Morningstar's Gregg Wolper, a senior fund analyst, looks back at the first half of the year in Morningstar fund categories. (Please note the categories and performance figures mentioned refer to the U.S. fund industry.)
When Morningstar created a new category last autumn to house the plethora of China-related funds that had appeared on the investment scene, we cautioned that we were not making a market call in favour of China or encouraging people to buy the funds. The change simply had become necessary from an administrative standpoint. The sheer number of China funds was overwhelming the Pacific/Asia ex-Japan category.
In hindsight, it seems we should have gone further and issued a warning: "Alert! When the fund industry pumps out so many funds of a given type that we need a new category to contain them, they might be ready to slow down."
Eastern Worries
The first half of 2011 is now in the books, and the China-region category did not fare well. It had the worst performance of Morningstar's 14 international-stock groups, with a loss of 3.1%. In second-to-last place was Japan-stock, which suffered a 2.6% decline.
It's no mystery why both categories struggled. In China, fears of slowing growth and rising inflation made investors cautious, and recent accusations of faulty accounting at a number of smaller companies have further dented confidence. In Japan, the earthquake, tsunami, and ongoing nuclear crisis have created misfortune and uncertainty for millions in that country, and the economy and stock market were strongly affected as well. The market quickly recovered some of the deep losses it suffered in the first two days after the earthquake, but not all of them, as Japanese companies warned that they were having a variety of troubles related to the crises.
Meanwhile, China wasn't the only problem for funds in the often-hot diversified emerging-markets category. India's stock market, also afflicted by worries about rising interest rates and inflation, suffered an even-greater decline than China's did, and Brazil was sluggish as well. Largely as a result, the category landed 0.4% in the red.
By contrast, funds investing in a region attracting plenty of negative attention posted surprisingly good results in the first half. The best performer of all the international-stock categories was Europe equity, in spite of the Greek debt crisis, concerns about debt woes and austerity legislation in several other countries, and unimpressive growth rates in many areas of the continent. The category gained 6.3% in the first half.
Size and Style Effects
For much of the past decade, small and mid-size companies have outpaced the giants in international stock markets. Not so in this year's first half. Therefore, this factor did not have a significant impact on the performance of individual funds. The same goes for style considerations. In many periods, value outperforms growth by a wide margin, or vice versa. But in the past six months, that effect was muted. The value side came out ahead in the large-cap and small-/mid-cap categories, but not by much.
In fact, a look at the table of category results shows the groups tightly bunched. Except for international large-value--the best performer of the broad foreign style-box groups with a 5.2% gain--the other international style-box categories all landed in a range between 3.4% and 4.2%.
