The end of first quarter of 2009 must have come as a relief to many investors. After dipping to new lows, markets embarked on a strong rally in March and finished 1Q 2009 on a strong note. It has been sometime since equity funds have been on our “top funds” list and we are glad to report that most of the top performing funds for 1Q 2009 are equity funds.

Equity Funds Top the List

Equity funds made up almost all the 10 spots on the “Top 10 Funds in 1Q 2009” list, in stark contrast to our last update “Fixed Income Funds Best Performing in 2008” where global bond funds and money market funds dominated. Our cash fund even made it to the previous top 10 list as there were only a handful of funds with positive returns in 2008.

Investors had been extremely risk-averse in 2008, and this trend continued in early 2009 as investors sold down risky assets further. However, we have recently seen a change in sentiment and increasing investor risk appetite, and this has benefited most equity funds and even higher-risk fixed income funds. Year-to-date returns for our top 10 funds ranged from between 14.1% to 17.2%, a credible performance given that only one quarter of the year has passed.

Some of the best performers in 1Q 2008 included funds invested in cyclical sectors like precious metals, resources and even technology. The DWS Noor Precious Metals fund and AllianzGl Global Internet fund were the best performing funds in the first quarter of 2009, with a return of 17.2% each. Global resources funds benefited from a renewed interest in inflationary-themes, as the US Federal Reserve embarked on hard-handed quantitative easing in the way of Japan and the UK. This also meant strong positive performances from funds invested in commodity-rich emerging nations such as Russia. Gold prices held up well as conditions remained uncertain, leading to a strong performance for the DWS Noor Precious Metals fund, which returned 17.2% in the first quarter of 2009.

The AllianzGI Global Internet fund returned 17.2% in the quarter, reflecting the strong performance of global technology stocks. Technology generally performed well as better-than-expected outlooks led to an improvement in investor sentiment on the sector, and has resulted in decent performances for funds invested in tech-heavy markets like Taiwan and Korea.

A Renewed Appetite for Risk in Fixed Income

While global bond funds were amongst the best performing fixed income funds in the last update, they are conspicuously absent here. Most global bond funds have large allocations in global government bonds, which have performed extremely well in 2008 as investors shunned risky assets. However, a return of investor risk appetite in 1Q 2009 has resulted in upside for other classes of fixed income, like emerging market debt, Asian bonds and even high yield bonds. Yields on G7 government debt have already fallen to unattractive levels, giving investors more incentive to move on to other riskier classes of fixed income.

New quantitative easing plans failed to lift US government bonds much further, despite an announcement by the US Federal Reserve of its intention to purchase US$300 billion worth of longer dated US government bonds. Further quantitative easing may not be ruled out, and any further lowering of Treasury yields should drive more investors into higher-risk assets such as investment grade corporate bonds.

Returns on these top 10 fixed income funds ranged from 6.2% to 12.1% for the first quarter of 2009 alone, representing very strong returns. If we extended table 1 to show the top 20 best performing funds (instead of just the top 10 funds) on the platform, the Fidelity Emerging Market Debt-SGD, Parvest Asian Convertible Bond, ING RF Asian Debt USD and Fidelity US High Yield USD would also be included. These returns may even be described as “equity-like”, which clearly indicates that good returns can be obtained from fixed income funds. However, a thing to note is that the bond funds that have gained considerably are in the higher risk bond classes, which include high yield and emerging market bonds.

Performances against regional benchmarks

Table 3 shows how regional funds performed on average, when compared to their regional benchmark indices. Asia ex-Japan and emerging market funds showed gains on average, slightly underperforming the MSCI Asia ex-Japan and MSCI Emerging Markets respectively. Our previous update (at the end of 2008) showed that active management reduced losses in these two regions, which led to benchmark outperformance in 2008. For this quarter, we note that several Asia ex-Japan funds turned in stellar performances like the APS Alpha fund (up 16.7%) and FTIF-Templeton Asian Growth fund (up 12.3%) whose returns convincingly beat the MSCI Asia ex-Japan index.

The developed regional markets of Europe, US and Japan turned in negative 1Q 2009 performances, but the average fund returns for each of these regions was better than the benchmark. Thus, investors would have benefited from active management when investing in funds from these 3 regions.

Financials and Global Property among the laggards

Despite the improvement in sentiment on the financial sector in March, financial were still the worst performers on a year-to-date basis, with Parvest Europe Financials losing 25.3% in the first 3 months of 2009. Financial funds invested in the US and Europe generally turned in poor performances, losing between 9% and 25.3%. However, this contrasted with the performance of the Fullerton Asian Financials fund, which posted a 0.3% positive return for the same period. Investors appear to be more discerning, choosing Asian financials which are possibly in more healthy positions than their western counterparts, resulting in the relative outperformance of Asian Financials fund.

Huge debt levels weighed down on emerging Europe, leading to a poor performance for funds invested in the region like Parvest Converging Europe, which lost 24.7%. Funds invested in the global property also turned in poor performances, as investors anticipated further downside in commercial and residential real estate. The RREEF Global Real Estate Income Securities fund appeared twice on the bottom 10 list, with the slight outperformance of the USD-hedged fund class (-18.6% vs. -22.3% for the SGD-hedged class) due to the appreciation of the USD against the SGD in 1Q 2009.

What did investors buy?

The first quarter of 2009 saw regional market equity funds regaining their popularity with investors. Investors continued to like China and Asia ex-Japan, and most regional markets appeared in the top 10 volume list, with the exception of Europe and Japan, which were incidentally, the worst performing regional markets in 1Q 09 (see “Most Equity Markets Higher in 1Q 2009, has the tide turned?”). Global bonds surprised us this quarter by garnering one of the strongest volumes. This could be a sign of continued risk aversion by investors as they are choosing to buy into the more resilient global fixed income category (highlighted in the previous update on top funds in 2008). Resources and commodities are also new on the list of top volume funds, showing an increased interest in this sector which has been battered down since June 2008.

Summing up

This quarterly update aims to provide information on the past quarter’s performance of various funds on our platform. Investors should note that the past performance of these funds are not a reflection future performance, hence their investment decisions should not made by just looking at the results for 1Q 2009. We encourage our investors to consider their investment horizon as well as their risk appetites, as well as to look at investment fundamentals like earnings and valuations before making an investment decision. That being said, the current crisis provides opportunities for tremendous gains with most asset classes being sold down substantially, but portfolio allocation decisions can make the difference between significant gains or losses (Table 4).

A key takeaway from this update is that while fixed income funds usually generate less investor interest, they may still be able to provide strong returns (Table 2). We would thus encourage our investors to take a closer look at fixed income funds which can help reduce downside volatility in a portfolio, and will also look to have more fixed income updates to assist with investor education.