Fund Performance Review (February 2009): Toxic assets poisoning governments

in February – the newly confirmed Treasury Secretary Timothy Geithner announced a Capital Assistance Program on 10 February, which is actually a rebranding of the Troubled Assets Relief Program (TARP), which has only USD 350bn left to save the financial institutions. Furthermore, the Congress approved a USD 787 billion stimulus package in mid-February.

However, the TARP did not gain much applause from the very beginning because of the chaotic and unorganized procedure. Geithner unveiled more details of the Capital Assistance Program on 25 February, but it was still not clear enough to earn investors’ support. The US stock slumped further and DJIA closed at an 11 years low. The US equity ranked low in all Morningstar categories. Morningstar US Large-Cap Growth Equity was the best among the five US equity categories, reporting a 7.68 percent loss in February. The worst US equity category was the US Large-Cap Value Equity, which lost 11.75 percent in the same period.

Europe banking sector in deep distress
European stock markets dropped to the lowest level since 2003 due to dreadful economic data. In early February, Bank of England fiercely cut interest rate by 0.5 percentage point to the record low of 1 percent, whereas the European Central Bank kept the rates at 2 percent.

Alongside the rate cut, UK government also announced an Asset Protection Scheme in late February, to insure more than $500 billion pounds of bank’s toxic assets and to rescue the moribund banking sector. The Lloyds Bank and Royal Bank of Scotland Group, which lost $10 billion pounds and $24 billion pounds respectively, need further help from the government. The loss of RBS was the largest ever in the British corporate history.

It was a surprise to investors that ECB kept rates unchanged in February. The outlook of Europe was murky – manufacturing activities slowed down, economic confidence remained low, the fourth quarter economy contracted at its fastest pace in 13 years. Together with the worries that Central and Eastern Europe banking system may collapse, Europe stock market went down.

It is undeniable that the gloomy outlook dominated the investment world, but the UK government’s willingness to take prompt actions in helping banks to unload the toxic assets and determinative decisions to roll out stimulus packages are supportive to the Europe economy. UK and Europe equity funds performed better compared with the US one. Among all UK and Europe Equity Fund categories, UK Small-Cap Equity fund reported a relatively better result, dropped 3.92 percent in February. The Europe Large-Cap Value Equity fund recorded a loss of 9.71 percent, lagging behind its peers.

Asia stock markets polarized
In Asia, different countries’ performance was polarized. Taiwan, China and Greater China equity funds placed at the top quartile among all Morningstar categories. Thanks to the positive impact of stimulus plan and the stable internal demand. Greater China stock markets performed quite well in February. Greater China Equity Category lost 1.42 percent, China Equity dropped 1.96 percent, and Taiwan equity even reported positive return, Small/Mid-Cap Equity and Large-Cap Equity Category gained 3.45 percent and 2.82 percent respectively.

Unfortunately, Japan and Korea Equity met the Waterloo. Japan announced a 3.3 percent economy contraction in the 4Q08 on a qoq basis. On the other hand, Korea is not only facing economic downturn and slowed down of export, but also the drastic Korean won depreciation, which hurts Korea Equity fund seriously. Japan Large-Cap Equity funds and Japan Small/Mid-Cap Equity lost 12.67 percent and 13.77 percent on average, while Korea Equity category lost 15.29 percent, which was the worst performing category in February.

Commodity regained power
In economic turmoil, investors tend to lower their risk appetite and reallocate their asset to fixed income classes. In this financial tsunami, bond funds, especially government bond funds, again proved their defensive power. Dollar and Euro Government Bond Category posted good results in February, reporting thin loss of 0.1 percent and 0.39 percent respectively. Sterling Government Bond fund, which posted a slight gain of 0.2 percent, performed even better.

Commodities revived in February. Precious metals including gold and silver surged. The Sector Equity Precious Metals Category posted a 1.18 percent gain. Oil price stayed above US Dollar 40 per barrel and it underpinned Russia Equity funds, which is an oil dependent country. With a 4.33 percent surge, the Russia Equity Category became the best performing Morningstar Category in February.