Deterioration of various economies gathered pace in the last quarter. National Bureau of Economic Research said in early December 2008 that the world’s largest economy, the US, has fallen into a recession since December 2007. Economic slowdown has been contagious that even developing economies like China have witnessed a decline in export growth.

Against such a backdrop, most equity markets experienced sharp selloff in the fourth quarter, resulting in a nightmare for investors of equity funds in 2008. (Read Scoreboard for Equity Markets in 2008). Money market funds and selected fixed income funds benefitted from the continued flight-to-safety since the third quarter of 2008, taking most of the places in the top 10 performing funds for 2008.

Fixed Income and Money Market Funds are Top 10 funds in 2008

Fixed Income Funds overtook money market funds to top the performance table for full year 2008. The bond funds that delivered strong positive returns are likely to have benefited from their exposure to government bonds of the developed nations, notably Treasuries. US Treasuries as represented by the ITRROV index returned 14.7% in SGD terms for 2008. Equity investors have flocked to the safety offered by risk-free Treasuries, pushing up their prices. The aggressive rate cuts in the last quarter by central banks in US and other developed nations have also driven up the prices of their respective government bonds. UOB United Global Bond SGD, whose mandate is investing mainly in sovereign bonds rated by Standard & Poor' or A2 by Moody's (or its equivalent rating) and above, has benefited the most, delivering an 8.9% return for 2008.

Money market funds continued to do well in preserving capital, taking up 3 places in the top 10 performing funds. A new addition to the top 10 performing funds since the third quarter is PRU Protected Global Titans Fund, a capital protected fund which has shown its ability to deliver more than its stated objective of protecting 95% of its floor value.

Bond funds With Government Bonds Performed Better In 2008

While some fixed income funds like UOB United Global Bonds SGD have delivered admirable performances, investors should note that not all bond investments in 2008 ended up the same way. After the collapse of Lehman Brothers, investors sold down corporate bonds as they bought into US Treasuries. As a result, fixed income funds that invested into global government bonds of developed nations benefited while those which invested in corporate bonds suffered.

Table 2 above shows that among all bond funds on our platform, only 6 fixed income funds have delivered positive returns. The rest of the bond funds with exposure to corporate bonds or to emerging markets suffered as investors sold off these bonds with the perception that the chances of default on these classes of bonds have increased.

At this point of time, we believe there is more value in corporate bonds rather than government bonds. (Read Investment Grade Bonds - Most Attractive in 70 Years)

With only 6 fixed income funds delivering positive returns, investors might have some doubts on the benefits of diversification. Although most fixed income funds have also lost investors money in 2008, an equities-only portfolio would have performed much worse, as even the best performing equity fund fell 21.3% last year.

All Equity Funds Lost Money

UOB United Global Healthcare Fund was the top performing equity fund in 2008. Although healthcare is a very defensive sector, it was not spared in the global meltdown in equities either. The fund was down 21.3% for 2008. The other two healthcare funds featuring in the top-10 list were also down more than 25%.

Japanese equity funds took up the most number of slots in the top 10 performing equity fund list, with 5 in total. One reason is that Japanese Yen has appreciated 18.2% against Singapore Dollar (SGD) in 2008, contributing positively to performance. Another possible reason is that the Japanese market did not participate much in the equity market rally in 2007 (falling 11.5% in stark contrast to the top performer India which returned 54.9%) and therefore the sell-down has not been pronounced last year.

Equity Funds Fell In Line With Indices

Table 4 shows that all regions that we cover have fallen significantly with the Japanese market being the least affected. The falls are in line with the regional indices. An interesting observation that can be made from the data is that active management seems to work better in the Asia ex-Japan region and emerging markets rather than for developed nations. On average, fund managers have managed to beat the index in Asia ex-Japan and the emerging markets region while fund managers in developed markets like Europe, US and Japan were not able to do so. (We would be prudent not to generalize this observation as we used only funds from our platform which might not be a fair representative of the universe of funds.)

10 Worst Performing Funds Value Wiped Out By More Than Half

The 10 worst performing funds experienced horrendous falls in excess of 66%. Most of the funds are invested into developing economies which have borne the brunt of the selloff in risky assets. The best performing fund in 2007, HGIF Indian Eq-A SGD, was the second worst performing this year. Investors are reminded not to chase after performance and to adequately diversify their portfolios limiting risky funds of single countries or exotic regions to the supplementary portion of their portfolio.

What did investors buy?

In the year of 2008, with the increased volatility in the equity markets, investors have bought less equity funds and balanced funds. Sales of the fixed income asset class remained stable as investors seek alternative asset classes with lower volatility. As such, global fixed income funds made it to the top 5 categories of best-selling funds. Asia ex-Japan equity funds, Asia ex-Japan balanced funds, China equity funds and Indian equity funds remained the most popular among all funds on our platform.

Important takeaways

While the article seeks to provide investors with information on how various funds performed in 2008, there are also important takeaways for investors. One of which is diversification helps, as noted by the difference in the performance of equity funds and bond funds. The second would be not to be blindly chasing after the past years’ winners. Investors should be aware that historical performance would not be an indication of future performance. For a forward looking piece on 2009, investor can refer to Our Asset Allocation Decision for 2009.