Fund Performance Review (4Q2006)

The year of 2006 was a year of China. The MSCI China Index rose 35.7 percent for the fourth quarter and 78.1 percent for the whole year ....

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The year of 2006 was a year of China. The MSCI China Index rose 35.7 percent for the fourth quarter and 78.1 percent for the whole year, significantly outperforming the regional benchmark return of 7.7 percent and 10.4 percent for the same period. Improved corporate governance, strong economic and earning growth, and increasing foreign inflows altogether boosted the performance of China equities this year. All of the top 10 performing funds for the year of 2006 are China region funds.

Other emerging markets also remained buoyant during the fourth quarter with the Latin America stock markets among top performers as economic growth continued and inflation was eased in the region. The MSCI Latin America Inde

x reached record high in early December and rose by around 21 percent for the fourth quarter. The Latin America equity funds have staged four years of strong performance, gaining 46 percent on average in 2006.

This year has also seen dramatic turns of fortune for some funds. Japan Small/Mid Cap equity funds ranked among 2005's best performers, adding an average of 36.7 percent while losing 23.1 percent this year. In addition, some of this year's outperformers have taken a highly volatile path. Emerging-markets and commodities funds, for instance, suffered steep losses during the second quarter. But emerging-markets funds are now up 31 percent, while the average natural resources fund has gained about 17.8 percent for the year.

Overall, fund performance was satisfactory: 47 of the 50 Morningstar Categories posed positive returns this year, while fund performance ranged from the 160.3 percent gains of the Hang Seng IS China H-Share Index Leveraged 150 to the 40.2 percent loss of JF Japan OTC fund. For the fourth quarter the top three Morningstar fund categories are China equity funds, up 35.9 percent; Greater China funds, up 24.6 percent; and Latin America stock funds, up 23 percent.

Top 10 Performing Fund Categories
China equity funds trounced all other 49 Morningstar categories with a blistering 84.7 percent average return for the year. The performance of China Equity fund also far surpassed the other categories, around 57 percent higher than the third best performing category- the Latin America Equity over the fourth quarter. The top performer in this category, Hang Seng IS China H-share Index Leveraged 150 Fund posted a 160.3 percent gain when the Hang Seng China Enterprise index rose around 94 percent for the year. The Hang Seng China Equity fund, an actively managed portfolio, advanced 107 percent for the year.

The Singapore economy expanded at its fastest rate in 2006 with full year growth estimation around 7.7 percent. However, the dramatic turnaround of Thai foreign exchange controls within 24 hours last December cast some shadow on surrounding countries, especially ASEAN countries. Both Singapore stock funds and ASEAN equity funds were among the top 10 performing categories over the fourth quarter. The JF Singapore Fund, the best performing Singapore stock fund, gained 67.5 percent for the year. The GAM Singapore/Malaysia Fund was the best performing fund within ASEAN equity fund by gaining 58.3 percent for the year.

The emerging markets remain expanding fast, well supported by prospects for strong earnings growth and growing domestic demand as consumer spending in many emerging economies is boosted by rising wages and lower borrowing costs. Specifically, the BRICs (Brazil, Russia, India, and China) continued to prosper during 2006, proving their leadership among emerging markets. The MSCI BRIC Index advanced 52.9 percent in 2006, more than 29.2 percent gains of the MSCI Emerging Market Index. The Schroder ISF BRIC fund topped the emerging market category by gaining 24.1 for the fourth quarter and 53.6 percent for the year. The other two BRIC funds, Templeton BRIC fund and the HSBC GIF BRIC Freestyle fund also advanced 48.5 percent and 45 percent respectively for the year.

Thanks to gold prices rise in the fourth quarter, Gold and Precious Metal funds staged a rousing fourth-quarter rally with an impressive double digit average gain of 16.4 percent and 34.9 percent for the year. It is the sixth year in a line that the Gold and Precious Metal funds recorded double digit gains. The MLIIF World mining led the category by gaining 20.4 percent for the fourth quarter and Investec GSF Global Gold fund followed by a return of 17.1 percent.

Among sector funds, Real Estate funds, which are tied not to housing but mainly to income-producing office and retail properties, were the best performers with a 35.6 percent gain for the year. The Morgan Stanley SICAV European Property gained around 70 percent for the year, followed by Henderson HF-Pan European Property fund, up 68.8 percent. Heath Related equity funds lagged other sector funds, posting a 2.24 percent gains for the year of 2006. The Credit Agricole-Global Food & Healthcare fund led the category with a 13 percent increase for the year.

Bottom 10 Performing Fund Categories
Recent US data has been strong with US December retail sales showing the economy looking more resilient. In light of better-than expected labor data, the chance of a near-term rate cut by the US Fed is diminishing despite of a sharp drop in oil prices. Such news had negative impact on the performance of fixed income portfolios.

Among the bottom 10 performing Morningstar fund categories, five were fixed income portfolios. Japan Fixed Income funds slumped around 1 percent on average for the quarter, and lost 2.1 percent for the year. As British pound rose to record high against the USD, the UK Fixed Income portfolios were ranked No. 1 among 10 Morningstar Fixed Income categories. The UK Fixed Income fund advanced 8.55 percent for the year with Fidelity Funds Sterling Bond leading the category, gaining 14.2 percent.

The year's biggest laggard was Japanese small/cap stock funds with losing 2.2 percent for the fourth quarter and 23.1 percent for the year even though the Japanese market ended 2006 with the fourth consecutive annual rise. The Nikkei 225 gained 6.9 percent during 2006, boosted mostly by the large caps. The Livedoor scandal in early 2006 hurt small cap sentiment despite of their steady earnings growth. The best performing Japan Small/Mid Cap stock fund, Henderson HF Japanese Smaller Cos Fund, lost 16.2 percent for the year while the JF Japan OTC Fund continued being the worst performing fund of this category, slumping 40.2 percent for the year.

Editorial & Research Team, Morningstar Asia Ltd. can be reached at hksupport@asia.morningstar.com
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