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Emerging markets equity funds soar in quarter two

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Fund performance in quarter two 2009 showed a continued return to risk, with investors finding the best performances in emerging markets, smaller cap funds and in lower quality credit b

Fund performance in quarter two 2009 showed a continued return to risk, with investors finding the best performances in emerging markets, smaller cap funds and in lower quality credit bonds, according to research by Morningstar.

Fund flows followed the stronger performers to some degree, with large inflows seen in the emerging markets and Asia Pacific ex Japan sectors.

India equity funds saw the best performances, delivering an average return in the Morningstar India Equity category of 37.41 per cent. Turkey took second place across the board, with an average quarterly return for equity funds of 35.57 per cent.

Within the developed economies, funds focussed on UK small cap equities delivered the best performances, with the Morningstar UK small cap equity category posting a 22.52 per cent return.

‘As was the case late in the first quarter, we have seen higher risk offerings particularly single country emerging markets funds outperform,’ says Christopher Traulsen, director of fund research for Morningstar Europe and Asia. ‘However, investors need to keep in mind the risks of such vehicles. In the case of single country emerging markets funds, we believe few investors need them and if they do need more emerging exposure, should consider a global emerging markets offering instead. The broader mandate allows more scope for the fund manager to add value and limits country specific risk.’

Top performers by sector were real estate indirect (Asia), financials and private equity, delivering returns of 21.97 per cent, 21.67 per cent and 20.44 per cent respectively.

Conversely, last quarter’s top performer precious metals lost some of its gains and fell 2.95 per cent.

Biotechnology also fared poorly, down 4.86 per cent, and real estate (direct) finished last, down 6.24 per cent for the quarter. Defensive categories such as sector equity healthcare and sector equity utilities also fared poorly.

In the UK, UK mid cap equities delivered an average 15.34 per cent increase, and UK large cap equities just over 12 per cent. Of the ten largest UK equity funds, the M&G Recovery Fund achieved the highest quarterly performance, gaining approximately 17.09 per cent. Invesco Perpetual Income and Invesco Perpetual High Income, the largest equity fund offerings in the UK market, delivered 7.9 per cent and 6.70 per cent respectively, significantly underperforming their Morningstar UK large cap value peer group.

In Europe, the northern European equity fund markets of Denmark, Finland, and Austria led the European equity fund averages, with quarterly performances averaging approximately 20 per cent each.

Swiss equity funds disappointed, delivering the lowest performance of all equity fund categories in Europe. Swiss large cap equity achieved 3.59 per cent average growth, and the Swiss small mid cap equity category returned 10.71 per cent.

Across Asia, cyclical issues were in favour. The top 20 performing funds held an average of 13 per cent of assets in the consumer discretionary sector and 17 per cent in technology stocks. India equity funds delivered the best performance on average (+37.4 per cent), with Singapore equity funds next, achieving an average 28.54 per cent upturn. China equity funds delivered an average return of 18.6 per cent, solid, but far below the continent’s leaders. Funds in the Asean equity category also proved strong, rising 23.74 per cent on average.

Japanese equities dragged Asian regional equity fund performance, with the average fund in the Japan large cap equity category rising just 6.41 per cent.

US equities also performed poorly. The US mid cap equity, US large cap growth equity, and US large cap blend equity categories were the worst performing equity categories worldwide at 3.13 per cent, 2.12 per cent, and 1.72 per cent respectively. The Morningstar US small cap equity category offered slightly improved returns at seven per cent, and the US large cap value category rose by 4.3 per cent.

The second quarter showed a clear swing away from government bonds, with funds invested in high yield bond bonds and corporate bonds performing best. Funds in the Morningstar sterling high yield bond category returned 17.3 per cent on average, whist funds in the sterling corporate bond category returned 9.4 per cent. In contrast, the average fund in the sterling government bond category lost 0.74 per cent.

Across the industry, fund closures remained extremely high, and a trend of continuing note. Year-to-date for 2009, some 3,821 fund classes have so far merged or liquidated. This compares to 5,223 in 2008, 3,442 in 2007, and 1,565 in 2006, giving a projected annual increase of 46 per cent by year end.

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