Second quarter in funds: High risk offerings soar

Emerging markets, small caps and high-yield fare best in a strong 2Q for funds

Morningstar Manager Analysts 7 July, 2009 | 1:20PM
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Morningstar Category Q1 Returns Page 1 of 6 - Go to page 1 , 2 , 3 , 4 , 5 , 6

Fund investors who stayed the course were rewarded in the second quarter as a number of downtrodden areas of the market sprang sharply back and all major equity market indices delivered positive returns. As a general rule, riskier areas shunned by investors in 2008 proved particularly strong, while defensives weakened, and this held true across equities and bonds. Emerging-markets equity funds soared, small caps strongly outperformed large-caps, and lower-quality credits outperformed safer government debt.

The pace of fund closures remained extremely high in the quarter. If it continues--and for reasons set out below, we firmly believe it should--the 2009 closure rate is set to handily eclipse the already elevated level registered in 2008. The closures are being driven by dramatically shrunken asset bases, the need to rethink fund line-ups that haven't served investors needs well in many cases, and the ongoing consolidation among asset managers.

Industry trends: the consolidation continues; trackers get cheaper in UK market
After years of expansion that we consider far too rapid, the fund industry has been shrinking fund lineups at a rapid clip. The trend started in 2007, increased greatly in 2008, and is moving at an even faster rate thus far in 2009. In the first six months of the year, 3,821 fund classes closed, on pace for nearly 7,650 on the year--which would be a big jump from 5,223 that closed in 2008 and nearly five times the number that closed in 2006.. Of the closed classes, 70% were outright liquidations, and 30% were merged into other fund classes.

At a macro level, we think the closures are for the best--during the boom years, fund houses came out with far too many niche funds in a short-term effort to gather assets. As we've said before, fund companies that want to build a durable business will do so not by making a grab for the hot money, but by offering a responsible fund line up that reflects the firm's expertise and is designed to offer sound long-term investments to investors. To the extent the ongoing consolidation cleans up some of the excesses of the bull years, that's a welcome change.

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