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Marginal risks pay off in first quarter

Certain riskier areas of the markets demonstrated an improvement in performance in the first quarter of 2009, according to a funds report from Morningstar. These areas include some emerging markets, small and mid-caps and high-yield bonds.

The group said there had been no return to the “freewheeling mentality” of before the credit crunch, but that investors were prepared to take on “incrementally more risk”.

Russia and Latin America funds delivered strong returns during the quarter, with Russian equity returning 8.79% when measured in sterling, and Latin American equity 3.45%.

Small and mid-cap equities in Taiwan returned 7.89%, and large-cap Taiwanese equities 7.37%, mainly thanks to a rebound in the technology sector. Chinese and Greater Chinese equities returned 5.26% and 2.33% respectively.

Among British and European equity funds, small and mid-cap vehicles outperformed large-cap, losing 1.98%, reflecting a lack of exposure to financials. Norwegian equities rose 4.35%, chiefly because of rises in energy stocks.

Poor performers in geographic terms included Germany, where large-cap stocks lost 19.16% and small and mid-caps 14.47%. Morningstar blames exposure to cyclical sectors for the falls.

All sectors of American equities showed negative returns; the best performer there was the large-cap growth equity sector, which lost 4.53% as investors favoured large businesses with strong balance sheets.

The emerging markets gains were underpinned by strengthening prices for oil and metals, according to Morningstar.

Precious metals sector funds returned 13.3%, powered by the rising gold price, and technology 1.62%, but most other sector categories lost money overall. The poorest was real estate, which lost 20.43%.

Meanwhile healthcare and consumer goods and services, usually regarded as defensive sectors, underperformed, leading to poor performance in large equity funds such as Neil Woodford’s Invesco Perpetual Income and High Income vehicles.

Bond investors showed some return of risk appetite, with high-yield funds beating all other categories in fixed income, losing 1.31%. Morningstar notes that yields at their peak implied a default rate of up to 35%, indicating excessive pessimism had been priced into the market.


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