Ugly-duckling funds turn swan in first quarter

Funds considered ugly ducklings last year have turned out to be swans in the first three months of 2016.

According to a quarterly survey conducted jointly by the JoongAng Ilbo and the fund evaluation firm Zeroin, released on Monday, index funds, raw materials funds and those focused on Brazilian equities came out on top.

The survey was made on funds that manage net assets of 10 billion won ($8.7 million) or more and have been in operation for at least three months, and grouped them by sector, region and type of fund.

By sector, raw material funds that invest in companies producing gold, silver and iron ore were most profitable, yielding an average return of 19.77 percent.

Other types of funds involving raw materials performed well, with gold funds performing best among individual foreign equity funds. BlackRock World Gold, Shinhan BNPP Gold1 and IBK Gold Mining Fund were the three highest-yielding gold-focused funds, seeing average returns between 34 to 37 percent.

By region, Brazilian-focused funds were ranked No. 1, with an average return of 20.47 percent, followed by South American emerging market equity funds, which yielded an average of 16 percent, and Russian equity funds with 10.29 percent.

The South American funds performed particularly well, thanks to high proportions of Brazilian equities.

The categories had been declining for the past few years as raw material prices have tumbled sharply, which particularly affected exporters like Brazil and Russia.

Raw material sector funds have seen the worse returns in the last five years with an average return of negative 65 percent, followed by Brazilian equity funds, which saw negative 58 percent returns, and Russian funds with negative 45 percent.

The funds suddenly rallied in the first quarter, thanks to clear signs of recovery in the global raw material prices.

International gold prices hit bottom at $1,060.3 per ounce at the end of last year and have since rebounded by as much as 16.4 percent to hit $1,234.2 at the end of March.

U.S. Western Texas Intermediate crude prices have also recovered to $38.34 per barrel as of the end of March, after hitting bottom at $26.21 per barrel on Feb. 11. Along with crude prices, the prices of iron ore, copper, zinc and aluminum are also rebounding.

By type, index funds are enjoying unexpected rallies, too.

The index funds that follow the Kospi 200, which includes the 200 largest listed companies, was named the best-yielding type of fund in the first three months in Korea, with an average 2.29 percent.

The Kospi 200 index rose by 2.28 percent during the same period.

The rally is remarkable because index funds are passively managed, since they reflect the market, whereas decisions in actively managed funds are made by individual managers.

The fact that index funds are outperforming actively managed funds means the latter are doing particularly poorly.

Among actively-managed funds in Korea, dividend equity funds were the only type that barely yielded at 1.74 percent during the same period, thanks to the government’s initiative to encourage more listed firms to expand payouts.

All other types resulted in losses.

Regular equity funds recorded a negative 1.15 percent return, while mid-cap and small-cap equity funds also lost 2.6 percent.

“Economy-sensitive equities like chemical, steel and energy stayed sluggish last year, but have largely rallied in the first three months,” said Jang Bong-young, the chief fund manager at the Kiwoom Asset Management.

“Index funds enjoyed the lift [from raw material prices’ rebounds], but I think the actively-managed funds didn’t include many raw-materials equities because of worries that they’d fall.”

Analysts warn that mutual fund investors should pay close attention if the rallies of raw material and emerging market equities continue throughout the year.

Jang Deok-jin, vice president of Shinhan BNP Paribas Asset Management, expected that “raw materials like gold may stay strong for a while, as major advanced economies like Japan and the EU maintain their negative-interest policies.”

But he warned that investors should stay careful when investing in raw material-related equities, especially as countries like Brazil suffers from sluggish economic growth, as well as domestic political risks like incumbent presidents facing impeachment.

“Economy-sensitive equities [like raw materials and gold] are likely to stay strong in the first half, but we are not sure if the trend will continue through the second half,” Jang of Kiwoom said. “That’s why we’re also unsure if the index funds will remain strong.”

BY PARK JIN-SEOK, KIM SUNG-HEE AND LEE SEUNG-HO [kim.jiyoon@joongang.co.kr]