment due to its political and economic importance.

The big dip in oil price and other commodity prices also caused troubles at hedge funds as well as Derivatives and Warrants funds. Amaranth Advisors has reportedly lost $6 billion within two weeks primarily on bad natural-gas bets, prompting observers to wonder whether heavy use of derivative instruments by hedge funds will eventually cause an economic crisis. Oppenheimer Real Asset Futures Fund posted the greatest loss of 14.02 percent for the quarter while MLIIF New Energy Fund was the best performing fund within Natural Resources Equity Category by slumping 2.32 percent.

Despite better-than forecasted corporate earnings for the first-half of financial year and growth in domestic demand in Japan, Japan reported weaker-than-expected GDP growth data for the second quarter. Market was oversold moved by excessively pessimistic views on corporate performance, which proved largely unfounded. A weak Yen also eroded some gains for investors.

Japan small/mid cap stocks detracted mostly during the third quarter as risk aversion was heightened. However, according to the latest report released in October by the Bank of Japan, Japan's economy remains expanding moderately supported by rising consumer spending, brisk corporate activity and continued growth of exports. Such underlying trends should be supportive of a positive performance over long term. Japan Equity fund slipped 1.79 percent on average for the third quarter while Japan Small/Mid Cap Equity posted an 8.16 percent loss, with the JF Japan OTC Fund the worst performing fund of this category, slumping 15.51 percent.

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