Equity funds invested in China clocked up the best first-quarter performance while gold-oriented funds fell from glory to come in at the bottom, according to the latest data from fund-tracking firm Lipper.
China funds rose 0.61 per cent. Gold-oriented funds - last year's stellar performers - lost an average 12.2 per cent, ranking them the greatest overall loser among equity funds.
'Overall, it was a turbulent quarter for mutual funds, and long-term patterns were hard to glean from its results. It is evident that the geopolitical storm enveloping the world has caused fund prices to decouple from future earnings estimates,' said Don Cassidy, senior research analyst at Lipper.
As a group, world equity funds fell 7.39 per cent during the first quarter, erasing all the gains of the last three months of 2002 and seeing sharper downward momentum than their United States counterparts.
European funds fell 9.06 per cent, led by finance stocks, and Japanese funds lost 7.81 per cent. Hong Kong funds dropped 7.37 per cent, with Germany down 16.21 per cent and France 14.54 per cent against a 3.6 per cent drop in the S&P 500 Index.
'Skies over developed markets, which make up the vast majority of international funds' assets, were especially turbulent . . the depreciation of the US dollar, which was propping up international funds amid a slide in asset prices, reversed in mid-March. Ironically, emerging markets provided some shelter from global uncertainty,' Mr Cassidy said.
Emerging markets funds fell an average 6.04 per cent, with Latin American funds losing only 1.11 per cent, making them the best performers after the China region. South Korea, which has the highest weighting in emerging market portfolios at 16 per cent of assets, was a strong negative after a 14.64 per cent drop in the Korea Composite Index.
Mr Cassidy said the resilience of smaller markets such as China was due to a relatively good underlying economy and a lower war risk premium compared with other areas. Emerging markets were also the best positioned to gain from a global economic revival, with funds expected to benefit from investor moves to international markets due to US dollar weakness.
The tide turned for gold-oriented funds. The precious metal peaked at a six-year high of US$380 per ounce in early February, but its subsequent fall brought the fund group to its worst quarterly performance since the first quarter of 2000.
The weak showing did not necessarily mean the end of the upward ride for gold funds, Mr Cassidy said. Gold prices are still well above their average of the past four years, demand is expected to grow and some mining companies present good buys.
'For investors looking for safety, gold-oriented funds should not be an option. They are valid investments for those who are willing to bear risk, who believe that the stock market will continue to falter, or who expect an important resumption of future inflation,' he said.
In the US, large-cap funds (-2.92 per cent) outperformed small caps (-4.75 per cent) for the third consecutive quarter. Large-cap funds are the biggest group in the equity fund universe, making up half of the US$1.82 trillion in US diversified equity funds.