Third Quarter in Funds

European fund closures outpace fund launches; risk continues to pay; emerging markets still strong; and Australian & New Zealand equities charge to first place

Morningstar Manager Analysts 15 October, 2009 | 8:01PM
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Performance Overview
Continuing a trend that started in March, funds delivered strong gains in the third quarter on the back of surging equity and bond markets. Once again, higher risk areas outperformed as funds with significant exposure to high-yield bonds, small-cap or emerging-markets equities, or to the financials or resources sectors derived benefit from rebounds in those areas. On the flip side, funds that continued to emphasise government bonds or defensives such as large-cap pharmaceuticals or consumer staples lagged.

Despite that strength, we think investors and fund houses should exercise caution. Some houses have already suggested they might try to launch more higher-risk vehicles to take advantage of recent performance trends. In our view, this is the wrong path to take: funds are meant to be long-term investments and to serve investors well in that regard, they should not be launched just to capture whatever the market happens to favour at a point in time. For investors, we think the best course of action is to design a diversified portfolio in line with their long-term risk tolerance and investment goals, ignore short-term noise, and to rebalance as needed. Our own research suggests most investors cost themselves performance (not to mention sales charges) by trying to time moves in and out of different slices of the market.

Industry Trends
During the boom years that came to an abrupt end in late 2007, the European fund industry rapidly expanded in an attempt to gather assets. The result was far too many funds chasing a pool of assets that was too small to permit many offerings to achieve economies of scale. Morningstar currently tracks a universe of 33,105 European domiciled funds excluding money-market offerings (36,779 with money-market funds). This compares to only 6,736 non money-market funds domiciled in the United States. That's not an unreasonable comparison: While Europe's population is more than double that of America, the size of assets invested in funds is in the same general neighbourhood, with EUR 4.5 trillion in funds compared to EUR 3.8 trillion in the US, ex MM and ex FoF. ( Europe asset figure consists of UCITS offerings ex Money Markets and ex funds-of-funds, plus non-UCITS funds at 30 June 2009; data from Morningstar and EFAMA).

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Morningstar Manager Analysts

Morningstar Manager Analysts  research and rate hundreds of OEICs, unit trusts and investment trusts available for sale in the UK.

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