Fund Performance Review (2Q2007)

Ample liquidity worldwide, binge of M&A activity and healthy corporate earnings pushed the broad market higher. MSCI World Free Index gained 5.82 percent for the second quarter.....

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Ample liquidity worldwide, binge of M&A activity and healthy corporate earnings pushed the broad market higher. MSCI World Free Index gained 5.82 percent for the second quarter. Regionally Asia ex Japan equities continued its five-year rally as MSCI AC Pacific Free ex Japan gained 13.4 percent for the second quarter. Although the subprime concerns spurred risk aversion and the ten-year U.S. treasury yield once crossed above the Federal benchmark rate, S&P 500 went up 6.32 percent bolstered by corporate buyouts and strong performance of resource stocks.

Latin America led the way of general emerging markets with MSCI Latin America returning 18.7 percent and MSCI Emerging Markets Index advanced 14.1 percent.

Latin America equity funds produced an average return of 19.4 percent. Despite strong performance of general emerging markets, Eastern Europe was laggard against others, owing to Russia's lackluster performance. MSCI EM Eastern Europe Index returned 3.06 percent while MSCI Russia edged down 0.84 percent for the second quarter.

Although energy prices keep climbing towards all-time high, Russia equities' performance was disappointing as results of heavy IPO pipelines drained market liquidity and political tension between Russia and other European countries mounted. The other three 'BRIC' countries, Brazil, India and China returned 22.9, 20.4 and 23 percent respectively and sent MSCI BRIC Index up 16 percent for the quarter.

For the second quarter equity funds outperformed against fixed income funds with China equities topped the performance league. Fund performance ranged from the 44.2 percent gains of the JF China Pioneer A-Share Fund to the 15.6 percent loss of JF Japan OTC fund.

Top Fund Categories
ASEAN markets including Singapore, Malaysia and Indonesia repeatedly hit all time high, thanks to strong domestic economies, supportive macroeconomic policy moves and sustained foreign buying interest. Singapore's economy expands 12.8 percent for the second quarter, much faster than expected buoyed by construction and property sectors. Singapore equity funds posted an average return of 14.7 percent as Straits Times Index gained 9.8 percent. Allianz GIS RCM Singapore fund led the Morningstar Singapore equity category by returning 22.5 percent.

Some attractively valued markets in Asia like Taiwan and Korea saw strong capital inflows over the quarter as valuations of other Asian markets are stretched. The average P/E of South Korea remains at 10x and Taiwan Weighted Index's average P/E is around 16x, lower than MSCI AC Asia Pacific ex Japan's 18x. In South Korea, recently signed U.S.-South Korea free trade agreement is expected to benefit Korean economy by growing trade and investment. Supportive macro policies as well as strong inflows boosted Korea's KOSPI up 20 percent over the quarter.

Taiwan Weighted Index hit seven-year record high in June as foreigner rotate out of priciest markets. However, Taiwan economy is still weak and continues to rely heavily on the technology sector, a global rather than domestic play. The General of Budget, Accounting and Statistics forecast this year Taiwan GDP's growth rate would reach 4.38 percent, lower than last year's 4.68 percent because of weaker global economy. Over the quarter, Morningstar Korea Equity category returned 23.1 percent and Taiwan Large Cap Equity category returned 16.4 on average.

Domestic liquidity in China keeps flushing into equity markets. The PBoC has raised its benchmark interest rate three times and bank's deposit reserve ratio five times since this year. However, the latest CPI signaled heightened inflation pressure and the real interest remains close to zero or even negative. In addition to monetary policy, Chinese government also actively implemented fiscal policies to restrain liquidities from overheated stock markets. In May the government tripled stamp duty on shares and recently the Ministry of Finance issued a 1.55 trillion Yuan (approximately 200 billion USD) of special treasury bonds to alleviate abundant liquidity. Despite continuous austerity measures taken by mainland government, China equity market continued its rally. The Shanghai and Shenzhen 300 Index posted a stellar return of 35.3 percent for the second quarter and had a year-to-date return of 84 percent.

China equity funds topped the performing league again by returning 24.3 percent on average for the second quarter, recovering from the market setback in early June. JF China Pioneer A-share Fund, one of the QFII funds available in Hong Kong retail markets, lead the league by returning 44 percent and the iShares FTSE/Xinhua A50 China Tracker advanced 29 percent. Led by strong A-shares performance, Hang Seng China Enterprises Index advanced 24.8 percent for the quarter and Hang Seng IS – China H-Share Index Leveraged 150, the worst performing China equity fund in the first quarter, ranked the second with a return of 41 percent.

Bottom Fund Categories
The interest rate hikes by the ECB and BOE began to weigh on the European property securities and the U.S. subprime woes had negative impact on global property funds. As end of June, the European property securities has lost 7.4 percent year to date with the UK having the largest impact with a drop of 17.2 percent. Sector Equity Real Estate Indirect- Europe went down 10.2 percent on average with Morgan Stanley SICAV European Property losing 10.7 percent.

Although Japan's economy shows sign of recovering, domestic demand sentiment remains weak. The Yen carry trade as well as reaffirmation of raising interest rates by the BoJ sent both Japanese equities and Japan bond down. For the second quarter, MSCI Japan edged down 0.7 percent while MSCI Japan Small Cap Index slumped 3.49 percent. Morningstar Japan Small/Mid Cap equity category lost 3.67 percent and JPY Bond slumped 5.28 percent on average. Schroder ISF Japanese Equity Alpha leads the category by returning 3.13 percent..

On fixed income side, short-term bonds outperformed long term ones as interest rate hike worries mounted on increasing oil prices. Corporate bonds investors suffered as debt rating downgrades on U.S. subprime securities triggered a worldwide selloff. Emerging market bonds, especially emerging Europe bonds, outperformed against others with Baring Emerging Market Debts Fund returning 5.68 percent over the second quarter.

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Editorial & Research Team, Morningstar Asia Ltd. can be reached at
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