First Quarter in Funds: Performance and Trends
Riskier areas fare better in Q1; we review all fund categories and key industry trends.
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European Regional Equity: Small caps in favour
The trend for small-caps to hold up better than large-caps held true in Europe as well in the UK. In both the Europe ex-UK and pan-European equity category groups, small- and mid-cap categories outperformed large-cap categories. The reasons are similar to those in the UK--namely, big cap banks, where these funds had little if any exposure, fared poorly. They also had little exposure to struggling large-cap pharmaceutical, utility, and consumer staples issues and were coming from a low base after a terrible performance through the credit-crunch.
| Morningstar Category | Total Ret 3 Mo (Qtr-End) GBP | Total Ret 3 Mo (Qtr-End) EUR | Total Ret 3 Mo (Qtr-End) USD | Total Ret 3 Mo (Qtr-End) JPY |
|---|---|---|---|---|
| Europe Small-Cap Equity | -9.14 | -5.16 | -9.42 | -1.30 |
| Eurozone Small-Cap Equity | -9.59 | -5.64 | -9.87 | -1.80 |
| Eurozone Single Country Equity | -10.34 | -6.42 | -10.61 | -2.61 |
| Europe Mid-Cap Equity | -10.71 | -6.80 | -10.98 | -3.01 |
| Europe Large-Cap Growth Equity | -11.41 | -7.53 | -11.68 | -3.77 |
| Eurozone Mid-Cap Equity | -13.15 | -9.35 | -13.42 | -5.66 |
| Europe Large-Cap Blend Equity | -13.40 | -9.61 | -13.67 | -5.93 |
| Europe Large-Cap Value Equity | -14.70 | -10.97 | -14.97 | -7.35 |
| Europe ex-UK Equity Large Cap | -14.85 | -11.12 | -15.11 | -7.50 |
| Eurozone Large-Cap Equity | -16.42 | -12.76 | -16.68 | -9.21 |  |
Norway Equity: Powered by a comeback in energy
The Morningstar Norway Equity category was the strongest developed Europe category in 1Q 2009, rising 4.35%. Funds in the category benefited immensely from the energy rally: The sector constitutes 50% of prominent local market indices and StatoilHydro typically accounts for 30% of broad indices on the Norwegian market. Such concentration can cut both ways, however. One of the Norwegian market’s key stocks, Telenor, was hit by problems in its Russian operation, demonstrating the stock-specific risk that investors face in the country.
The average fund in the Norway Equity category lagged the OBX, OSEBX and OSEFX indices, which are the most prominent benchmarks in the Norwegian market. These indices had returns of 6.4%, 4.4% and 3.5% respectively. The average fund in the category devoted 46% of equities to the energy sector at the end of February. Energy provided a return of 3.4 % in NOK terms. In a sharp break from other European markets, financials provided a positive return of 8.6% in NOK terms. The average Norway Equity fund holds 7% of its equity exposure in the sector.
Industrials, materials and telecoms all dragged on returns, with the average Norway Equity fund holding 13.8%, 12.5% and 6% of equities in these sectors respectively. Industrials fell 7% in NOK terms, materials lost 4.5% in NOK and telecom services dropped 16.7 % in NOK from year end through 31 March.
| Morningstar Category | Total Ret 3 Mo (Qtr-End) GBP | Total Ret 3 Mo (Qtr-End) EUR | Total Ret 3 Mo (Qtr-End) USD | Total Ret 3 Mo (Qtr-End) JPY |
|---|---|---|---|---|
| Russia Equity | 8.79 | 13.55 | 8.45 | 18.17
|
| Norway Equity | 4.35 | 8.92 | 4.03 | 13.35
|
| UK Small-Cap Equity | -1.98 | 2.30 | -2.28 | 6.47
|
| Sweden Small/Mid-Cap Equity | -3.56 | 0.66 | -3.86 | 4.75
|
| UK Mid-Cap Equity | -6.68 | -2.60 | -6.96 | 1.37
|
| Portugal Equity | -7.14 | -3.08 | -7.43 | 0.87
|
| Sweden Large-Cap Equity | -7.39 | -3.34 | -7.67 | 0.60
|
| UK Large-Cap Growth Equity | -8.01 | -3.99 | -8.29 | -0.08
|
| France Small/Mid-Cap Equity | -8.97 | -4.98 | -9.25 | -1.12
|
| UK Large-Cap Blend Equity | -9.07 | -5.09 | -9.35 | -1.23
|
| Austria Equity | -9.14 | -5.16 | -9.42 | -1.30
|
| Belgium Equity | -10.49 | -6.57 | -10.76 | -2.77
|
| Finland Equity | -10.74 | -6.83 | -11.01 | -3.04
|
| UK Large-Cap Value Equity | -10.84 | -6.94 | -11.12 | -3.16
|
| Denmark Equity | -12.39 | -8.56 | -12.66 | -4.84
|
| Netherlands Equity | -14.31 | -10.57 | -14.58 | -6.92
|
| Germany Small/Mid-Cap Equity | -14.47 | -10.73 | -14.74 | -7.10
|
| France Large-Cap Equity | -15.07 | -11.36 | -15.33 | -7.75
|
| Switzerland Small/Mid-Cap Equity | -15.43 | -11.73 | -15.69 | -8.14
|
| Switzerland Large-Cap Equity | -15.44 | -11.75 | -15.70 | -8.15
|
| Italy Equity | -16.15 | -12.48 | -16.41 | -8.92
|
| Spain Equity | -16.92 | -13.29 | -17.18 | -9.76
|
| Germany-Large Cap Equity | -19.16 | -15.62 | -19.41 | -12.19
| |
German Equity: Lack of resource issues, cyclical bias hit German Equity funds hard
At the other end of the European spectrum, industrial cyclical exposure and a lack of energy and mining issues dragged down German large caps relative to European peers, causing Morningstar’s Germany Large Cap Equity category to lose more than 19% in the first quarter--the worst developed Europe performance for the period. Automobile stocks VW, Daimler and BMW were hammered, along with industrial giant Siemens. Prominent German contrarian fund manager Jürgen Meyer holds in his EUR 500 SEB Aktienfonds approx. 25% in automobile stocks. Utility heavyweight EON lost ground in a pretty brutal manner given the defensive role most companies are assumed to play in a portfolio.
Morningstar’s German Small Cap Equity category fared two percentage points better than the broader German Equity category. Most German equity fund offerings following an all-cap approach are already heavily underweight in the small- and mid-cap space. This relative dearth of selling pressure as well as the lack of exposure to utilities and large industrial conglomerates helped give these offerings a slight edge over their large-cap rivals.
Swiss Equity: No longer a safe haven
Morningstar’s Swiss Large Cap Equity category fared poorly, losing nearly 16% as key defensive issues that had worked well in 2008 gave up ground. Swiss equity offerings traditionally show a tilt to defensive sectors like pharma and consumer staples, but in 1Q 2009, issues such as consumer giant Nestlé, and drugmakers Novartis and Roche lost their safe haven status for fund managers and investors. These names appear frequently among the top holdings of European and global equity funds, and are oft praised by fund managers for their defensive cash generating abilities. However, Nestlé, Novartis and Roche are currently showing up as growth or even high growth stocks in the Morningstar style box, indicating that pricing may be overly ambitious for defensive sectors.
Austrian Equity: On the way back?
Austrian stocks showed impressive resilience after heavy losses in 2008. Reflecting this, the average fund in Morningstar’s Austrian Equity category lost just 9.1% for the first quarter. This is somewhat surprising: The Austrian equity market is often viewed by institutional investors as a safer way to play Eastern Europe--but in this case, we note that Eastern Europe ex Russia has fared pretty badly, yet Austrian Equity funds remained relatively stable. This owes in part to the strength of large market constituents such as Telekom Austria, Raiffeisen International Bank Holdings, and energy group OMV. Smaller-cap issues such as property firms Immoeast Immbolien Anlagen and Immofinanz Immbolien Anlagen, and online gaming concern bwin Interactive Entertainment have also rallied sharply from lows, aiding some funds in the category.
France Equity: Small was beautiful, or at least less ugly
Morningstar’s French Large Cap Equity category suffered heavy losses in the first quarter, falling roughly 15%. The losses were in line with the major Paris stock index CAC 40, dragged down by banks like Societe Generale and insurers such as Axa. The French Small & Mid Cap Equity category, which was less exposed to the financials sector, lost only half as much. Fund managers have begun to move away from large caps, at the same time moving to the value side of the Morningstar style box. The smaller-cap tilt led to French large cap funds gaining an average of 3.7% in the month of March, while the CAC 40 lost 7%. In the French Small and Mid Cap category, the best performer was Raymond James Microcap with a positive return of 2.7%.
Italy Equity: The cash-heavy and the financials-light won the first quarter
During the first three months of 2009, the global financial crisis continued to buffet the Italian stock market. On a relative basis, the Italian financial sector performed worse than the overall market as measured by the MSCI Italy, though in the last part of the quarter, the recovery of large banks, such as Unicredit and Intesa Sanpaolo, contributed to reversing this trend. Not surprisingly, given conditions, the best performing funds in the Morningstar Italy Equity category in the first quarter were those that were positioned in a more defensive way: funds that were underweight financials, such as Motus Sicav Italian Equity or Symphonia Azionario Italia Small Cap, and funds with a large component of cash, such as Ducato Geo Ita Alto Potenziale and Vegagest Azionario, were able to limit losses during the market downturn.
Spain Equity: Smaller caps and Telefonica were the places to hide
As was the case across most of Europe, the first quarter was negative for funds in Morningstar’s Spanish Equity category. The average fund in the category suffered a loss of 16.9%. That’s better than the benchmark IBEX 35, which declined more than 13% during the same period. A few interesting insights can be extracted from the analysis of first quarter returns. First, as was the case across most of Europe, funds more heavily invested in small- and mid-caps performed much better than the average. A few good examples are BK Pequeñas Compañías (-3.0%) and Santander Mid Caps Iberia (-3.6%). That is consistent with the comparison between the MSCI Spain NR (-13% for the quarter) and the MSCI Spain Small Cap NR (-10.5%). In the other extreme of the rankings are funds that are still using leverage in their investment policy. Examples include BBVA Bolsa Ibex Quant (-21.3%), Foncaixa Bolsa España 150 (-19.6%) or Santander Aggressive Spain (-19.4%). There is also a tremendous difference in terms of sector returns. As in other countries in Europe, the Spanish banking sector suffered a lot during the first quarter (-21.3%) and top performers had a bit less in financials than did those at the bottom of the league tables. Meanwhile, the telecommunication sector, dominated by Telefonica, proved fairly defensive, falling 5.2% in EUR terms.
Netherlands Equity: A difficult start
The year did not start well for Dutch investors. Funds investing solely in Dutch equities lost an average of 14.3%. As with most markets, energy exposure was a key differentiator in the first quarter. The average energy exposure in the Netherlands Equity Category is 16.7% of assets, with Royal Dutch Shell the largest holding. Some funds have 25-30% of assets in energy, while funds that use the AEX Index as a benchmark has energy positions close to 0%. Not surprisingly, given the energy rebound of 2009, the worst performing funds in the Netherlands Equity Category were index funds offered by Aegon, ING, and Fortis that track the AEX-index.
Market-cap focus has also been an important factor in 2009, with smaller-cap focussed funds outperforming larger-cap focussed funds by a significant margin. This was in part because they had little exposure to battered financials relative to their larger-cap rivals. Dutch funds characterised by the Morningstar Style Box as small- or mid-cap, including Orange Fund, Delta Deelnemingen, Fortis Small Cap and all cap fund Delta Lloyd Nederland, faced lighter losses than their large-cap peers.
Belgium Equity: Financials and telecoms hurt funds
Funds investing in Belgium did a better job than their Dutch counterparts, but also lost money. The Morningstar Belgium Equity category suffered a loss of 10.5% on average with financials and telecoms being the biggest disappointments. Utilities and consumer goods such as Suez and Inbev surprised with gains of more than 20% in the first quarter.
Financial services stocks are still by far the biggest sector for funds in the Belgium Equity Category, but they have lost the glory they once had. For example, one year ago, the three biggest banks on the Belgian market (Fortis, KBC and Dexia) had a total weight in the Bel 20, the index of most important stocks, of 37%. Now they account for only 7.5%. Still, the average fund in the Belgium Equity category has 27% of assets invested in financials with Groupe Bruxelles Lambert the most popular holding, and Fortis the most controversial. Fortis shareholders will vote next month on a new agreement between the Belgian government and BNP Paribas after a third round of negotiations. At this time, however, it remains unclear what will happen with Fortis Investment Management.
