Despite high volatility the latest bear market rally has sustained to become the largest experienced since the credit crunch began in 2007. Nevertheless, every sector across Financial Express' Hong Kong Mutual universe still posts a loss over a one year horizon, with the MSCI Hong Kong index having lost 30.7 per cent, meaning that markets have far to come back in recouping losses made over the longer-term.
Serial underperformers continued their surge this month as cyclical sectors prospered – Financial Equity sector for example posted a gain of 22.9 per cent over the month whilst remaining poor over the year with a loss of 45.4 per cent.
It would have been easy to pick a winner this month as almost every fund in the entire HKM universe posted a gain – and this month we pick out a Financial Equity fund for further inspection given the surge in financial stocks.
Fund Review: JPM Global Financials
The Financial Equity sector had an impressive month returning 22.9 per cent and JP Morgan’s Global Financials fund out-performed with a noteworthy 26.1 per cent. The fund aims to achieve a high return by investing primarily in companies from the financial, banking, insurance and property sectors ('Financial Companies') across the globe. JP Morgan’s Global Sector team manage the fund and have kept a fairly diverse portfolio with investment across eight differing world regions. European and North American financials are favoured reflected through respective weights of 33.4 and 23.9 per cent.
The fund is risky consequently not for the faint hearted – as is the sector – reflected through the funds’ 50 per cent one year volatility. Nevertheless if one can stomach this amount of volatility the fund is likely to outperform in a rising market given the high 1.56 beta against the MSCI World index it posts – meaning that if one expects the average world equity to have a good month then in theory this fund should outperform 1.5x, i.e. certainly worth holding in growing markets. The following chart reflects the funds’ relative outperformance over the last quarter.
Performance of fund over the last quarter
Source: Financial Express Analytics
Outlook
Asian markets had another impressive month and gains were there for the taking – although as fundamental factors supporting a more sustained recovery are yet to take effect caution is to be emphasised.
Research has shown that if one expects global markets to have a good month then Financial Equity funds are certainly worth a punt for a quick profit. However on the flipside they should be avoided as their volatile nature can also accentuate losses when markets dwindle.
The beta measure highlights that every fund in the HKM Financial Equity sector is likely to out-perform during a global market surge given their high cyclicality to the MSCI World Index – having said that with maximum drawdown experienced at around 60 per cent in any given month means one could see their wealth diminish and do little about it – as a result such bets require high conviction and the risk averse investor may prefer to avoid volatile sectors until a more sustained period of global recovery presents itself.
The JPM Financial Equity fund should therefore be taken with a pinch of salt – where if one feels optimistic for the month ahead then it is certainly worth a punt, otherwise it may be best to stay clear of the fund and the sector altogether.