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Asian Equity: Surprising bright spots in Taiwan and China
Asia was not immune from the gloomy global economic outlook in the first quarter of 2008, but there was just enough positive news in the area to push the average fund in the broad Morningstar Asia-Pacific ex-Japan Equity category down 0.6%. In contrast, the Asia-Pacific with Japan Equity category lost 7.22%, reflecting the poor performance of Japanese equities, which was accentuated in Europe by the Yen's depreciation relative to the pound and Euro.
| Morningstar Category | Total Ret 3 Mo (Qtr-End) GBP | Total Ret 3 Mo (Qtr-End) EUR | Total Ret 3 Mo (Qtr-End) USD | Total Ret 3 Mo (Qtr-End) JPY |
|---|---|---|---|---|
| Taiwan Small/Mid-Cap Equity | 7.89 | 12.61 | 7.56 | 17.19 |
| Taiwan Large-Cap Equity | 7.37 | 12.07 | 7.05 | 16.63 |
| China Equity | 5.26 | 9.87 | 4.94 | 14.34 |
| Greater China Equity | 2.33 | 6.80 | 2.01 | 11.15 |
| Australia & New Zealand Equity | 0.95 | 5.37 | 0.64 | 9.65 |
| Asia-Pacific ex-Japan Equity | -0.56 | 3.79 | -0.86 | 8.02 |
| Korea Equity | -1.81 | 2.48 | -2.11 | 6.65 |
| Hong Kong Equity | -1.99 | 2.30 | -2.29 | 6.46 |
| ASEAN Equity | -4.42 | -0.24 | -4.71 | 3.82 |
| Malaysia Equity | -4.70 | -0.53 | -4.99 | 3.52 |
| India Equity | -5.89 | -1.77 | -6.18 | 2.23 |
| Asia-Pacific with Japan Equity | -7.22 | -3.16 | -7.51 | 0.78 |
| Singapore Equity | -8.73 | -4.74 | -9.01 | -0.86 |
| Japan Large-Cap Equity | -15.50 | -11.80 | -15.76 | -8.21 |
| Japan Small/Mid-Cap Equity | -16.01 | -12.33 | -16.26 | -8.76 |  |
Taiwan proved the most resilient market in the region. Morningstar’s Taiwan Large-cap Equity category gained 7.37%, led by technology stocks, and outran all Asian rivals in the quarter. Although some large tech players, such as TSMC, are still expecting headwinds, they rebounded after big losses in the fourth quarter of 2008. The average fund in the Greater China Equity category rose 2.3%. According to Morningstar’s holding data, the top 20 funds held an average of 33% assets in Taiwanese equities, while the bottom 20 help just 23%. On a sector basis, Greater China equity funds with overweight positions in technology stocks and underweight positions in financials tended to outperform over the first quarter.
In 2009, portfolio managers of broad Asia Pacific Equity funds are paying more attention to Taiwan, Philippines and China, which has also been resilient. Chinese equities, underpinned by the RMB 4 trillion stimulus package, fared better than most Asian and Western peers. Many portfolio managers of Asia Pacific Equity funds have been looking for beneficiaries of the stimulus, such as infrastructure stocks, and these stocks fared well last quarter. On the other hand, many managers have trimmed exposure to Korean and Singaporean equities. Banks in those countries have been hard hit by non performing loans.
US Equity Funds: Value funds slump; growth rules
US Equity fund returns were broadly split by style in the quarter. Specifically, growth issues outperformed value markedly. Investors in US equities are according the greatest favour to large businesses with manageable debt levels, such as wide-moat stalwart Coca-Cola. Technology and Internet-related companies such as Google, Apple and Qualcomm also fared well. They don't have the steady revenues and earnings of Coke, but they have solid balance sheets. All three have equity/asset ratios of 50% or more, suggesting strong financial health.
As elsewhere, financials, including banks and real estate issues, drove down the value indices, as credit remains tight, and firms with debt struggle both to refinance and in some cases to make interest payments.
| Morningstar Category | Total Ret 3 Mo (Qtr-End) GBP | Total Ret 3 Mo (Qtr-End) EUR | Total Ret 3 Mo (Qtr-End) USD | Total Ret 3 Mo (Qtr-End) JPY |
|---|---|---|---|---|
| U.S. Large-Cap Growth Equity | -4.53 | -0.35 | -4.82 | 3.71 |
| U.S. Mid-Cap Equity | -7.41 | -3.36 | -7.70 | 0.57 |
| U.S. Large-Cap Blend Equity | -9.39 | -5.43 | -9.67 | -1.58 |
| U.S. Small-Cap Equity | -11.11 | -7.22 | -11.38 | -3.45 |
| U.S. Large-Cap Value Equity | -12.25 | -8.41 | -12.52 | -4.68 | |
This equity performance was clearly reflected in the Morningstar fund categories: The best performing fund category was US Large-Cap Growth--down 4.5%--reflecting the generally heavier emphasis of these funds on technology issues and lower emphasis on financial services. The strength also owes in part to the notably lower debt-to-cap ratios of the holdings in these funds. Funds in the Large-Cap Value category were the worst performers, falling 12.3% on average. This reflects their larger stakes in financials and willingness to own cheaper, but somewhat more troubled, companies at a time when investors continue to seek certainty. US Small Cap Equity was close behind, falling 11.1% on average--the loss is a marked split from the European trend of small-cap outperformance. We note in this respect that US Small Cap funds have holdings with much lower ROE and ROA figures than their large-cap counterparts, an indicator of quality that may account for their sluggishness in a market where investors remain attuned to risk.
