January 7, 2019

Monday Morning Memo: Performance Review of Long-Term Mutual Funds Registered for Sale in Europe, Year End 2018

by Detlef Glow.

The year 2018 was a bumpy ride for the global securities markets as investors faced fears about a global trade war, geopolitical uncertainties and corporate scandals, as well as increasing interest rates. The resulting sluggish performance of the securities markets is also reflected in the average returns of long-term mutual funds registered for sale in Europe (-5.68%) for the year 2018. That said, a view on the average results does hide that some funds were able to generate solid positive results, even as the respective classification average might be negative.

Real estate funds (+1.54%) had on average the best performance of all long-term mutual funds registered for sale in Europe, followed by bond funds (+1.09%), while all other asset types showed on average negative returns. Equity funds (-10.01%) showed the weakest returns, bettered by commodity funds (-8.09%) and mixed asset funds (-6.86%).

Graph 1: Average Performance (in %) by Asset Type

Performance review European mutual funds 2018

Source:  Lipper

Best and Worst Performing Lipper Global Classifications Overall

The table of the best performing Lipper Global Classifications is from a European investor’s perspective dominated by sectors, which are in many cases considered as exotic, and therefore, might not be the focus of a large number of investors. With an average performance of +18.59%, Equity Sector Real Estate Japan was the best performing sector overall for 2018, followed by Equity Saudi Arabia (+ 14.00%), and Equity GCC (+9.04).

On the other side of the spectrum, Equity Turkey (-36.03%) showed the worst average performance for 2018, bettered somewhat by Mixed Asset TRY Aggressive (-29.65%) and Equity Pakistan (-28.69%).

Graph 2: Performance (in %) of the 10 Best and Worst Performing Lipper Global Classifications, 2018 (in Euro)

Performance review European mutual funds 2018

Source:  Lipper

Absolute Return Sectors

The average performance of funds classified as absolute return funds was -3.54% for the year 2018. This means that the average absolute return fund has not kept what its name promised to investors. That said, one needs to bear in mind that even if the average returns for a given sector are negative, there can be classifications or single funds which have delivered positive returns.

With regard to the Lipper Global Absolute Return classifications, we witnessed that Absolute Return USD Low (+4.63%) and Absolute Return USD Medium (+2.21%) were the only classifications with positive returns within the absolute return sectors. Nevertheless, there were funds with positive returns in mainly all absolute return classifications.

Table 1: Performance and Ranks of the Absolute Return Classifications, 2018 (in Euro)

Performance review European mutual funds 2018

Source:  Lipper

Bond Sectors

The overall group of bond sectors contained 81 different Lipper Global Classifications which showed an overall average return of 1.09% for the year 2018 and was, therefore, the second-best performing sector in the segment of long-term funds.

Within this section, the author looked at those Lipper Global Classifications that might be most interesting for the majority of European investors; i.e. rather broad categories denominated in the major European currencies and the US-dollar. The 12-month performance of the different bond sectors was widely spread at the end of 2018. That said, one needs to bear in mind that bonds have multiple performance drivers, such as the issuer (corporate, government, etc.), the valuation currency, and the rating segment (investment grade vs. high yield), to name the most obvious. With regard to the market environment, it was not surprising that emerging markets, high yield, and corporate bonds were at the end of the table, since investors were in a kind of risk-off mode at the end of the year.

With regard to the above, it was not surprising that Bond CHF Government (+3.61%) lead the table of the selected bond sectors, followed by Bond USD Government (+3.26%), and Bond CHF (+3.02%). With regard to the mentioned risk-off mode of European investors and a resulting flight to quality, it was also not surprising that Bond Emerging Markets in Local Currencies (-5.30%) showed the weakest performance bettered by Bond Emerging Markets in Hard Currencies (-4.08%) and Bond GBP High Yield (-3.61%)

Table 2: Performance and Ranks of Selected Bonds Classifications, 2018 (in Euro)

Performance review European mutual funds 2018

Source:  Lipper

Equity Sectors

The overall group of equity sectors contained 106 different Lipper Global Classifications which showed an overall average return of -10.01% for the year 2018. From a European investor’s perspective, it makes sense to look beyond the top performing Lipper Global Classifications, as mentioned above, and revisit the more relevant classifications.

As no surprise, the resulting league table followed the overall market pattern, Equity US (-3.59%) was the best performing Lipper Global Classification, followed by Equity Global (-7.62%) and Equity Switzerland (-7.96%). On the other side of the table, we witnessed that classifications with a higher risk profile show the weakest returns. Even though as Equity Eurozone may not have fallen in this category on the first view, the ongoing scandal in the European/German automobile industry with respective losses in those stocks contributed to this result.

Table 3: Performance and Ranks of Selected Equity Classifications, 2018 (in Euro)

Performance review European mutual funds 2018

Source:  Lipper

Mixed Asset Sectors

The group of mixed asset sectors contained 47 different Lipper Global Classifications which showed an overall average return of -6.86% for the year 2018. As for the other asset types, reviewing all of these sectors would go far beyond the purpose of this report. With regard to this, we will once again look on the most meaningful sectors from the perspective of a European investor.

The league table below unveiled that the managers of mixed asset funds fulfilled the expectations with regards to the risk profiles of their respective classifications. Conservative funds showed a better average performance than balanced or flexible funds with the same base currency. That said, it is remarkable that investors might be disappointed by the returns of the mixed-asset flexible funds, since these funds should be able to reduce their equity exposure significantly to reduce drawdowns in their portfolio; i.e. investors might have expected that these funds show at least a better performance than their balanced peers. As we are looking on average numbers here, it should be clear that some of the underlying funds have been able to produce even positive results.

Table 4: Performance and Ranks of Selected Mixed Asset Classifications, 2018 (in Euro)

Performance review European mutual funds 2018

Source:  Lipper

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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