Morningstar: European and Asian fund performance for Q1 2009

Morningstar, Inc. has released its quarterly review of fund performance for funds domiciled in Europe and Asia. All performance averages are based on Morningstar Europe and Asia fund categories and are quoted in pounds sterling unless otherwise stated.

Highlights of first-quarter 2009 fund performance include:

Selected higher-risk areas began to outperform: high-yield bond funds, small-cap equity funds and Russia and Latin America funds all fared better than the norm.

Among specialty funds, top performers were those in the Morningstar Sector Equity Precious Metals category, followed by Sector Equity Technology and Sector Equity Industrial Materials. Energy funds also fared well, with a small loss of 3.6%. Funds focused on financials, property, and utilities fared worst.

The industry continued to contract: The number of fund classes liquidated or merged increased more than 60% year on year; and merger and acquisition activity among fund houses continued to heat up, creating risks for fund investors.

The first quarter of 2009 was a difficult one, but there were some marked shifts from trends in 2008. Most notably, investors with a measured appetite for risk did well. Energy and mining shares firmed up, leading to strong performance from key emerging markets such as Russia and Latin America. The Morningstar Norway Equity category also benefitted from that market's high degree of energy exposure and beat all other developed Europe equity categories. High-yield bonds and small and mid-cap funds performed well, as did the technology sector.

In contrast, funds over-weight in financials and in property suffered. Defensive areas in favour in 2008 lagged, and funds that favoured healthcare, utilities and more defensive consumer issues tended to fall behind their peers this quarter.

Christopher Traulsen, CFA, director of fund research for Morningstar Europe and Asia, said, "Fund performance in the first quarter showed that investors are finding pockets of value among higher-risk areas, and that defensives may be waning."

Precious metals investors scooped the top returns for the quarter. Returning an average 13.3%, funds in the Morningstar Sector Equity Precious Metals category delivered the best showing of all Morningstar fund categories, benefitting from a revived investor interest in gold as a place to store wealth. Technology funds also performed well, delivering a modest average growth of 1.6%. Real Estate (Indirect), with an average fund loss of 20.4%, delivered the worst of all Morningstar sector categories.

Across the map, emerging markets offered strong gains. Investors in the Morningstar Russia Equity and Latin America Equity categories ended the quarter up with returns of 8.8% and 3.5% respectively. Asian equity funds also delivered, with an appetite for Taiwanese stocks bringing good performances, and China holding up well on the enormous stimulus plan announced by the Chinese government. The Morningstar Taiwan Small/Mid Cap Equity delivered the best performance at 7.9%.

In developed European markets, Norway stands out as the best and only positive performer. The Morningstar Norway Equity fund category returned an average of 4.4% with funds across the category benefitting from a rally in energy stocks. In sharp contrast with other markets, Norwegian financials showed a positive return of 13% in GBP terms.

In the United Kingdom, the best news is found among small- and mid-cap funds. The UK Small Cap Equity category lost just 1.98% over the quarter, faring better than all other developed European equity categories except for Norway Equity. The UK Mid-Cap Equity came in with a - 6.7% loss; UK Large-Cap Growth Equity lost 8.01%; the UK Large-Cap Blend Equity lost 9.07% and the UK Large-Cap Value Equity lost 10.8%.

Germany delivered the worst European results, with the German Large Cap Equity fund average down 19.2%. The Swiss Large Cap Equity fund category also disappointed, with big defensive stocks Nestle, Novartis, and Roche dragging the category to an average quarterly loss of 15.4%.

The Morningstar Europe ex-UK Small/Mid-Cap Equity and the Europe Small Cap Equity categories enjoyed low exposure to financials, and outperformed their large-cap cousins. In Spain, Telefonica proved a good defensive player, and somewhat counter to the general trend in Europe, select consumer and utility issues helped to offset woes among telecoms and financials in Belgium.

In the United States, funds geared toward growth outperformed those focused on value. The US Large-Cap Growth Equity category delivered an average return of negative 4.5%, with a preference for technology and energy preventing greater loss. Funds in the US Large-Cap Value category - oriented more heavily toward financials - lost an average of 12.3%.

Away from equities, some good performances were found in the bond fund market. Strong performances from low-grade investment bonds buoyed results, with the Morningstar Dollar High-Yield, Morningstar Sterling High-Yield, and Morningstar Euro High-Yield categories easily beating other bond categories in those respective currencies. Government bonds also performed relatively well, and short-duration funds continued to outpace their longer peers. Funds focused on investment-grade corporate issues lagged, held back by their high exposures to financials.

Industry wide, the quarter saw 1,439 fund class liquidations or mergers - an increase of 61.5% on the same period in 2008. Niche funds that populated the market in previous years are now under question as fund houses seek to maintain economies of scale and profitability.

"A scaling back of the funds market is needed", Traulsen said. "But too often we find that merger activity focuses on fund group profitability instead of the outcome for investors. We urge investors to keep an active watch out for how such events might affect their portfolios".