The Quarter in Review: How did Funds Perform?
Rising commodity prices and a sinking financials sector dominated second quarter fund results, but they weren't the only factors to have an impact.
Two stories dominated a rocky second quarter of 2008: Commodities, and the ongoing crisis among financials stocks. Also notable was the continued downturn in Chinese and Indian shares, as well as a patch of relative strength of US equities.*
Economic Sector Funds: Black Gold Rules the Day
With oil prices surging past $140 US per barrel and food and metals prices soaring, the two best performing Morningstar Categories for the second quarter were Sector Equity: Energy, and Derivative Commodities. Energy funds were up 14.3% on average (7.5% for the year to date). Derivative Commodities offerings were essentially even with energy, rising 15.3% for the quarter, but had a much stronger first quarter, resulting in a 31% year to date rise).
| Morningstar Category | Average Return % |
|---|---|
| Sector Equity Energy | 14.3 |
| Derivative Commodities | 14.3 |
| Sector Equity Industrial Materials | 5. 5 |
| Sector Equity Biotechnology | 1.3 |
| Sector Equity Technology | 1.2 |
| Sector Equity Utilities | 0.3 |
| Sector Equity Health Care | -0.5 |
| Sector Equity Real Est. - Direct | -2.0 |
| Sector Equity Communications | -2.6 |
| Sector Equity Precious Metals | -3.4 | Sector Equity Consumer Gds & Svcs | -6.9 |
| Sector Equity Real Est. - Indirect - Asia | -8.0 | Sector Equity Real Est. - Indirect | -8.0 |
| Sector Equity Financial Services | -9.0 |
| Sector Equity Real Est. - Indirect - Europe | -14.1 |
At the other end of the spectrum, the financials crisis continued to take its toll with funds in the Morningstar Sector Equity Financials category dropping 9% for the period. Those funds with large bank weights were the hardest hit. Insurance offered steadier ground, but stock selection was important as issues such as AIG and mortgage and title insurers in the States dropped precipitously. Those financials funds with more of a tilt towards Asia generally outperformed their rivals. Certain offerings, including Jupiter Global Financials, which posted one of the smallest losses in the sector, benefitted from defensive moves into cash and bonds.
Real-Estate funds proved to be even worse performers. Morningstar's Sector Equity Real Estate Indirect and Sector Equity Real Estate Indirect - Europe fund categories both slid precipitously as listed real estate in the UK, Continental Europe, and the US dropped on a combination of tight credit and concerns about valuation levels in some of the most overheated markets. The broad Sector Equity Real Estate - Indirect category fell 8%, whilst the Europe focused category dropped 14%. Among Direct Property funds, those focused on UK property held up reasonably well, with an average loss of 1.5% in the quarter.
Style Mattered for Funds in 2Q
A clear style trend was evident in the second quarter, suggesting again that those who aren't aware of their style exposures may be taking more risk than they intend. Value oriented Morningstar Categories in Europe, the UK, and the US clearly underperformed their Blend and Growth peers. This owed principally to value managers traditional emphasis on financial services and limited willingness to pay up for surging resources issues. The trend across the market-cap spectrum was less clear, except in the U.S., where small and mid-cap funds notably outperformed large-cap oriented rivals.
| Morningstar Category | Average Return % |
|---|---|
| Europe Large-Cap Blend Equity | -3.6 |
| Europe Large-Cap Growth Equity | -3.2 |
| Europe Large-Cap Value Equity | -4.8 |
| Global Large-Cap Blend Equity | -1.2 |
| Global Large-Cap Growth Equity | -0.6 |
| Global Large-Cap Value Equity | -3.2 |
| UK Large-Cap Blend Equity | -2.6 |
| UK Large-Cap Growth Equity | -0.8 |
| UK Large-Cap Value Equity | -4.8 |
| US Large-Cap Blend Equity | -1.0 | US Large-Cap Growth Equity | 1.2 |
| US Large-Cap Value Equity | -4.2 |
Fund Performance Across World Regions
The biggest regional story in the second quarter continued to be China and India. The Morningstar India Equity category dropped 16% in the quarter, as fears mounted over inflation and slowing growth in India. China's drop slowed, but the news was still not positive: With concerns mounting about inflation and growth rates coming in, the Morningstar China Equity category fell 4.8%, after a 27.5% fall in the first quarter.
Rising commodity prices also dictated the top performing markets around the globe. Without exception, all are resources heavy; the Morningstar Latin America Equity category rose 9.5% in the period, Norway rose 8.3%, Canada jumped 8.2%, and Russia ended the quarter up 7.9%.
Other than China and India, the worst performing regional Morningstar categories in the second quarter included Taiwan Equity, Finland Equity, Sweden Equity, Spain Equity, Portugal Equity, and Belgium Equity.
| Morningstar Category | Average Return % |
Morningstar Category | Average Return % |
|---|---|---|---|
| India Equity | -16.1 | Korea Equity | -6.1 |
| Taiwan Small/Mid-Cap Equity | -11.3 | Greater China Equity | -6.0 |
| Taiwan Large-Cap Equity | -10.5 | Switzerland Large-Cap Equity | -5.7 |
| Emerging Asia Single Country Equity | -10.4 | Asia-Pacific ex-Japan Equity | -5.3 |
| Finland Equity | -9.2 | Europe Large-Cap Value Equity | -4.8 |
| Sweden Small/Mid-Cap Equity | -9.1 | UK Large-Cap Value Equity | -4.8 |
| Spain Equity | -8.0 | Emerging Europe ex-Russia Equity | -4.8 |
| Sweden Large-Cap Equity | -7.6 | Eurozone Large-Cap Equity | -4.8 |
| Portugal Equity | -7.4 | China Equity | -4.8 |
| Belgium Equity | -7.2 | Italy Equity | -4.6 |
U.S. Equity Funds Show Improvement
The U.S. staged something of a mini-comeback in the second quarter: Despite its June swoon, US Equity funds, particularly those focused on small- and mid-cap shares and on large-cap growth shares, held up well. As with other regions, funds in the Morningstar U.S. Large-Cap Value Equity category fared worst due to their high financials exposure. The performance is a marked shift--US Equity funds have dramatically underperformed funds focused on other equity markets in recent years.
| Morningstar Category | Average Return % |
|---|---|
| US Large-Cap Blend Equity | -1.0 | US Large-Cap Growth Equity | 1.2 |
| US Large-Cap Value Equity | -4.2 |
| US Mid Cap Equity | 3.0 |
| US Small-Cap Equity | 2.5 |
European Fund Perfomance
Broad European Equity funds ended the quarter in negative territory, with most Morningstar Categories losing between 2.6% and 5%. The top performing Morningstar Category was Europe Mid Cap Equity, down 2.6% for the quarter. This was part of a broader trend which saw small- and mid-cap equities rebound to outperform large-caps. The style trends that held elsewhere around the globe also applied to Morningstar's broad European categories, with growth funds outperforming value offerings on the back of a financials underweight.
| Morningstar Category | Average Return % |
Morningstar Category | Average Return % |
|---|---|---|---|
| Norway Equity | 8.3 | Europe ex-UK Large-Cap Equity | -3.7 |
| Russia Equity | 7.9 | France Small/Mid-Cap Equity | -3.8 |
| Emerging Europe Equity | 3.5 | France Large-Cap Equity | -4.0 |
| Austria Equity | 3.1 | Nordic Equity | -4.1 |
| Germany Small/Mid-Cap Equity | 1.2 | Italy Equity | -4.6 |
| Germany Large-Cap Equity | -1.6 | Eurozone Large-Cap Equity | -4.8 |
| Denmark Equity | -2.3 | Emerging Europe ex-Russia Equity | -4.8 |
| Europe Mid-Cap Equity | -2.6 | Europe Large-Cap Value Equity | -4.8 |
| Eurozone Small-Cap Equity | -2.9 | Switzerland Large-Cap Equity | -5.7 |
| Netherlands Equity | -3.2 | Belgium Equity | -7.2 |
| Europe Large-Cap Growth Equity | -3.2 | Portugal Equity | -7.4 |
| Eurozone Mid-Cap Equity | -3.5 | Sweden Large-Cap Equity | -7.6 |
| Europe Small-Cap Equity | -3.5 | Spain Equity | -8.0 |
| Europe Large-Cap Blend Equity | -3.6 | Sweden Small/Mid-Cap Equity | -9.1 |
| Switzerland Small/Mid-Cap Equity | -3.7 | Finland Equity | -9.2 |
UK: Financials Hurt Value Funds
In the UK market, style trumped size. Funds in the UK Large-Cap Value Equity category, with their large financials exposure, posted a loss of 4.8%, the worst of the five Morningstar UK Equity categories. The top performer was UK Large-Cap Growth Equity, reflecting its comparatively heavier weights in commodities and light exposure to financials. UK Small-Cap Equity also held up reasonably well, down 1.6% for the period.
| Morningstar Category | Average Return % |
|---|---|
| UK Large-Cap Blend Equity | -2.6 |
| UK Large-Cap Growth Equity | -0.8 |
| UK Large-Cap Value Equity | -4.8 |
| UK Mid-Cap Equity | -3.5 |
| UK Small-Cap Equity | -1.6 |
Credit Exposure Boosts Bond Funds
Most mainstream bond categories fared better than equities in their respective regions. Credit risk was rewarded as, across currencies, high-yield funds beat investment grade offerings, and corporate-focused funds beat broader offerings and government-oriented funds. The table below gives bond fund category returns in local currency terms.
| Morningstar Category | Average Return % |
|---|---|
| Sterling Corporate Bond | -1.1 |
| Sterling Diversified Bond | -1.3 |
| Sterling Government Bond | -3.0 |
| Sterling High Yield Bond | 1.6 |
| Euro Corporate Bond | -0.6 |
| Euro Diversified Bond | -1.7 |
| Euro Government Bond | -2.2 |
| Euro High-Yield Bond | 2.4 |
| Dollar Corporate Bond | -1.7 |
| Dollar Diversified Bond | -1.7 | Dollar Government Bond | -1.8 |
| Dollar High-Yield Bond | 1.2 |
*Note: All returns in this article are stated in GBP, except for bond funds, which are given in local currency terms. All returns are preliminary figures as of 27 June 2008.
