Fund Performance Review (August 2007): A Global War with Sub-prime Crunch

With US housing starts falling to 10-year low and US mortgage borrowers bleeding, global investors are worried about how far the credit jitters will extend to .....

YT Kum, CFA 14 September, 2007 | 0:00
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With US housing starts falling to 10-year low and US mortgage borrowers bleeding, global investors are worried about how far the credit jitters will extend to, igniting a deep correction in US market in mid-August. In this outbreak, central banks around the globe acted decisively to fight back. Central Banks of US, Japan, Australia, Canada and Russia pumped nearly 100 billions dollars into the market, proving their resolution to restore normalcy. The Fed also cut the discount rate from 6.25 percent to 5.75 percent, and this action arouses intensified speculations of a near-term Fed rate cut. Although it is still too early to say whether the rescue is successful, some investors have hailed for this, giving US major gauges a sharp turnabout, though they are still far from full recovery

. For the month, average US Large-Cap Growth equity fund, US Large-Cap Blend equity fund and US Large-cap Value equity fund posted 0.29 percent, 0.11 percent and -0.44 percent monthly returns respectively.

Asia: Affected, not yet recovered
Asian major markets were affected by the credit woes, and they have not yet been recovered. Among all Asian equity funds categories, Singapore equity fund, Malaysia equity fund and ASEAN equity fund performed disappointingly in August, slumping 7.53%, 11.49%, and 8.52% respectively. They slide from the top 20 fund category league to the bottom 20 for three-month performance, according to Morningstar.

However, investors view the deep correction was driven by US rather than weakening fundamentals as no particular negative news among ASEAN economies. The July inflation figure in Malaysia has proven that the inflationary pressure is in-check. Average Korea equity fund and Australia & New Zealand equity fund performed slightly better than ASEAN fund in August, with a negative 4.14 and 3.57 percent monthly returns respectively.

China, China and China
China related fund categories, namely, China equity, Great China equity fund and Hong Kong equity fund, stayed at the top three among all Morningstar Categories ranked by 3-month performance as of August end. China equity fund jumped 5.5 percent in August.

China's State Administration of Foreign Exchange announced a pilot programme allowing Chinese individuals to invest directly in Hong Kong equity market. This new policy, though far from materialized, helped Hong Kong equity funds to be fully recovered from the setback and pushed HSI to the new high. Although Taiwan market was lackluster in August, Great China equity fund performed strongly thanks to strong China equities.

Bottom Break
Sector Equity Real Estate Indirect – Europe and Sector Equity Real Estate Indirect fund have stayed behind all their peers at the league ranked by 3-month performance as of end of August. Although they registered a positive monthly gain of 1.78 percent and 1.89 percent respectively in August, they did not escape from the bottom10. Dollar High Yield Bond fund, despite in the center of concern to the recent sub-prime outbreak, managed a 0.67 percent monthly return in August to be out of the bottom 10 league.

JPY Bond fund ran the most successful recovery in August. JPY Bond fund ranked 79 out of 121 Morningstar Categories based on 3-month performance at July end while it jumped up to the tenth with a respectable monthly return of 3.70 percent in August. The huge improvement was largely attributed to the strengthening Japanese Yen due to the unwinding of carry trade.

Newts in the Top and Bottom
With rate cut speculation and withering investors' risk appetite, bond gained popularity in August, proved by declining yields of US Treasuries. Some bond fund categories, including Euro Global Bond fund, Dollar Diversified Bond fund and CHF Global Bond registered a good gain in August, making them among the top 20 league ranked by 3-month returns. Although gold traditionally acts as safe heaven, gold price edged up 0.94% during August. Sector Equity Precious Metals fund registered a loss of 6.35 percent to be among the bottom league.

Small-cap stocks were underperformers of the current wave of correction in Europe. Europe ex-UK Small/Mid Cap fund, Eurozone Small-Cap equity fund and Europe Small-Cap equity fund lost 5.15 percent, 4.80 percent and 4.52 percent respectively in August, underperforming other Europe equity categories. As for three-month performance, now they rank among the bottom 20 league for the first time this year.

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About Author

YT Kum, CFA  YT Kum is a consultant for Morningstar, contributing to manager selection and asset allocation activities in Asia, and is responsible for providing investment thought leadership on topics relevant to investors in Asia.

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