"Q1 Performance Won't Change Fund Ratings"

VIDEO: Morningstar fund analyst Jeffrey Schumacher looks at how equity funds have performed in the sell-off

Holly Black 30 April, 2020 | 1:56PM
Facebook Twitter LinkedIn



Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jeffrey Schumacher. He is a fund analyst at Morningstar. Hello.

Jeffrey Schumacher: Good morning, Holly.

Black: So, you've been looking at equity markets across the globe and equity funds. What are some of the trends you saw in the first quarter of 2020 across equity markets?

Schumacher: Yeah. So, the first quarter of 2020 has proven to be an extraordinary and unique period but also a quite volatile one actually. So, markets initially started the year on a positive note but most already began to weaken in February and came increasingly under pressure in March driven by the rapid escalation and globalization of the coronavirus which has grinded the global economy to a halt as a result of the lockdowns enforced by governments in order to prevent the virus from spreading.

There was also another big factor that has caused the markets to sell off dramatically in this period which has been the historical question of the oil price. So, the oil industry actually suffered from a perfect storm basically as a demand shock that was driven by the global lockdowns was followed by a supply shock as Saudi Arabia swamp the oil market with fresh oil after a dispute with Russia about potential production cuts. So, overall, the impact of the Covid-19 crisis combined with the oil crisis have hit equity markets significantly in this period with the Morningstar Developed Market Index declining 20% in the first three months of the year.

Black: So, obviously, not all funds take the same approach. Did you notice any differences between the different styles of fund or the different Morningstar fund categories?

Schumacher: Yeah, certainly. So, there has been a lot of dispersion in performance among categories but actually also within categories. So, over the first three months of the year, we have seen growth stocks once again outperforming value stocks and thereby extending their impressive run. So, funds with a tilt to quality stocks or with a higher exposure to low volatility stocks or momentum did pretty well. Also, funds that were underweight mid and small cap stocks did pretty well. And in contrast actually dividend stocks which are actually known for their defensive traits didn't deliver this time on the promise as dividends got suspended or cancelled and that has put those stocks under pressure actually.

So, from a sector perspective, the global lockdowns have certainly impacted some of these sectors quite heavily, most notably the airline sector, for example, or luxury goods and retailers alongside financials and the oil industry. So, stronger performance has actually came from the healthcare sector and in particular biotechnology firms that did well. But also supermarkets and food delivery companies alongside ecommerce and software companies have performed relatively well versus the rest of the universe.

From a regional perspective, we have seen strong performances within the Asian region and especially within Chinese and Japanese stocks. US stocks also outperformed the broader market in contrast to European equities and UK equities actually that underperformed. And within emerging markets the picture was relatively mixed with Latin American countries and South Africa clearly lagging. So, the portfolio managers actually that were having some extra cash in their portfolios actually benefited from their position. Although, there were only a dozen of funds actually on our coverage list that had more than 10% of cash in their portfolios when entering the year.

Black: So, are you able to share with us the names of the couple of the funds that have caught your eye that outperformed or underperformed?

Schumacher: Yeah. So, within global equities, actually, the underperformance of the value style combined with the underperformance of some of the cyclical sectors in the universe has hit some of the Morningstar medalists. For example, Gold-rated Dodge & Cox Worldwide Global Stock, Silver-rated Kempen Global High Dividend Fund and Bronze-rated Robeco QI Global Value Equities were all among the worst performers within their category. So, all these three funds have actually stronger performance to the value factor and also, in the case of the latter two, have a more pronounced exposure to mid and small cap. So, that definitely explains part of the underperformance there.

So, for better-performing funds investors were better off in funds that have exposure to more defensive sectors basically or higher exposure into quality stocks. For example, Silver-rated Veritas Global Focus and DWS Top Dividend which have also benefited from their higher exposure to cash in the portfolio.

Black: So, I think some people might be surprised that a fund with a Gold or a Silver rating would be one of the worst performers in its category. Has the recent performance made you revisit any of the Morningstar Analyst Ratings on these funds?

Schumacher: No. Our Analyst Ratings are set with a long-term view and are driven by our conviction in the investment team, the investment process and the fund company. So, short-term performance alone does not drive our judgment. And actually, since the beginning of the sell-off, we haven't changed any ratings due to poor performance, but we have kept an eye on large performance swings among the funds that we cover and made sure that those performances were in line with our expectations. So, over the past couple of weeks, we have published several articles and analyst notes on funds where the performance or the underperformance was more significant or appeared at first sight out of line.

Black: Jeffrey, thank you so much for your time. For Morningstar, I'm Holly Black.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Holly Black  is Senior Editor, Morningstar.co.uk